Responsive Documents - CREW: Department of Education: Regarding For-Profit Education: 8/17/2011 - 11-00026 Ginns Responsive 8-12-11 - PART 1

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To: CC: Date: 4/12/2010 5:33 :50 PM

Subject:
James Bob Finley, Steve
FYI Comments? Robert H. James Liaison for Career Institutions of Higher Education U.S Department ofEducation FAX: 317-257-2098 Call first Cell Phone #202-557-5835 D.C. # 202-377-4301 Indianapolis Office 317-257-2098 8527 Quail Hollow Road Indianapolis. IN 46260-2208
April 12,2010
The Honorable Anthony Wilder Miller Deputy Secretary U.S. Department of Education 400 Maryland Avenue, SW Washington, DC 20202
Dear SecretaryMiller: 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 find a solution that addresses student debt and simultaneously enables the Administration to achieve its goals of expanding access to quality higher education, particularly among nontraditional 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.
The Honorable Anthony Wilder Miller April 12, 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-toincome 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 fmancial 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 calleges would find it difficult to satisfy this standard if they were subjected to it. "
Kantrowitz further found that:

"The proposed use ofBureau of Labor Statistics wage data ... will disproportionately harm minority andfemale 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:
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, 2010, p. 1. 3 Ibid.
The Honorable Anthony Wilder Miller April 12,2010 Page 3
"The debt-service-to-income threshold effectively establishes borrowing limits based on field ofstudy 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
Ibid. p. 2. s 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, Apri12, 2010, prepared by Jonathan Guryan, PhD, and Matthew Thompson, PhD, p. 1.
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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-incomeratio 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 .
The Honorable Anthony Wilder Miller 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 fmancial 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 longterm 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/ 10 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 debtservice-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 postgraduate 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.
How Much Debt Is Too Much, Sandy Baum and Saul Schwartz, The College Board, 2006, p. 12.
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 _.....:...:.:c::..:co=-u=.:n~t:.:.:in"""g._____ program A Program Level: 0 Associates [g)Bachelors 0Masters Ocertificate/Diploma June 30, 2010
Here are some important disclosures for the award year ending
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:llwww.bls.gov/oeslcurrentloes_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:IIstud entloans.govImyDi rectLoa n/i ndex.action. The latest official Cohort Default Rate (FY07) from the US Department of Education indicates that 1.7 % of graduates in this program defaulted on their federal loans. PLEASE NOTE THAT YOUR ACTUAL EXPERIENCE MAY BE DIFFERENT THAN THE AVERAGES AND STATISTICS PRESENTED ABOVE.
From: To:
Robert MacArthur <nnacarthur@altresearch com> Wittman Donna Woodward Jennifer 6/23/2010 8:49:58 AM
CC:
Date: Subject:
North America United States Industrials Business Services & Education
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Apollo Group (A POL.OO), USD48.01 Bu y, Price Target USD80.00 American Public Ed. Inc (APEI.OO), USD48.00 Hold, Price Target USD44.00 Corinthian Colleges Inc (COCO.OO),USD11 .21 Buy, Price Target USD24.00 DeVry (DV N), USD56 58 Hold, Price Target USD70.00 ITT Ed ucation Services (ESI.N), USD93.42 Buy, Price Targe t USD125.00
Prepared testimonies from Margaret Reiter (consumer advocate), Yasmine lssa (student), Steve Eisman (investor), and Kathleen Tighe (OIG) are now widely circulating in Washington, which we obtained via our DC contacts. Based on expected testimony, it does not seem like there is new proof of wrongdoing by the industry. While we expect testimony will be decidedly negative, nearly all of it has likely been heard before . The key negative in the upcoming hearings and GAO review is that they w ill potentially give the DoE more confidence (and potentially Congressional support) to be strict in t heir final regs, particularly Gainful Employment. 1) Based on the info being disseminated, there w ill likely be a call for tougher cohort default rate (CDR) thresholds as witnesses reportedly believe the "true" CDR is higher than published rates due to w idespread use of deferment and forbearance. There may also be a call for tougher accreditation review s. 2) lssa's testimony will likely elicit some empathy. She is unable to sit for a licensing exam without a year's w ork ex perience due to the program's lack of state accreditation, but cannot get a job w it hout a license or w ork experience. 3) Testimony suggests Reiter may cite data from a settled complaint against COCO in 2007, and claim for-profit abuses and fraud are wide-spread. She reportedly believes accreditation, increased disclosure, and current DoE proposals are insufficient to solve the problems. We think most of the critique on Thursday w ill be addressed by the pending DoE Notice of Proposed Rulemaking (NPRM). The OIG acknow ledges the NPRM covers many of its concerns, particularly Definition of a Credit Hour, w hile Reiter and Eisman have publicly stated that they w ant legis lation beyond w hat is currently proposed .
Paul Ginocchio, CFA

Research Analyst
Adrienne Colby
Associate Analyst () 212 250-0948 adrie nne.colbyCdb.com
(+1) 415617-4207 paul.ginocchioCdb.com
Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading session unless otherw ise 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 w ith companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. THE VIEWS EXPRESSED ABOVE ACCURATELY REFLECT PERSONAL VIEWS OF THE AUTHORS ABOUT THE SUBJECT COM PANY(IES) AND ITS(TH EIR) SECURITIES. THEY HAVE NOT AN D WILL NOT RECEIVE ANY COMPENSATION FOR PROVIDING A SPECIFIC RECOMMENDATION OR VIEW IN THIS REPORT. FOR OTHER DISCLOSU RES PLEASE VISIT HTTPI/ GM.DB.COM M ICA(P) 007/05/2010
From: To:
Robert MacArthur <nnacarthur@altresearch com> Robert MacArthur 7/20/2010 9:45:08 PM
CC:
Date: Subject:
Deutsche Bank
Industry Update
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 political analyst reported to day that Gainful Employment (GE) could now potentially be a debt repayment metric of 12% of income over 10 years, vs the previous 8%. At 12%, using our GE model, we calculate no CY1 OE EPS impact fo r 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 m odel and updating f or new info - this significantly reduced the EPS hit for DV and ESI. Our top pick in the sector remains APOL. We also updated our original Gainful Employment 8% calculations In our July 2"d not e, we showed a very significant 80% negative impact to EPS for ESI and DV from a Gainful Employm ent w ith debt repayment at 8% of income over 10 years. We showed transfer credits in our model, but d id not actually include them in our calculations. Correcting this error, plus updating assumptions fo r other new information, reduced the negative EPS impact under the 8% over 10 years scenario. For Apollo, the CY1 OE EPS impact we originally calculated was 14%, our updated EPS impact is -10% . For DV, the im pact goes from -79% to41 %, for ESI from -80% t o -66%, and for COCO from -1 20% to -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 the last Senate hearing on the For Profit industry on J une 24th, Senator Harkin stated there would be another one in J uly and at least one more after that. We had heard from contacts that August 4th was the next likely date, with another one in September. Due t o the required 2-week notice period and the August recess which starts on the 9th, the hearing has t o be announced by Friday or the next one will not occur until September. An announcement is now likely in the next f our days . Apollo remains our favorite idea in the sector We find APOL attractive as 1) it is addressing most of its issues already through the University Orientation pro gram, which weeds out uncommitted students befo re they take on student debt, 2) our updated Gainful Employment calculations (at 12% over 10 years) suggest no impact on revenues and EPS, and 3) Apollo's 3year 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 10-yr forecasts. In our terminal value we use a 3.5% long-term g rowth 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: negative regulat ory developments that are not already priced in, higher 2009 CDRs than expected, a bigger negative growth impact from the orientation program or bachelor's degree focus, or a stronger than expected recovery in job growth.
Apollo Group (APOLOQ),US045.56 Buy 2009A 2010E 2011E EPS (USD! 3.79 5.35 5.53 18.0 8.5 8.2 P E !xl / EV/EBITDA (x) 8.1 3.9 3.5 Am erican Public Ed. Inc (APEI.OQ),U$042.67 Hold 2009A 2010E 2011E EPS (USD) 1.27 1.74 2.50 P/E (x) 28.6 24.5 17.1 EV/EBITDA (x) 13.5 11.6 7.8 Cor inthian Colleges Inc (COCO.OQ),US010.40 Buy 2009A 2010E 201 1E EPS (USD) 0.82 1.63 2 04 P E !xl / 19.4 6.4 5.1 EV/EBITDA (x) 7.0 3.0 1.9 OeVry (0V.N),US052.85 Hold 2009A 2010E 2011E EPS (USD! 2.30 3.78 5.12 P E !xl / 22 .2 14.0 10.3 EV/EBITDA (x) 12.2 7.4 4.9 ITT Education Services (ESI.N),U$086.53 Buy 2009A 2010E 2011E EPS (USD) 7.98 11.04 11.71 P/E (x) 12.9 7.8 7.4 EV/EBITDA (x) 7.3 4.2 3.8
Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading 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 w ith companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. M ICA(P) 007/05/2010
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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 Apollo, Corinthian, DeVry and ITT 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 previous 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 believe that under this potential new scenario, that Gainful Employment is less onerous. The EPS im pact to Apollo and DeVry, we believe, could be zero, at ITT it is very minor, and at COCO the im pact 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
Impact APOL
coco
DV
ESI
0% -1% -3%
-3% -14% -1 0% -29%
-10% -109% -41% -66%
-4% -16% -19% -35%
-14% -120% -79% -80%
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 for ITT 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% t o -50%. In addition to now correctly including transfer credits, we have m ade 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-cam pus. We assume students who chose this higher cost program would not need many credit s 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% 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 conservative. We raised the average BA salary slightly t o 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 1OK. ITT Technical Institute: We slightly decreased ITT Tech's transfer credit assumptions from 1.25 years in the BA program to 0.75, to be conservative. Due to their slightly
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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 1OK 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 1OK, 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 sim ilar to ESI's, and we now have a hard data point fo r 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 requiring students of For-Profit Title IV eligible programs to be able to replay their total student debt w ith less than 8% of a graduates' expected annual income and be repayable over a 10 year period. With the publication of its Program Int egrity NPRM in mid-June, the Dept indicated its plans to release GE in a second NPRM later t his summer (we believe late J uly to M id-August).
Major assumptions in our Gainful Employment calculations

We make five key assumptions in our Gainful Employment EPS impact calculations: 1) 2) The number of credits the average student transfers in w ith from another institution, We do not assume that students have any debt associated w ith these transfer credits, w hich is not a correct assumption but one we have absolutely no data on to help guide us, We assume a percentage of cash tuition contribution per student, 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, w hich may no longer be valid, fo r COCO), We are assuming no offsetting cost cuts or pot ential revenues, from increased tuition at certain programs or larger class sizes. In light of t his final assumption, our calculations may somewhat reflect a worst case scenario.
3) 4)
5)
We remind investors that the DoE's GE d raft proposed evaluating Title IV eligibility on an individ ual program by program basis, not on an institution-wide basis. Due to the lack of granular program data available, our GE estimates above are constrained to high level, school-wide calculations, w hich could lead to significant variation from the actual program by program impact. Finally, we note that although our analysis assumes that schools would c ut 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 q ualifies for and may chose to take on. In Apollo's FY 3010 100 filing, the company makes the fo llowing 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
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particular program ceased to be eligible for Tit le IV f unding, in most cases it would not be practical to continue offering t hat course under our current business model." We have included snapshots of our Gainful Employment analysis for Apollo, Corint hian, DeVry and ITI in Appendix 1, at the end of this note.
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Appendix 1
Figure 2: Gainful Employment Calculations- Apollo Group Step 1 - Calculating potential tu1 t1on cuts
Source/Calc
APOL
APOL
APOL
Tuition & Fees source Program o/o of Total Enrollment Avg. Pell Grant '08-'09 (DoE) Percent of Students getting Pell Assumed years of credits transferred Total Tuition & Fees Cash/out of pocket payments Pell Grants Avg. Debt from School
DB ests. DoE DoE DB ests. calc 7% calc sum
67,000 $ 54,400 $ 22,200 online avg. ground online website website website BA Assoc BA 4% 38% 40% 2,695 $ 55% 2.00 2,695 $ 55% 1.50 2,695 55% 0.20
33,500 2,345 2,960 28,195
34,000 2,380 3,700 27,920
19,980 1,399 2,664 15,917
Monthly payments over 10 years at 6.8% interest rate mort calc $ 324 $ 321 $ 183 -------------~--~~--~'~r-~~~~--~~~~~--~ Implied Requu-ed Salary to meet mont y pay: e 12% Assumed starting salary Total monthly student debt payments Max Debt Load Cash/out of pocket payments add Avg. PelI Grants Total Tuition & Fees Implied Pr'ice.Cut @ -8% ofsalary over 10yrs Step 2- Reven ue Reduct1on 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 St ep 3 - Impact t o EPS and PE Current Calendar 201 OE DB EPS EPS impact from revenue decrease with no cost offset Estimated impact from Gainful Employment
NOt<> PriCes as ol July 19" r PM E1 I'JP-cut sc t1>3t star11trg b#l:hell>t'ss.l.,yls$501:
DB est. Mort. Calc.
$ $
50,000 $ 500 $ 43,448 2,345 2,960 48,753 $ 46%
50,000 $ 500 $ 43,448 2,380 3,700 49,528 $ 46%
25,000 250 21,724 1,399 2,664 25,787 29%
o/o of Revs 19% 4% 38% 39%
0%
100% EPS
Price Cut Rev impact 0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0% 0.0% 0.0% PE 8.6x 8.6x
$ $
5.66 5.66
( JN<> f)tif:eCVI tf ~SCCi~res can~rn$2$K .lf gr~virl<::m
Soutee Ct:>mpany date ntJ Oeutsr:he S.nr estm,.tes
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Figure 3: Gainful Employment Calculations- DeVry
Step 1 - calculation Exposure to HS Grads Tuition & Fees source Program %of Total Enrollment Avg. Pell Grant '08-'09 (DoE) Percent of Students getting Pell Assumed years of credits transferred Total Tuition & Fees Cash/out of pocket payments Pell Grants Avg. Debt from School Average Starting Salary Monthly payment at 8% of salary Max Debt Load, over 10 years, 6.8% int.rate Cash/out of pocket payments add Avg. Pell Grants Total Tuition & Fees Implied Price Cut @ 8% of salary over 1Oyrs Step 2 - Revenue Reduction Estimate of impact of current Gainful Employment Ross Medical Keller Graduate School Bachelor's degrees><: Associate's degrees** US Healthcare & Chamberlain Becker CPNCFA & Other (Fanor, Advanced Academics HS) Total revenue impact Step 3- Impact to EPS and PE Current Calendar 201 OE DB EPS EPS impact from revenue decrease with no cost offset Estimated impact from Gainful Employment
Note Pnces as of July 1ft" 1 PM ET tJPrice cur .1ssummg starTing bdchelor's saldl"f tS $50~ ( JPnce cur >SSum"'g sr.ttJ119 .scNres salary 1$ $2 71<
Source/Calc Co. comments

$
DV 30% 61,700 $ 10-K BA 52% 2,572 $ 77% 0.75

$
DV 30% 35,038 10-K Assoc . 15% 2,572 77% 0.25 30,658 3,066 3,457 24,135 33,288 333 28,926 3,066 3,457 35,449 16%
DoE DoE DB est. calc 10% calc sum est, See Calc A
50,131 $ 5,013 6,420 38,698 50,071 501

$ $
$ $ $
12%
mort calc from above from above
43,510 $ 5,013 6,420 54,943 $ 10%
%of Revs 12% 14% 40% 12% 15% 7% 100% EPS

$
Price Cut Rev impact 0% 0.0% 0.0% 0% 0% 0.0% 0% 0.0% 0% 0.0% 0% 0.0% 0.0% PE
4.48 4.48 0%
11 .9x 11 .9x 0%
Scutce
Cc!'~?Pinr datil fKI Oe<tlxl>o 8ank eSttn><les
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Figure 4: Gainful Employment Calculations -ITT Education

Step 1 -ca lculation Exposure to HS Grads Tuition & Fees source Program % of Total Enrollment Avg. Pell Grant '08-'09 (DoE) Percent of Students getting Pell Assumed yea rs of cred1 tra nsferred ts Total Tuition & Fees Cash/out of pocket payments Pell Grants Avg. Debt from School (D) Average Starting Salary Implied monthly payments to cover d ebt (D) (8%. 1Oyrs. 6 8%) Implied starting salary by debt (D) Monthly payment at 8% of salary Max Debt load. over 10 years. 6.8% int.rate Cash/out of pocket payments add Avg. Pell Grants Total Tuition & Fees lmphed Price Cvt@ S'f( of salary ove1 10 1rs Step 2- Revenue ReductiOn Estimate of impact of current Gainful Employment Bachelors Associates Total revenue impact Step 3- Impact to EPS and PE Current Ca lendar 201 OE DB EPS EPS impact from revenue decrease w ith no cost offset Estimated impact f rom Gainful Employment
Noll!! Ptices as o/Juty IS", I PM ET SO<Jrce Ccm,o.>ny data arK/ 0e<A$CI>e Bank eStrmatM

$
ESI 20.25% 69, 600 1o-K BA 15% 2.550 80% 0.75

$ $
ESI 20.25% 34,800 1o-K Assoc. 85% 2.550 80% 0.25

$
Company data DoE DoE DB ests.
calc
I
calc sum
5%
56.550 2.828 6,630 47,093 50.000

$ $
30.4 50 1.523 3.570 25,358 29.000

$ $
est. See Calc A
542 54.194
$
292 29.181 25.358 1,523 3,570 30.450
12% mort calc from above from above
$
$
500 43.448 $ 2,828 6, 630 52, 905 $ ,0%
290 25.200 $ 1.523 3,570 30,292 $
47.093 $ 2.828 6,630 56,550 $
1 %
%of Revs 15% 85% 100% EPS 11.04 (0.36) 10.68 -3%
Price Cut Rev impact ,0% -1.0% -1% -0.4% -1 .4% PE 8.0x 8.3x 3%
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Figure 5: Gainful Employment Calculations- Corinthian Colleges

, , ., Exposure to HS Grads ( 11 TUitiOn & Fees Souroa/Calc Co oomments
$
COCO 5%1010% 15.409 College Nav Med ASSISt 2.407 90% 15,409
COCO $31,000
$
COCO
COCO
COCO
COCO
source
Program %of Total Enrollment Avg Pell Grant '08- '09 (DoEI Petcent of Students gemng Pell Total Tuition & Fees CastVout or pod:et payments Pell Grants Avg Debt from School Average Starttn<J Salary DoE DB est calc
Assoc.
Biz& HC $2.407 90% $31,000 1,550 4,333 25.117 24.200 1 DB est
$
$
26,450 $ 26.450 $ 26.450 $ 19.026 College Nav College Nav College Nav College Nav AutoMech Dtesel Auto Body Electncian 2,407 $ 90% 26,450 $ 1,323 2.166 22.961 25.aa:J $ Bl.S 2.407 $ 90% 26,450 $ 1,323 2,166 22.961 32.660 $ BLS 2.407 $ 90% 26.450 $ 1,323 2.166 22.961 29.620 $ BLS 2,407 90% 19,026 951 2,166 15.900 35.990 BLS
-4%16% revsl <I% II% revs! <1% 11% revs! <1%ll%revsl

$
I
calc sum
5%
770
2.166 12.472
$
SOCoodes
source
lmp!Jed monthly paymerus to oover debttn row 18 (8%. IOyrs, 6.8%1 lmphed sta<Mg salary by debt m row 18
24.060 1 $ BLS
289
28.905
$
Montnty ~~ at 891- of S<>iatY Max Debt Load. over 10 years. 68% tnt rate CastVout or pocket payments add Avg Pell Grants Total Tuition & Fees
12% mort calc
$
$
lromaeov" !rom abOve
241 $ 20.907 $ 770 2,166 23.844
242 21.029 $ 1.550 4,333 26.911
2$ $
22.489 $ 1,323 2.166 25.977
327 $.
28,38) $ 1,323 2,166 31,869
2$6$
25,739 $ 1,323 2166 29.227
360
31,274 951 21EO 34,391
25,117 $ 1.550 4,333 31.000
Estimate of impact of current Gainful E~loyme nt Certiltcate tn Healthcare Assoaate's 1n Bus1ness Associate's'" Cnmmal Just1oe Auto mechantc Otesel mechante+ Auto body Trades Total revenue impact
~r
%of Revs 56% 13% 16%

10% 2% 2% 1%
Price Cut
0% -t39'o 13% 2% 20% II% 0%
100%
Rev impact 00% -17% 21% .02% 04% 02% 00% -34%
~t
EPS
$ $
PE
1.71
(0451
Current Calendar 201 OE OB EPS EPS tmpact from revenw decrease wtth no cost offset Esbmated tmpact from Gatnful Employment
126 -26%
S.lx na
Note Pnces ~s of Juty 1Y". 1 PM ET POC-e cur assummg stJrting salary for assoc~ate's In busiflfiSS and Comindl Justice is $24k. $26K tor Auto Mechanic. $33/K for Diesel Mechanic and $30K for Auto Body.
$()(JJC8 Company Wtd af'X'J 06utsch8 Bant-' esrtmates
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Appendix 2
Important Disclosures
Additional information available upon req uest
Disclosure checklist Company
Apollo Group
Ticker
APOL.OO
Recent price*
45.56 (USD) 16 Jul 10
Disclosure
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 required by at least one jurisdiction in addition to the 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 this 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 this 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/DisclosureDirectory.eqsr.
Analyst Certification
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Paul Ginocchio
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Historical recommendations and target price: Apollo Group (APOL.OQ)

(as of 7/16/2010j
no.oo ~----------------------------------------------------------~
00.00 +-~----~~----~~----~~--~~~----~~----~~----~~-4
Previous Recommendations Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Ratmg *New Recommendation Structure as of September 9, 2002
00.00 +-----w---~------------------~~~~-------------------------4
Q)
.2 ....
a...
60.00 50.00 40.00
.~ ....
::1
() Q)
(/)
0.00 +---~----~---r----~--~--~~--~--~----,---~----~--~
Jul 07
Oct 07 Jan 08 Apr 08
Jul 08
Jul 09
Oct 09
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
Eq u1ty ratmg key
Equ1 ratmg d1 ty spers1 and bank1ng relat1 on onsh1 ps
Buy: Based on a current 12- month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected d ividend yield), we recomm end that investors buy the stock. Sell: Based on a current 12-month view of total shareholder 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 (includ ing dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of10% or worse over a 12-month period
500 400 300 200 100

0
~--49'~~---------~~%.---------------~
1%27%
- j ----L--
Buy
Hold
Sell
0 Companies Covered lil'il Cos. w/ Banking Relationship

North American Universe
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Regulatory Disclosures 1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs . Investors are strongly encouraged to review this information before investing.
2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://qm .db.com.
3. Country-Specific Disclosures
Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name- Deutsche Securities Inc. Registration number- Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, The Financial Futures Association of Japan. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of the New Zealand Securities Market Act 1988. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation .
Page 11
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From:
To: CC: Date: 4/12/2010 5:33 :50 PM

Subject:
FYI Comments? Robert H. James Liaison for Career Institutions of Higher Education U.S Department ofEducation FAX: 317-257-2098 Call first Cell Phone #202-557-5835 D.C. # 202-377-4301 Indianapolis Office 317-257-2098 8527 Quail Hollow Road Indianapolis. IN 46260-2208
April 12,2010
Dear SecretaryMiller: 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 find a solution that addresses student debt and simultaneously enables the Administration to achieve its goals of expanding access to quality higher education, particularly among nontraditional 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.
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-toincome 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 fmancial 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 calleges would find it difficult to satisfy this standard if they were subjected to it. "
Kantrowitz further found that:

"The proposed use ofBureau of Labor Statistics wage data ... will disproportionately harm minority andfemale 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:
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, 2010, p. 1. 3 Ibid.
The Honorable Anthony Wilder Miller April 12,2010 Page 3
"The debt-service-to-income threshold effectively establishes borrowing limits based on field ofstudy 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
Ibid. p. 2. s 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, Apri12, 2010, prepared by Jonathan Guryan, PhD, and Matthew Thompson, PhD, p. 1.
4
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-incomeratio 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 .
The Honorable Anthony Wilder Miller 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 fmancial 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 longterm 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/ 10 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 debtservice-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 postgraduate 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.
How Much Debt Is Too Much, Sandy Baum and Saul Schwartz, The College Board, 2006, p. 12.
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,
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 _.....:...:.:c::..:co=-u=.:n~t:.:.:in"""g._____ program A Program Level: 0 Associates [g)Bachelors 0Masters Ocertificate/Diploma June 30, 2010
Here are some important disclosures for the award year ending
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:llwww.bls.gov/oeslcurrentloes_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:IIstud entloans.govImyDi rectLoa n/i ndex.action. The latest official Cohort Default Rate (FY07) from the US Department of Education indicates that 1.7 % of graduates in this program defaulted on their federal loans. PLEASE NOTE THAT YOUR ACTUAL EXPERIENCE MAY BE DIFFERENT THAN THE AVERAGES AND STATISTICS PRESENTED ABOVE.
From: To:
Robert MacArthur <nnacarthur@altresearch com> Wittman Donna Woodward Jennifer 6/23/2010 8:49:58 AM
CC:
Date: Subject:
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Apollo Group (A POL.OO), USD48.01 Bu y, Price Target USD80.00 American Public Ed. Inc (APEI.OO), USD48.00 Hold, Price Target USD44.00 Corinthian Colleges Inc (COCO.OO),USD11 .21 Buy, Price Target USD24.00 DeVry (DV N), USD56 58 Hold, Price Target USD70.00 ITT Ed ucation Services (ESI.N), USD93.42 Buy, Price Targe t USD125.00
Prepared testimonies from Margaret Reiter (consumer advocate), Yasmine lssa (student), Steve Eisman (investor), and Kathleen Tighe (OIG) are now widely circulating in Washington, which we obtained via our DC contacts. Based on expected testimony, it does not seem like there is new proof of wrongdoing by the industry. While we expect testimony will be decidedly negative, nearly all of it has likely been heard before . The key negative in the upcoming hearings and GAO review is that they w ill potentially give the DoE more confidence (and potentially Congressional support) to be strict in t heir final regs, particularly Gainful Employment. 1) Based on the info being disseminated, there w ill likely be a call for tougher cohort default rate (CDR) thresholds as witnesses reportedly believe the "true" CDR is higher than published rates due to w idespread use of deferment and forbearance. There may also be a call for tougher accreditation review s. 2) lssa's testimony will likely elicit some empathy. She is unable to sit for a licensing exam without a year's w ork ex perience due to the program's lack of state accreditation, but cannot get a job w it hout a license or w ork experience. 3) Testimony suggests Reiter may cite data from a settled complaint against COCO in 2007, and claim for-profit abuses and fraud are wide-spread. She reportedly believes accreditation, increased disclosure, and current DoE proposals are insufficient to solve the problems. We think most of the critique on Thursday w ill be addressed by the pending DoE Notice of Proposed Rulemaking (NPRM). The OIG acknow ledges the NPRM covers many of its concerns, particularly Definition of a Credit Hour, w hile Reiter and Eisman have publicly stated that they w ant legis lation beyond w hat is currently proposed .
Paul Ginocchio, CFA

Research Analyst
Adrienne Colby
Associate Analyst () 212 250-0948 adrie nne.colbyCdb.com
(+1) 415617-4207 paul.ginocchioCdb.com
Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading session unless otherw ise 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 w ith companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. THE VIEWS EXPRESSED ABOVE ACCURATELY REFLECT PERSONAL VIEWS OF THE AUTHORS ABOUT THE SUBJECT COM PANY(IES) AND ITS(TH EIR) SECURITIES. THEY HAVE NOT AN D WILL NOT RECEIVE ANY COMPENSATION FOR PROVIDING A SPECIFIC RECOMMENDATION OR VIEW IN THIS REPORT. FOR OTHER DISCLOSU RES PLEASE VISIT HTTPI/ GM.DB.COM M ICA(P) 007/05/2010
From: To:
Robert MacArthur <nnacarthur@altresearch com> Robert MacArthur 7/20/2010 9:45:08 PM
CC:
Date: Subject:
Deutsche Bank
Industry Update
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 political analyst reported to day that Gainful Employment (GE) could now potentially be a debt repayment metric of 12% of income over 10 years, vs the previous 8%. At 12%, using our GE model, we calculate no CY1 OE EPS impact fo r 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 m odel and updating f or new info - this significantly reduced the EPS hit for DV and ESI. Our top pick in the sector remains APOL. We also updated our original Gainful Employment 8% calculations In our July 2"d not e, we showed a very significant 80% negative impact to EPS for ESI and DV from a Gainful Employm ent w ith debt repayment at 8% of income over 10 years. We showed transfer credits in our model, but d id not actually include them in our calculations. Correcting this error, plus updating assumptions fo r other new information, reduced the negative EPS impact under the 8% over 10 years scenario. For Apollo, the CY1 OE EPS impact we originally calculated was 14%, our updated EPS impact is -10% . For DV, the im pact goes from -79% to41 %, for ESI from -80% t o -66%, and for COCO from -1 20% to -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 the last Senate hearing on the For Profit industry on J une 24th, Senator Harkin stated there would be another one in J uly and at least one more after that. We had heard from contacts that August 4th was the next likely date, with another one in September. Due t o the required 2-week notice period and the August recess which starts on the 9th, the hearing has t o be announced by Friday or the next one will not occur until September. An announcement is now likely in the next f our days . Apollo remains our favorite idea in the sector We find APOL attractive as 1) it is addressing most of its issues already through the University Orientation pro gram, which weeds out uncommitted students befo re they take on student debt, 2) our updated Gainful Employment calculations (at 12% over 10 years) suggest no impact on revenues and EPS, and 3) Apollo's 3year 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 10-yr forecasts. In our terminal value we use a 3.5% long-term g rowth 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: negative regulat ory developments that are not already priced in, higher 2009 CDRs than expected, a bigger negative growth impact from the orientation program or bachelor's degree focus, or a stronger than expected recovery in job growth.
Apollo Group (APOLOQ),US045.56 Buy 2009A 2010E 2011E EPS (USD! 3.79 5.35 5.53 18.0 8.5 8.2 P E !xl / EV/EBITDA (x) 8.1 3.9 3.5 Am erican Public Ed. Inc (APEI.OQ),U$042.67 Hold 2009A 2010E 2011E EPS (USD) 1.27 1.74 2.50 P/E (x) 28.6 24.5 17.1 EV/EBITDA (x) 13.5 11.6 7.8 Cor inthian Colleges Inc (COCO.OQ),US010.40 Buy 2009A 2010E 201 1E EPS (USD) 0.82 1.63 2 04 P E !xl / 19.4 6.4 5.1 EV/EBITDA (x) 7.0 3.0 1.9 OeVry (0V.N),US052.85 Hold 2009A 2010E 2011E EPS (USD! 2.30 3.78 5.12 P E !xl / 22 .2 14.0 10.3 EV/EBITDA (x) 12.2 7.4 4.9 ITT Education Services (ESI.N),U$086.53 Buy 2009A 2010E 2011E EPS (USD) 7.98 11.04 11.71 P/E (x) 12.9 7.8 7.4 EV/EBITDA (x) 7.3 4.2 3.8
Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading 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 w ith companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. M ICA(P) 007/05/2010
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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 Apollo, Corinthian, DeVry and ITT 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 previous 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 believe that under this potential new scenario, that Gainful Employment is less onerous. The EPS im pact to Apollo and DeVry, we believe, could be zero, at ITT it is very minor, and at COCO the im pact 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
Impact APOL
coco
DV
ESI
0% -1% -3%
-3% -14% -1 0% -29%
-10% -109% -41% -66%
-4% -16% -19% -35%
-14% -120% -79% -80%
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 for ITT 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% t o -50%. In addition to now correctly including transfer credits, we have m ade 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-cam pus. We assume students who chose this higher cost program would not need many credit s 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% 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 conservative. We raised the average BA salary slightly t o 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 1OK. ITT Technical Institute: We slightly decreased ITT Tech's transfer credit assumptions from 1.25 years in the BA program to 0.75, to be conservative. Due to their slightly
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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 1OK 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 1OK, 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 sim ilar to ESI's, and we now have a hard data point fo r 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 requiring students of For-Profit Title IV eligible programs to be able to replay their total student debt w ith less than 8% of a graduates' expected annual income and be repayable over a 10 year period. With the publication of its Program Int egrity NPRM in mid-June, the Dept indicated its plans to release GE in a second NPRM later t his summer (we believe late J uly to M id-August).
Major assumptions in our Gainful Employment calculations

We make five key assumptions in our Gainful Employment EPS impact calculations: 1) 2) The number of credits the average student transfers in w ith from another institution, We do not assume that students have any debt associated w ith these transfer credits, w hich is not a correct assumption but one we have absolutely no data on to help guide us, We assume a percentage of cash tuition contribution per student, 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, w hich may no longer be valid, fo r COCO), We are assuming no offsetting cost cuts or pot ential revenues, from increased tuition at certain programs or larger class sizes. In light of t his final assumption, our calculations may somewhat reflect a worst case scenario.
3) 4)
5)
We remind investors that the DoE's GE d raft proposed evaluating Title IV eligibility on an individ ual program by program basis, not on an institution-wide basis. Due to the lack of granular program data available, our GE estimates above are constrained to high level, school-wide calculations, w hich could lead to significant variation from the actual program by program impact. Finally, we note that although our analysis assumes that schools would c ut 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 q ualifies for and may chose to take on. In Apollo's FY 3010 100 filing, the company makes the fo llowing 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
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particular program ceased to be eligible for Tit le IV f unding, in most cases it would not be practical to continue offering t hat course under our current business model." We have included snapshots of our Gainful Employment analysis for Apollo, Corint hian, DeVry and ITI in Appendix 1, at the end of this note.
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Appendix 1
Figure 2: Gainful Employment Calculations- Apollo Group Step 1 - Calculating potential tu1 t1on cuts
Source/Calc
APOL
APOL
APOL
Tuition & Fees source Program o/o of Total Enrollment Avg. Pell Grant '08-'09 (DoE) Percent of Students getting Pell Assumed years of credits transferred Total Tuition & Fees Cash/out of pocket payments Pell Grants Avg. Debt from School
DB ests. DoE DoE DB ests. calc 7% calc sum
67,000 $ 54,400 $ 22,200 online avg. ground online website website website BA Assoc BA 4% 38% 40% 2,695 $ 55% 2.00 2,695 $ 55% 1.50 2,695 55% 0.20
33,500 2,345 2,960 28,195
34,000 2,380 3,700 27,920
19,980 1,399 2,664 15,917
Monthly payments over 10 years at 6.8% interest rate mort calc $ 324 $ 321 $ 183 -------------~--~~--~'~r-~~~~--~~~~~--~ Implied Requu-ed Salary to meet mont y pay: e 12% Assumed starting salary Total monthly student debt payments Max Debt Load Cash/out of pocket payments add Avg. PelI Grants Total Tuition & Fees Implied Pr'ice.Cut @ -8% ofsalary over 10yrs Step 2- Reven ue Reduct1on 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 St ep 3 - Impact t o EPS and PE Current Calendar 201 OE DB EPS EPS impact from revenue decrease with no cost offset Estimated impact from Gainful Employment
NOt<> PriCes as ol July 19" r PM E1 I'JP-cut sc t1>3t star11trg b#l:hell>t'ss.l.,yls$501:
DB est. Mort. Calc.
$ $
50,000 $ 500 $ 43,448 2,345 2,960 48,753 $ 46%
50,000 $ 500 $ 43,448 2,380 3,700 49,528 $ 46%
25,000 250 21,724 1,399 2,664 25,787 29%
o/o of Revs 19% 4% 38% 39%
0%
100% EPS
Price Cut Rev impact 0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0% 0.0% 0.0% PE 8.6x 8.6x
$ $
5.66 5.66
( JN<> f)tif:eCVI tf ~SCCi~res can~rn$2$K .lf gr~virl<::m
Soutee Ct:>mpany date ntJ Oeutsr:he S.nr estm,.tes
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Figure 3: Gainful Employment Calculations- DeVry
Step 1 - calculation Exposure to HS Grads Tuition & Fees source Program %of Total Enrollment Avg. Pell Grant '08-'09 (DoE) Percent of Students getting Pell Assumed years of credits transferred Total Tuition & Fees Cash/out of pocket payments Pell Grants Avg. Debt from School Average Starting Salary Monthly payment at 8% of salary Max Debt Load, over 10 years, 6.8% int.rate Cash/out of pocket payments add Avg. Pell Grants Total Tuition & Fees Implied Price Cut @ 8% of salary over 1Oyrs Step 2 - Revenue Reduction Estimate of impact of current Gainful Employment Ross Medical Keller Graduate School Bachelor's degrees><: Associate's degrees** US Healthcare & Chamberlain Becker CPNCFA & Other (Fanor, Advanced Academics HS) Total revenue impact Step 3- Impact to EPS and PE Current Calendar 201 OE DB EPS EPS impact from revenue decrease with no cost offset Estimated impact from Gainful Employment
Note Pnces as of July 1ft" 1 PM ET tJPrice cur .1ssummg starTing bdchelor's saldl"f tS $50~ ( JPnce cur >SSum"'g sr.ttJ119 .scNres salary 1$ $2 71<

$
DV 30% 61,700 $ 10-K BA 52% 2,572 $ 77% 0.75

$
DV 30% 35,038 10-K Assoc . 15% 2,572 77% 0.25 30,658 3,066 3,457 24,135 33,288 333 28,926 3,066 3,457 35,449 16%
DoE DoE DB est. calc 10% calc sum est, See Calc A
50,131 $ 5,013 6,420 38,698 50,071 501

$ $
$ $ $
12%
mort calc from above from above
43,510 $ 5,013 6,420 54,943 $ 10%
%of Revs 12% 14% 40% 12% 15% 7% 100% EPS

$
Price Cut Rev impact 0% 0.0% 0.0% 0% 0% 0.0% 0% 0.0% 0% 0.0% 0% 0.0% 0.0% PE
4.48 4.48 0%
11 .9x 11 .9x 0%
Scutce
Cc!'~?Pinr datil fKI Oe<tlxl>o 8ank eSttn><les
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Figure 4: Gainful Employment Calculations -ITT Education

Step 1 -ca lculation Exposure to HS Grads Tuition & Fees source Program % of Total Enrollment Avg. Pell Grant '08-'09 (DoE) Percent of Students getting Pell Assumed yea rs of cred1 tra nsferred ts Total Tuition & Fees Cash/out of pocket payments Pell Grants Avg. Debt from School (D) Average Starting Salary Implied monthly payments to cover d ebt (D) (8%. 1Oyrs. 6 8%) Implied starting salary by debt (D) Monthly payment at 8% of salary Max Debt load. over 10 years. 6.8% int.rate Cash/out of pocket payments add Avg. Pell Grants Total Tuition & Fees lmphed Price Cvt@ S'f( of salary ove1 10 1rs Step 2- Revenue ReductiOn Estimate of impact of current Gainful Employment Bachelors Associates Total revenue impact Step 3- Impact to EPS and PE Current Ca lendar 201 OE DB EPS EPS impact from revenue decrease w ith no cost offset Estimated impact f rom Gainful Employment
Noll!! Ptices as o/Juty IS", I PM ET SO<Jrce Ccm,o.>ny data arK/ 0e<A$CI>e Bank eStrmatM

$
ESI 20.25% 69, 600 1o-K BA 15% 2.550 80% 0.75

$ $
ESI 20.25% 34,800 1o-K Assoc. 85% 2.550 80% 0.25

$
Company data DoE DoE DB ests.
calc
I
calc sum
5%
56.550 2.828 6,630 47,093 50.000

$ $
30.4 50 1.523 3.570 25,358 29.000

$ $
est. See Calc A
542 54.194
$
292 29.181 25.358 1,523 3,570 30.450
12% mort calc from above from above
$
$
500 43.448 $ 2,828 6, 630 52, 905 $ ,0%
290 25.200 $ 1.523 3,570 30,292 $
47.093 $ 2.828 6,630 56,550 $
1 %
%of Revs 15% 85% 100% EPS 11.04 (0.36) 10.68 -3%
Price Cut Rev impact ,0% -1.0% -1% -0.4% -1 .4% PE 8.0x 8.3x 3%
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Figure 5: Gainful Employment Calculations- Corinthian Colleges

, , ., Exposure to HS Grads ( 11 TUitiOn & Fees Souroa/Calc Co oomments
$
COCO 5%1010% 15.409 College Nav Med ASSISt 2.407 90% 15,409
COCO $31,000
$
COCO
COCO
COCO
COCO
source
Program %of Total Enrollment Avg Pell Grant '08- '09 (DoEI Petcent of Students gemng Pell Total Tuition & Fees CastVout or pod:et payments Pell Grants Avg Debt from School Average Starttn<J Salary DoE DB est calc
Assoc.
Biz& HC $2.407 90% $31,000 1,550 4,333 25.117 24.200 1 DB est
$
$
26,450 $ 26.450 $ 26.450 $ 19.026 College Nav College Nav College Nav College Nav AutoMech Dtesel Auto Body Electncian 2,407 $ 90% 26,450 $ 1,323 2.166 22.961 25.aa:J $ Bl.S 2.407 $ 90% 26,450 $ 1,323 2,166 22.961 32.660 $ BLS 2.407 $ 90% 26.450 $ 1,323 2.166 22.961 29.620 $ BLS 2,407 90% 19,026 951 2,166 15.900 35.990 BLS
-4%16% revsl <I% II% revs! <1% 11% revs! <1%ll%revsl

$
I
calc sum
5%
770
2.166 12.472
$
SOCoodes
source
lmp!Jed monthly paymerus to oover debttn row 18 (8%. IOyrs, 6.8%1 lmphed sta<Mg salary by debt m row 18
24.060 1 $ BLS
289
28.905
$
Montnty ~~ at 891- of S<>iatY Max Debt Load. over 10 years. 68% tnt rate CastVout or pocket payments add Avg Pell Grants Total Tuition & Fees
12% mort calc
$
$
lromaeov" !rom abOve
241 $ 20.907 $ 770 2,166 23.844
242 21.029 $ 1.550 4,333 26.911
2$ $
22.489 $ 1,323 2.166 25.977
327 $.
28,38) $ 1,323 2,166 31,869
2$6$
25,739 $ 1,323 2166 29.227
360
31,274 951 21EO 34,391
25,117 $ 1.550 4,333 31.000
Estimate of impact of current Gainful E~loyme nt Certiltcate tn Healthcare Assoaate's 1n Bus1ness Associate's'" Cnmmal Just1oe Auto mechantc Otesel mechante+ Auto body Trades Total revenue impact
~r
%of Revs 56% 13% 16%

10% 2% 2% 1%
Price Cut
0% -t39'o 13% 2% 20% II% 0%
100%
Rev impact 00% -17% 21% .02% 04% 02% 00% -34%
~t
EPS
$ $
PE
1.71
(0451
Current Calendar 201 OE OB EPS EPS tmpact from revenw decrease wtth no cost offset Esbmated tmpact from Gatnful Employment
126 -26%
S.lx na
Note Pnces ~s of Juty 1Y". 1 PM ET POC-e cur assummg stJrting salary for assoc~ate's In busiflfiSS and Comindl Justice is $24k. $26K tor Auto Mechanic. $33/K for Diesel Mechanic and $30K for Auto Body.
$()(JJC8 Company Wtd af'X'J 06utsch8 Bant-' esrtmates
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Appendix 2
Additional information available upon req uest
Disclosure checklist Company
Apollo Group
Ticker
APOL.OO
Recent price*
45.56 (USD) 16 Jul 10
Disclosure
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 required by at least one jurisdiction in addition to the 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 this 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 this 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/DisclosureDirectory.eqsr.
The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Paul Ginocchio
Page 9
19 July 2010
Deutsche Bank
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Historical recommendations and target price: Apollo Group (APOL.OQ)

(as of 7/16/2010j
no.oo ~----------------------------------------------------------~
00.00 +-~----~~----~~----~~--~~~----~~----~~----~~-4
Previous Recommendations Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Ratmg *New Recommendation Structure as of September 9, 2002
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60.00 50.00 40.00
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Jul 07
Jul 08
Jul 09
Oct 09
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
Eq u1ty ratmg key
Equ1 ratmg d1 ty spers1 and bank1ng relat1 on onsh1 ps
Buy: Based on a current 12- month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected d ividend yield), we recomm end that investors buy the stock. Sell: Based on a current 12-month view of total shareholder 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 (includ ing dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of10% or worse over a 12-month period
500 400 300 200 100

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0 Companies Covered lil'il Cos. w/ Banking Relationship

North American Universe
Page 10
19 July 2010
Deutsche Bank
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Regulatory Disclosures 1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs . Investors are strongly encouraged to review this information before investing.
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Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://qm .db.com.
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Page 11
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From:
To: CC: Date: 7/26/2010 9:29:50 AM

Subject:
Robert H . James Liaison for Career Institutions ofHigher Education U.S Department ofEducation FAX: 317-257-2098 Call first Cell Phone #202-557-5835 D.C.# 202-377-4301 Indianapolis Office 317-257-2098 8527 Quail Hollow Road Indianapolis. IN 46260-2208
~Eir~t~nalysis
Online Research: www.research-driven.com Research: (800) 866-3272 Trading: (800) 322-3272 (312) 258-0660 One South Wacker Drive Suite 3900 Chicago, IL 60606
July 26, 2010
Post-secondary education
Analyst: Corey Greendale
Important disclosures and certifications begin on page 11 of this report.
Further thoughts on gainful employment NPRM

We summarize here our thoughts upon review of the full gainful employment NPRM. We view the proposal as less draconian than the proposal floated during the negotiated rulemaking, but also more onerous than suggested by the summary press release DOE issued Friday morning last week. Analysis is complicated by lack of data (particularly around repayment metric) , as well as by ambiguities in the NPRM. Among our covered companies, we expect the proposed regulation would have relatively little impact on APEI, CPLA, DV (ex Carrington), STRA, and UTI. For the most part, view likely impact as more-than-factored into current stock prices of other covered companies.
COMPANY
TICKER
RATING CURRENT YR EST (OLD NEW~ PRICE (OLD NEW~
FORWARD YR EST (OLD NEW~
TARGET MARKET CAP PRICE (MILLIONS~
American Public Education Inc. Apollo Group Inc. Capella Education Co. Career Education Corp. DeVrylnc. Education Management Corp. ITT Educational Services Inc. Strayer Education Inc. Universal Technical Institute
$46.03 $49.27 $89.69 CECO $25.41 DV $59.29 EDMC $16.31 ESI $85.44 STRA $236.49 UTI $21.79
APE I APOL CPLA
0 0 0 0 0 0 0 0 0
$ 1.74 $5.34 $3.57 $2.89 $1.45 $ 11 .12 $9.63 $1.19
$2.40 $5.43 $4.53 $3.55 $1 .86 $12.64 $11 .80 $ 1.65
$873.6 $7,503.4 $1 ,528.9 $2,112.0 $4,282.6 $2,347.6 $2,949.8 $3,246.8 $533.8
Given the complexity, and, in some instances, ambiguity of the proposed regulations on gainful employment, we thought it would be helpful to summarize our understanding of the Notice of Proposed Rulemaking (NPRM), as well as providing analysis. The NPRM proposes measuring all programs that are required, under the Higher Education Act, to lead to gainful employment in a recognized occupation (i.e., all non-liberal arts programs at for-profit schools, as well as non-degree programs at non-profit schools) on two criteria: 1) repayment rate, and 2) debt-to-income.
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Repayment rate
Under the proposed regulation , a repayment rate would be calculated annually for each program. The denominator of the repayment rate is the outstanding balance (including accrued interest) of all Federal Family Education Loan (FFEL) and direct loans entering repayment, on the date they entered repayment, in the preceding four federal fiscal years. The numerator is the original outstanding balance of any FFEL and direct loans that entered repayment in the preceding four federal fiscal years on which 1) the entire balance has been paid in full , or 2) payments were made during the year that reduced the principal balance. (Some ambiguities: It isn't clear to us whether the intention of the regulation is to include only loans on which the principal balance at year end is lower than the principal balance at the beginning of the year, or all loans on which principal-reducing payments are made, regardless of whether later interest accrued drives the year-end balance above the balance at the beginning of the year. Also, we note the proposed regulation stipulates principalreducing payments must be "made by a borrower;" it's not clear if, or why, the Department of Education (DOE) intends to disqualify loans on which payments are made by someone other than the borrower, such as a relative.) The balance of any loans whose borrowers' employment qualify them for public service loan forgiveness are also included in the numerator. Excluded from both the numerator and denominator would be: 1) Loan balances of students with military or in-school deferment, and 2) balances of borrowers who entered repayment during the final six months of the most recent fiscal year. While we expect high repayment rates, using this definition, would generally correlate with low cohort default rates, we note several differences between the two, including 1) cohort default percentages measure borrowers, whereas repayment rate percentages measure borrowed dollars, 2) the repayment rate is measured over a longer period of time, and 3) students in forbearance , deferment, and who make interest payments but don't reduce their loan principal balance aren't counted in the cohort default metric but WOULD be counted against a program's repayment rate. Lack of school-specific data on these latter items makes direct analysis of this metric challenging (for the schools themselves as well as for investors).
Debt-to-income
Under the proposed regulation, two different debt-to-income ratios would be calculated annually for each program. In both calculations, the numerator is the annual debt service cost of students who completed the program during the three most recently completed financial aid award years prior to the earningsmeasurement year. This calculation would use the median debt level of students who completed the program during those three years, a 10-year repayment period, and the interest rate on unsubsidized Stafford loans (currently 6.8%). The median debt level includes all Title IV loans other than parent PLUS loans, as well as private loans and institutional loans. Excluded from the median debt level would be debt incurred at other institutions, unless they're under common ownership with the institution in question. This differs from , and is less onerous than, the proposal floated at the negotiated rulemaking earlier this year, which called for including all debt incurred at all postsecondary institutions. In the first debt-to-income measure, the denominator is the average earnings in the most recent calendar year of graduates from the previous three years. The same calculation would also be performed using median debt and earnings of students who completed the program during the prior three years (i.e. , four, five, and six years ago). The proposal suggests graduates' annual
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earnings would be obtained directly from the Social Security Administration or other federal agency, rather than using 25th percentile Bureau of Labor Statistics (BLS) data as suggested in an earlier proposal. (This proposal is more onerous in this regard, as the prior proposal would have allowed schools to substitute actual graduate earnings for BLS data, and the BLS option has been eliminated in the current version . We note the proposal leaves open the question of how students for whom earnings data can't be obtained would be treated: whether they'd be omitted from the average or treated as zeros.) The second debt-toincome measure also uses median debt in the numerator, but uses discretionary income in the denominator. Discretionary income is defined as average annual earnings minus 150% of the poverty guideline for a single person in the continental U.S., which is $10,830 at present. The proposal also indicates earnings of students who graduated four, five, and six years ago may be substituted for earnings of students who completed in the most recent three years if the school can demonstrate (via employer or student survey or other means) earnings increase "substantially" after an initial employment period. (It's unclear to us why the DOE would require the burden of proof to fall to an institution to demonstrate substantial improvement when such improvement would, presumably, be evident in the earnings data the DOE proposes tracking for purposes of making the debt-to-income calculation.)
Eligibility categories
Table 1 below summarizes programs' eligibility under the proposed gainful employment regulation, depending on outcomes of the debt-to-income and repayment calculations. Programs that have a 45% or better repayment rate AND an 8% or lower debt-to-income ratio (or 20% or lower debt-to-discretionaryincome ratio) would be fully eligible, with no restrictions. Programs that have a 45% or better repayment rate OR an 8% or lower debt-to-income ratio (or 20% or lower debt-to-discretionary-income ratio), but not both, would be fully eligible but would have to warn current and prospective students that that they may have difficulty repaying their loans under certain circumstances, as well as the most recent debt-to-income and loan repayment data.
Table 1 Summary of gainful employment eligibility criteria Above 12% AND Above 30% of discretionary income Debt-to-income Between 8% and 12% OR Between 20% and 30% of discretionary income Eligible (with warning) Equal to or below 8% OR Equal to or below 20% of discretionary income Eligible (no warning)
45%+
Eligible (with warning)
35%to 45%
Restricted
Restricted
Below35%
Ineligible
Restricted
Source: Federal Register
Programs with repayment rates between 35% and 45% would be termed "restricted," unless they also have an 8% or lower debt-to-income ratio (or a 20% or lower debt-to-discretionary income ratio). Programs with restricted status would have to provide the DOE annual documentation from employers indicating the curriculum aligns with their businesses and that they anticipate openings in the job areas for which the programs prepare students. Additionally, enrollment
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July 26, 2010 of Title IV recipients in such programs would be limited to the average number of such recipients enrolled during the prior three years. For programs with growing enrollment, this suggests enrollment would decline at first and would ultimately reach equilibrium. (We would point out to the DOE two [possibly] unintended consequences of this regulation: 1) it could provide a financial incentive to schools with programs at risk of being restricted to grow as aggressively as possible between now and the 2012-13 school year, when the restrictions would be implemented, to raise the average enrollment level before that time [indeed, the fact that this concept has been proposed may already have provided such an incentive]; 2) for programs with growing enrollment, the institution may have to terminate some enrolled students at the beginning of the restriction period in order to meet the enrollment restriction. It's unclear to us how students would be well-served by being forced out of a program mid-stream so the program can meet an arbitrary enrollment cap.) Programs with repayment rates below 35% would remain eligible if they have debt-to-income ratios below 8% (or debt-to-discretionary-income ratios below 20%). Such programs would be restricted if they have debt-to-income ratios between 8% and 12%, or debt-to-discretionary-income ratios between 20% and 30%. And these programs would be ineligible for T itle IV if they have debt-toincome ratios above 12% or debt-to-discretionary-income ratios above 30%. Programs could also use median debt and earnings of students who graduated four, five, and six years ago, rather than those who graduated in the most recent three years, but if the prior-three-year data is used, the debt-to-income hurdle to avoid ineligibility is 8% and the debt-to-discretionary-income hurdle is 20%. The proposed regulation would cap the programs that could be declared ineligible in the first year of implementation (2012-2013) to those serving 5% of students in programs subject to the regulation. (The programs deemed ineligible would be the ones at each degree level with the lowest repayment rates, and others that would , in the absence of the cap, become ineligible, would instead be restricted in that first year.) The NPRM contains estimates of the percentage of programs and students attending those programs that would fall into each category. However, the methodology used to determine these numbers isn't explained particularly well , and, it appears, extrapolates data from a single state (M issouri) to the entire U.S. , leaving room for doubt as to the estimates' accuracy. For what it's worth, the NPRM estimates 84% of students in programs subject to gainful employment regulation are in programs that would remain eligible and unrestricted, 8% are in programs that would become restricted, and 8% are in programs that would become ineligible. However, a comment later in the N PRM makes it sound as though these estimates may assume programs close to "restricted" and "ineligible" cutoffs implement across-the-board tuition cuts in order to avoid missing the necessary hurdles. (We hope members of Congress ask for clarification of the assumptions underlying these estimates and for lists of programs that would fall in each category, to assure themselves that the estimates are realistic and that significantly greater numbers of students aren't going to get displaced if these regulations are implemented as proposed.)
Other details
The public comment period for the gainful employment NPRM ends on Sept. 9, and the goal is to publish a final regulation by Nov. 1, 2010, for implementation on July 1, 2011. While we view the proposal as somewhat less onerous (in terms of outcomes requirements, not necessarily in terms of data collection or simplicity) than the one floated during the negotiated rulemaking sessions, the language of
4
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July 26, 2010 the NPRM suggests a bias toward negative revisions. The NPRM says the DOE seeks questions on whether the current "restricted" category is too lenient and whether programs in this category should, instead, lose access to Title IV. It doesn't, on the other hand, specifically solicit comments on whether the proposal is too onerous, though we expect it will receive comments to this effect from the sector, as well as from some policymakers. We see no indication in the NPRM on whether schools will receive information ahead of time about how their programs are perform ing on relevant metrics. We're hopeful the DOE would provide access to such data, if the proposal were implemented as written, so students aren't blindsided by their programs losing Title IV eligibility. The proposed regulation would allow students enrolled in programs that become ineligible to continue receiving Title IV funds for the remainder of the award year in which the program becomes ineligible and the award year following the DOE's notice of ineligibility. Timeline of changes: As of July 1, 2011 , institutions would have to begin providing to the DOE information about students who completed programs in the past three years. DOE would use this information to compute average annual earnings and median debt. Also, institutions would have to put information on their websites about occupations for which the programs prepare students, graduation rates , and median debt levels. (All of these requirements are listed in the NPRM issued in June addressing the broader range of issues discussed at the program integrity negotiated rulemaking.) Then, as of July 1, 2012, programs serving up to 5% of students could be terminated, and other programs would become restricted or have to issue warnings to current and prospective students under the gainful employment regulation. As an editorial aside , we believe the proposal is extremely convoluted, and that it's unclear it meets original Congressional intent (particularly given that the "gainful employment" language has been in the legislation for several iterations of the Higher Education Act with no elaboration deemed necessary by either the DOE nor Congress) or the definition of "gainful employment." If the DOE views as practical the collection of earnings data for individual programs, we believe a metric that compares students' pre-enrollment earnings to their earnings three-to-five years after graduation would both more clearly meet the definition of "gainful employment" and measure whether the programs are providing economic value to students. (These calculations could be benchmarked against average increases in earnings among people without a college degree as a control.) Such a measure would weed out programs that aren't leading to enhanced earnings prospects, which, we believe, should be the purpose of any sort of regulation around gainful employment. We note that under the current proposal , a vocational program at a community college could get zero students jobs or income increases, but remain eligible because students take on very little debt (though this doesn't account for the taxpayer subsidies wasted on the program). We find it hard to believe such a program would meet any reasonable definition of "gainful employment," though it would do so under the current proposal.
Overall and company-specific analysis

We provide thoughts on the relative exposure of each of our covered companies to the gainful employment reg ulation if it's implemented precisely as proposed. We note several caveats to any analysis: As discussed above, while we expect low cohort default rates would
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July 26, 2010
generally correlate with high repayment rates , the two metrics are quite different, and we aren't aware of any publicly available data that would allow company-specific projection of repayment rates, as defined in the NPRM. While we believe the proposed regulation would have little impact on several of our covered companies at present, even these companies could be exposed in the future due to 1) changes in Stafford loan terms (i.e., an increase in the unsubsidized Stafford loan rate would make it more difficult to meet the debt-to-income requirement) , or 2) a recession hurting graduates' earnings or ability to make principal-reducing payments in a given year. We also note the proposed regulation could limit the ability of even unaffected companies to raise tuition prices in the future even if non-profit schools are doing so aggressively, or motivate them to borrow a tactic from many non-profit schools and raise sticker prices, while offering more scholarships as offsets. While restricted programs remain eligible for Title IV, the proposed regulation would allow the DOE to put schools on provisional certification if one or more programs are restricted or ineligible. The proposal also suggests that this would be a factor when the DOE considers the schools' application for renewal of their program participation agreements. In other words, we believe schools with restricted programs could ultimately become ineligible at the discretion of the DOE, suggesting that operating in a semi-permanent restricted state may not be a viable option. The proposal also calls for institutions to apply to the DOE before they can offer new Title IV-eligible programs, to ensure the programs will be consistent with gainful employment requirements. Under the proposal, institutions would have to provide the DOE 1) projected enrollment for each location, 2) documentation from employers that the curriculum aligns with projected job openings, and 3) if the program is a substantive change, documentation of approval of the change from the accrediting agency. The proposed regulation would also allow the DOE to restrict approval for an initial period based on enrollment projections and demonstrated ability to offer other programs that lead to gainful employment. In other words, it sounds as though the proposal would allow the DOE to slow approval of new programs and to restrict growth in those new programs, pending proof of compliance with gainful employment metrics. We don't expect the warnings some programs would be required to issue current or future students to have a material negative effect. (Unlike the DOE, apparently, we doubt most students would find the prospect of having to devote 9% of their income to servicing their student loans soon after they graduate to be alarming.) However, the possibility exists that such warnings could dampen enrollment prospects even at schools that wouldn't have restricted or ineligible programs. We continue to believe providing more information to students about metrics like graduation rates and typical debt levels makes sense for all schools, and it's unclear to us why the DOE would require only schools subject to gainful employment regulation to provide such data to students. Also in the category of "for what it's worth," the NPRM suggests DOE's analysis indicates programs that may require adjustments (presumably to tuition levels) in order to remain in compliance with gainful employment requirements are concentrated in the following curriculum areas: cosmetology, vehicle maintenance, legal support services, culinary, ground transportation, audiovisual technology, and medical assisting services (though the latter appears to be based on so little data that we note the DOE's conclusion only reluctantly).
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While we would love to be able to answer the question "What would Company X's earnings be if this regulation is implemented as proposed?" we believe there are at this point, for many of the companies, too many unknowns to provide an answer with any degree of confidence. We expect to do more analysis as we receive more data. For the moment, we provide at least directional commentary below: American Public. We believe the proposed regulation would have little impact on American Public. Given the large number of active duty military in its population, we believe the median debt of many programs is likely at or close to zero, and that even as the company expands outside the military, as we anticipate, its relatively low tuition costs would keep it in compliance with the requirements of the proposal. This is particularly true given that it appears its recently announced Wai-Mart relationship may be a significant source of enrollment growth and that, under terms of the partnership, Wai-Mart employees will receive a 15% discount off American Public's already low tuition rates . Apollo. We view Apollo as relatively challenging to analyze, given that 1) University of Phoenix has such a wide diversity of programs, and 2) the company has never, to the best of our knowledge, provided data on typical graduate debt levels, nor on typical graduate earnings. (University of Phoenix has provided information on typical salary increases of bachelor and masters students during the time they're enrolled in programs.) In the absence of more information, we're reluctant to extrapolate and draw conclusions from national data. As such, we see more uncertainty around gainful employment for Apollo than for some of our other covered companies. However, we note 1) Apollo's cohort default rates are better than proprietary averages, suggesting at least some of its programs may meet required repayment thresholds, 2) University of Phoenix has such a diversity of programs that it would likely be able to reallocate resources toward programs that meet gainful employment thresholds and away from programs that don't meet those thresholds. While we acknowledge the uncertainty around Apollo, we believe the most likely outcomes are more than factored into the stock at current levels, trading at just 8.8x our calendar 2011 EPS estimate. Career Education. Like Apollo, Career Education has not disclosed specific details on typical student debt levels nor on graduate earnings. The company has said that the portions of its business most exposed to gainful employment regulation are its culinary and art & design segments. While it communicated this belief prior to release of the current gainful employment proposal, we note this conclusion is consistent with the programmatic areas the DOE indicates are most exposed in the NPRM. The culinary and art & design segments account for approximately 20% of our 2010 operating income estimate. At AIU & CTU, which combined account for 72% of our 2010 operating income estimate, we believe more than 30% of students are military-affiliated (either active-duty and veterans) and thus have access to non-Title IV sources of tuition assistance, such as the military's active-duty tuition assistance program, the Montgomery Gl Bill, and the post-9/11 Gl Bill, all of which would reduce typical debt loads, helping programs at those schools remain within required debt-to-income parameters. As such, we continue to believe Career Education stock, at 7.2x our 2011 EPS estimate, more than incorporates the likely regulatory outcomes. Capella. While we've noted cohort default rates don't necessarily translate directly to repayment rates, we expect the bulk of Capella's programs would
7
(800) 866-3272
July 26, 2010 meet the proposed repayment hurdles, given its average cohort default rates are so low. Its fiscal 2007 draft three-year cohort default rate was just 5.5%, well below that of any other company in our coverage universe, except American Public, which had relatively few students borrowing under Title IV at that point. Other than Capella and American Public, the lowest draft threeyear cohort default rate in our public coverage universe belonged to Strayer, at 13.0%. DeVry. We expect Keller, Ross, and Chamberlain would be able to meet the repayment rate requirements of the gainful employment proposal, given their low draft fiscal 2007 cohort default rates (4.7%, 0.5%, and 4 .1%, respectively) . With average starting salaries in a range of $45,000 and typical graduate debt balances that we believe are slightly over $40,000, we believe DeVry University's undergraduate programs would, on average, be able to clear a 20% debt-to-discretionary-income threshold and remain eligible under the current proposal. Other portions of the business, including Becker, Advanced Academics , and Fanor, would not be subject to gainful employment regulation. The company has not, to the best of our knowledge, provided detail on Carrington (formerly U.S. Education Corp) graduates' typical starting salaries or debt balances. Education Management. We believe that some of Education Management's programs, particularly bachelor programs at the Art Institutes, would be among the most challenged in our coverage universe to meet a debt-toincome requirement, given median graduate debt of $41 ,000 and starting salaries in a range of $31,500. With these parameters, we calculate average debt-to-discretionary-income of 37%. The current proposal is more favorable toward Education Management than the prior proposal, however, given the inclusion of the repayment option. The Art Institutes' average fiscal 2007 twoyear cohort default rate was 7.2%, well below the proprietary-school average in a range of 12%, and Argosy's draft three-year cohort default rate was just 5.3%, suggesting programs at both these schools may be able to make required repayment thresholds. ITT. With typical graduate debt loads in a range of $30,000 and starting salaries in a range of $31,600, we calculate a debt-to-discretionary income average of approximately 27%. (The actual number may be higher, as graduate earnings would likely trend up from starting-salary levels.) This suggests ITT's programs would, in general, remain eligible for Title IV, but some might be restricted in the absence of business model changes. We suspect ITT would respond to the current proposal, if enacted, in part by 1) giving more selective scholarships to students in programs in danger of being restricted and who would otherwise have to borrow the most money to attend school, and 2) perhaps lowering tuition on programs that lead to lower earnings prospects, such as criminal justice. In any event, we continue to believe the most likely outcomes are more than factored into the current stock price, at 6.8x our 2011 EPS estimate. Strayer. Strayer has disclosed that its typical graduates earn $50,000 annually within three years after completing school. At that level of earnings, graduates could borrow nearly $49,000 and maintain a debt-to-discretionaryincome below the 20% required to remain eligible. Given that a full bachelor degree at Strayer costs on the order of $60,000, that students tend to come in with a considerable amount of prior-earned credit on average, and that some 20% of Strayer's revenue comes from tuition assistance provided by employers, we believe Strayer's programs would generally have no issues with the proposed gainful employment regulations . UTI. Management had stated publicly that 90% of its programs should be fine
8 First Analysis Securities Corporation
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July 26, 2010
under an 8% debt-to-income requirement. The only material change on that metric from the original proposal to the current proposal is the use of actual graduate earnings rather than BLS data. While UTI has not, as far as we know, ever disclosed a specific starting salary average, we note that according to BLS data, the 25th percentile earnings of auto mechanics are about $26,000, and we believe UTI graduates earn at least in that range (in the time horizon measured by the proposed regulation, if not immediately upon graduation) . As such , we believe the impact of the proposed regulation on UTI, if enacted, would be relatively minor.
COMPANYDESCffiPTION American Public Education Inc. American Public Education, based in Charles Town, W .Va., provides online education for the military and those interested in public-service related programs. Apollo Group Inc. Apollo Group Inc., headquartered in Phoenix, is a leading for-profit provider of college education to working adults, primarily through its University of Phoenix subsidiary. Capella Education Co. Capella Education Co., based in Minneapolis, provides online education through Capella University, a regionally accredited online university. Career Education Corp. Career Education Corp., headquartered in Hoffman Estates, Ill., offers associate, certificate, bachelor, and master's programs in visual communications, information technology, business studies, culinary arts, and allied-health. DeVry Inc. DeVry Inc., headquartered in Downers Grove, Ill. , is a leading provider of postsecondary education. It provides undergraduate and graduate technology-based programs; undergraduate and graduate business programs; allied health, medical, veterinary, nursing, and healthcare programs; CPA and CFA review courses; and online secondary education. Education Management Corp. Education Management Corp., headquartered in Pittsburgh, offers educational programs at the associate, bachelor, master, and doctoral levels through four school networks: 1) the Art Institutes, which provide education in creative and applied arts, 2) Argosy University, 3) Brown Mackie College, and 4) South University. ITT Educational Services Inc. ITT Educational Services Inc., headquartered in Carmel, Ind., is a premiere provider of technically oriented education nationwide. Strayer Education Inc. Strayer Education Inc., headquartered in Arlington, Va., provides accredited college degrees, mostly in business and information technology, to working adult students both in physical campuses and online. Universal Technical Institute Universal Technical Institute, based in Phoenix, is a nationwide provider of technical education training for students seeking careers as professional automotive, diesel, collision repair, motorcycle, and marine technicians.
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Institutional sales: (800) 866-3272
FIRST ANALYSIS SECURITIES EQUITY RESEARCH

HEALTH CARE PR()Dl)CTIVITY LIFE SCIENCE TOOLS & DIAGNOSTICS Dan Leonard- dleonard@firstanalvsis com PBMs HOME HEALTH SERVICES SPECIALTY HEALTH CARE OUTSOURCING Tony Perkins- tperkins@firstanalysis.com HEALTH CARE IT Frank Sparacino- fsparacino@firstanalysis.com CLINICAL RESEARCH ORGANIZATIONS Todd Van Fleet- tvanffeet@firstanalysis.com
OFFENDER(BEHA~ORAL)MANAGEMENT
Todd Van Fleet- tvanffeet@firstanalysis.com James Macdonald - jmacdonald@firstanalysis.com
BROADBAND ENABLED BUSINESSES
- IT APPLICATIONS TRANSACTION PROCESSING Lawrence Berlin - lberlin@firstanalysis.com NETWORK SECURITY CRM OPTIMIZATION Craig Nankervis - cnankervis@firstanalysis.com BUSINESS INTELLIGENCE Frank Sparacino- fsparacino@firstanalysis.com WIRELESS /INFRASTRUCTURE Howard Smith - hsmith@firstanalysis.com Lawrence Berlin - lberlin@firstanalysis.com
- OUTSOURCED SERVICESPOST-SECONDARY EDUCATION Corey Greendale - cqreendale@firstanalysis.com HR & ACCOUNTING SER~CES James Macdonald- jmacdonald@firstanalysis.com ACCOUNTS RECEIVABLE MANAGEMENT Lawrence Berlin - lberlin@firstanalysis.com CONTACT CENTER SER~CES Howard Smith- hsmith@firstanalysis.com
CLEAN-TECH /INFRASTRUCTURE RESOURCE MANAGEMENT Corey Greendale - cqreendale@firstanalysis.com ENERGY RELATED WATER SPECIALTY MATERIALS Michael J. Harrison - mharrison@firstanalysis.com Steven Schwarlz - sschwarlz@firstanalysis.com
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10
July 26, 2010
IMPORTANT DISCLOSURES AND CERTIFICATIONS
PRICE, RATING, AND TARGET PRICE HISTORY* American Public Education Inc.
Date
3!712008 5/512008 8/1412008 11/14/2008 8/512009 212312010
Close
$29.49 $34.86 $45.35 $38.77 $33.57 $42.45
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712612007 6/1312008 711012008 10/29/2008 11912009 3/2312010 313012010 712012010
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$63.37 S52.24 $55.46 $65.01 S85.27 $63.97 $6228 $48.08
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Capella Education Co.
Date 7!26!2007 11/5!2007 2115!2008 5f212008 816!2008 1117!2008 211312009 7/28!2009 10/27/2009 2117!2010 4/27!2010 Close $40.57 $68.98 $55.46 $61.80 S52.89 $52.49 $59.48 $62.10 $71.40 $80.10 $93.30 Target Rating $57 0 S87 0 S72 0 $80 0 $65 0 $69 0 $73 0 $87 0 S89 0 S96 0 $1 13 0
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Date 7!26!2007 9/26!2007 3/5!2008 3/29!2010 Close $31.23 $26.91 $14.02 $32.43 Target Rating $41 0 $37 0 $23 0 $51 0
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Date 7!26!2007 11/1!2007 1217!2007 1129!2008 1218f2008 1127!2010 Close S35.11 S53.25 $57.89 $54.63 S54.15 S63.32 Target Rating S45 0 $65 0 S67 0 S69 0 0 S76 S83 0
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Education Management Corp.

Date 7!26!2007 1012612009 2111!2010 516!2010 Close
$24.12 $18.15 $21.39
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ITT Educational Services Inc.
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July 26, 2010
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Date 7!26!2007 7130!2007 1112!2007 2115!2008 5/112008 7!24!2008 11/3!2008 4/30/2010 Close $157.68 $152.08 $185.00 $167.00 $197.38 $220.56 $224.75 $24312 Target Rating 0 $184 0 $208 0 $203 0 $225 0 $253 0 $279 0 $300 0
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14
Universal Technical Institute
Date
1/412008 8/20/2008 11/25/2008 8/2812009 12/2212009 5/412010
July 26, 2010
Close
S16.30 $16.99 $17.05 $20.23 $19.48 $2471
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*Left axis is stock price (gray area indicates 12-month price target); right axis is rating (line indicates rating level). When no rating is indicated in the chart or table, then the stock was unrated at that time. 12-month price targets, if any, are effective with respect to the dates on which they are issued. First Analysis Securities Corp. does not provide 12-month price targets for stocks rated equal-weight or underweight. It usually provides 12-month price targets for stocks rated overweight. The data in this chart are current as of the last trading date prior to the date of this report.
(800) 866-327 2
15
July 26, 2010
ANALYST CERTIFICATION I, Corey Greendale, attest the views expressed in this document accurately reflect my personal views about the subject securities and issuers. I further attest no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me herein.
correspond to buy, hold, and sell, respectively. Please refer to "RATINGS DEFINITIONS" above for an explanation of the FASC rating system. USE OF THIS DOCUMENT: Investors should consider this document as only a single factor in making their investment decision. Past performance and any projections herein should not be taken as an indication or guarantee of future performance. With the exception of information about FASC, the information contained herein was obtained from sources we believe reliable, but we do not guarantee its accuracy. As a subscriber or prospective subscriber, you have agreed not to provide this document in any form to any person other than employees of your immediate organization. FASC is a broker-dealer registered with FINRA and member SIPC. It provides research to its institutional clients as a service in connection with its other business activities. This document is provided for informational purposes only. Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. More information is available on request from FASC 800-866-3272. Copyright 2010 First Analysis Securities Corp. To residents of Canada: The contents hereof are intended solely for the use of, and may be only be issued or passed on to, persons to whom FASC is entitled to distribute this document under applicable Canadian securities laws. To residents of the United Kingdom: This document, which does not constitute an offer of, or an invitation by or on behalf of any person to subscribe for or purchase, any shares or other securities in any of the companies mentioned in this document, is for distribution in the UK only to persons who fall within any one or more of the categories of persons referred to in Article 8 of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) (No. 2) Order 1995 (SI 1995/1536) or in Article 11 of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (SI 1996/1586). ABBREVIATIONS AND ACRONYMS: The meaning of the following abbreviations and acronyms has been identified as not common knowledge, and we therefore provide these explanations. DCF: Discounted cash flow (model). DSOs: Days sales outstanding. EBITDA: Earnings before interest, taxes, depreciation, and amortization. G&A: General and administrative (expense). OEM: Original equipment manufacturer. R&D: Research and development (expense). SG&A: Selling, general, and administrative (expense). IF YOU WISH REMOVAL FROM OUR DISTRIBUTION LIST, PLEASE E-MAIL TO optout@firstanalysis.com OR CALL 312463-6404.
OTHER DISCLOSURES American Public Education Inc.: FASC expects to receive or intends to seek compensation for investment banking services from this company within the three months following the publication date of this document. Education Management Corp.: FASC expects to receive or intends to seek compensation for investment banking services from this company within the three months following the publication date of this document. The compensation of the research analyst(s) principally responsible for the preparation of this document is indirectly based on (among other factors) the general investment banking revenue of FASC. FASC considers all the companies covered in its research reports to be potential clients. RATINGS DEFINITIONS*: Overweight (0): Purchase shares to establish an overweighted position: Stock price expected to perform better than the S&P 500 over the next 12 months. Equal-weight (E): Hold shares to maintain an equal-weighted position: Stock price expected to perform in line with the S&P 500 over the next 12 months. Underweight (U): Sell shares to establish an underweighted position: Stock price expected to perform worse than the S&P 500 over the next 12 months. *Stock target prices may at times be inconsistent with these definitions due to short-term stock price volatility that may not reflect large-holder/buyer valuations of the security. DISTRIBUTION OF RATINGS: The following was the distribution of ratings for companies rated by FASC as of 6/30/2010: 57% had buy (overweight) ratings, 43% had hold/neutral (equal-weight) ratings, and 0% had sell (underweight) ratings. Also as of 6/30/2010, FASC had provided, within the prior 12 months, investment banking services to 6% of the companies rated that had buy (overweight) ratings and 0% of the companies rated that had hold (equal-weight) ratings. For purposes of the FINRA ratings distribution disclosure requirements, our stock ratings of overweight, equal-weight, and underweight most closely
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16
From: To:
Robert MacArthur <nnacarthur@altresearch com> Wittman Donna Woodward Jennifer 8/10/2010 12:14:00 PM
CC:
Date: Subject:
Industry Overview
Equity IUnited States I Business, Education & Professtooal Services 10 August 2010
Bank of America~ Merrill Lynch

DOE to release data on gainful employment 8/13
The Department of Education (DOE) will hold a call on 8/11 at 5pm ET on the proposed gainful employment (GE) regulation (NPRM). The purpose of the call will be to provide an overview of the NPRM and to clarify the proposal in response to public comments it has received. The DOE will then release additional data around the impact of GE on late afternoon on Friday, 8/13. We expect most of the data to be centered around the principal repayment rate calculation and while we don't yet know the extent of detail that will be provided, we are hopeful that it will enable us to better analyze the potential impact on schools. Lack of data around actual graduate salaries and student principal repaym ent rates has made it difficult for schools to assess the potential impact of GE fully.
Sara Gubins Research Analyst MLPF&S sara gubins@baml.oom David Chu Research Analyst MLPF&S davtd j.chu@baml.com David Ridley-lane Research Analyst MLPF&S david.ridleytane@baml.com
+1 646 855 1961
+1 646 855 2589
+1 646 855 2907
Table 1: BofAML ratings vs. consensus BofAML No. of opinions Rating Buy Z2 APOL ARCL Buy 7 Buy CECO 17 15 coco Neutral Buy 18 CPLA DV Buy Z2 EDMC Neutral 16 Neutral 19 ESI Neutral LINC 10 LOPE Buy 11 LRN Buy 9 Buy 17 STRA Underperform UTI 11 Ticker
Soun:e: Bloombe<g
ABC News to air segments on for-profits

We understand that ABC News is preparing segments on the for-profit postsecondary education sector that could run on several programs. The timing of airing is not yet clear, but we expect it could be soon (later this week or next week). While we don't know the slant they will take, most press on the sector has been negative. Aside from potentially bolstering the case against for-profits in Washington, another risk is that negative press on such a widely-viewed network could lower demand trends as well.
% breakdown Buy Neutral Sell 59% 41% 0% 57% 43% 0% 47% 41% 12% 33% 47% 20% 67% 33% 0% 59% 41% 0% 44% 56% 0% 47% 53% 0% 60% 40% 0% 82% 18% 0% 67% 33% 0% 44% 56% 0% 27% 55% 18%
Expect continued volatility in ed stocks

Companies continue to analyze the potential impact of the gainful employment regulation but it is challenging given limited available information. Given continued scrutiny, we generally continue to prefer what we view as high-quality, lesscountercyclical names such as Strayer, Grand Canyon, DeVry, & Capella given the continued broader regulatory overhang. We also view deep-value names Apollo & Career Education as attractive. They have more overhangs and will require patience but present an attractive risk/reward profile in our view.
Merrill Lynch 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 connict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making t heir investment decision. Refer to important disclosures on page 6 to 8. Analyst Certification on Page 4. Price Objective Basis/Risk on page 2. Link to Definitions on page 4. 10964181
Bank of America ~ Merrill Lynch

10 August 20 10
Business, Education & Profess ional Services
Price objective basis & risk

Apollo Group (APOL)
Our $68 target is based on 12.6x CY1 OE EPS, a significant discount to Apollo's 3year forward multiple of 17x. We apply a discounted multiple given broader regulatory risk and two key company specific overhangs - an informal SEC inquiry into revenue recognition and its transition to a higher degree/higher quality mix which will limit growth in FY11 as it rolls out its orientation program. Risks are: 1) SEC informal inquiry around revenue recognition practices. 2) Uncertainty in future growth as APOL shifts towards higher level programs. 3) Greater competition and limited growth in APOL's core working adult market. 4) Headline and regulatory risk. 5) Legal risks. 6) Concerns about the federal and private student lending markets, though this issue has largely subsided.
Capella Education (CPLA)

Our $110 price objective is based on 24x CY11 E EPS, below its 30x historical forward multiple, and a slight discount to our 25% CY 11E EPS growth forecast. While this represents a premium to its peer group, we believe a premium multiple is warranted given the company's pure online model, less countercyclical nature, margin expansion potential and attractive position from a regulatory perspective. Risks are: 1) Gainful employment risk 2) Funding risk: changes in corporate tuition reimbursement programs are a risk. Another is that if students lose their jobs they might drop out or postpone school. 3) Increasing competition in the online education market as market growth slows. 4) Popularity of programs. 5) Increasing mix of bachelors degree students could dilute revenue per student and lower graduation rates. 6) Capella operates in a highly regulated sector and is currently awaiting the outcome of a Federal Student Aid review of its financial aid.
Career Education (CECO)

Our $35 PO is based on 12x our 2010 EPS estimate and is a discount to peers given the continued regulatory overhang around the Dept. of Education gainful employment proposal. Risks to our price objective are: 1) execution risk, 2) higher than anticipated costs and decreased cash flow associated with internal financing of students, and 3) headline, regulatory, and legislative risks.
Corinthian Colleges Inc (COCO)

Our $18 PO is based on 10x CY10E, a significant discount to COCOs 3-year historical forward multiple of 21x. It compares favorably to our 28 percent 5-year EPS CAGR off of a low margin base, given lingering regulatory concerns for the sector. We believe upside could be limited near term until there is more clarity around potential outcomes to upcoming regulatory events. Risks to the price objective are: 1.) execution risk, 2.) higher than anticipated costs and decreased cash flow associated with internal financing of students, 3.) disruptions in federal loan availability, and 4.) headline and regulatory risk.
DeVry Inc (DV)

Our $82 PO is based on 20x CY10E EPS of $4.08, below OeVry's 23x average 3year forward multiple. We expect OV to surpass its 17.1 percent peak operating margin in FY10 and forecast earnings power of $5.19 in FY12. We maintain our positive fundamental view on OeVry as a high quality margin expansion & diversification story with a strong management team.

10 August 20 10
Risks are 1.) potential negative impact of any regulatory changes, 2.) faster than expected decline in enrollment trends, 3.) pressure on DV's countercyclical segments as the economy improves, 4.) declining job placement rates, 5.) integration risk of recent acquisitions, 6.) increasing competition.
Education Management Corporation (EDMC)

Our $22 target is based on EDMC achieving 7x CY10E EV/EBITDA, a slight discount to peers. We continue to be impressed by its operations and believe that its diversified offerings should help protect the company from countercyclical headwinds. However, we believe that EDMC is most exposed to the Department of Education proposal on gainful employment as relatively high tuition at the Art Institutes leads to high student debt loads relative to salaries. Risks are: 1) higher-than-anticipated costs and decreased cash flow associated with internal financing of students, 2) disruptions in federal loan availability, 3) relatively high tuition levels, 4) slowing market growth and increasing competition in the on-line education market, 5) continued popularity of programs, 6) headline and regulatory risk, including the recently-disclosed qui tam action.
Grand Canyon Education (LOPE)

Our $27 PO is based on 21x CY10E EPS or 16x CY11 E, a discount to forecasted growth given the broader regulatory and legislative overhang as well as the DOE program review. We continue to believe LOPE is a high-growth high-quality story and that it is well positioned vs peers on key regulatory risks given low tuition & low default rates. Risks are: 1) execution risk, 2) slowing market growth and increasing competition, 3) popularity of programs, 4) heavy reliance on federal financial aid, 5) regulatory risk, including an Office of Inspector General investigation, a DOE program review and a false claims lawsuit, and 6) the broader legislative overhang.
ITT Educational Services (ESI)

Our $90 PO is based on ITT achieving 7x CY11 E, a deep discount to its 15x 3year historical forward multiple. The multiple accounts for slowing demand trends and gainful employment risks, which will likely limit a return to more robust historical valuation multiples near term . Risks are 1) gainful employment risks: could result in tuition cuts or elimination of programs, 2) higher than anticipated costs and decreased cash flow associated with internal financing of students, 3) any disruptions in federal loan availability, 4) increasing competition and relatively high tuition levels vs peers, 5) limited online presence in a market in which online is the fastest growing segment and 6) ITT operates in a heavily regulated sector.
Lincoln Educational Services Corp (LINC)

Our $18 price objective is based on 7x 2011 E EPS. Our price objective represents a significant discount to Lincoln's 15x historical forward 3 year multiple. We believe a discount is warranted given potential for slowing enrollment growth in shorter-term vocational programs as the economy improves, the broader regulatory overhang, and execution risk around its new initiatives. Risks to the price objective are weaker-than-forecast auto enrollments, a slowdown in demand for health science programs, slowing enrollment growth in an improving economy, broader regulatory and DC concerns, and execution risk.

10 August 20 10
Strayer Education Inc. (STRA)

We believe Strayer should continue to warrant a premium multiple to the peer group given its ample growth prospects, superior profitability and strong track record. Our $280 price objective is based on a multiple of 23x our 2011 EPS estimate of $12.03, or a 1.1x PEG ratio. Risks are: 1) changes to the industry business model from gainful employment, 2) execution as the company scales and enters new markets and rolls out a new global online operations center, 3) increased competition, 4) increased regulatory scrutiny, and 5) longer-term DC risks.
Universal Technical Institute (UTI)

Our $21 price objective is based on 14x our CY 11 EPS estimate of $1 .53. Our target valuation multiple is more inline with peers as EPS has improved and investors no longer need to assign as much of a premium in anticipation of a more normalized profit environment. We see downside risk from the company's concentrated automotive/transportation curriculum, execution risk for an upcoming curriculum overhaul and new campus expansion, while competition and the regulatory environment represent other risks. Upside risks are better than expected improvement in capacity utilization and increased demand if job prospects in the auto industry improve.
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I, Sara Gubins, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.
US-Business, Education & Professional Services Coverage Cluster Investment rating BUY Company
Apollo Group Archipelago Learning Capella Education Career Education Corporate Executive Board DeVry Inc Ecolab Inc Grand Canyon Education K1 2 Manpower Resources Connection Strayer Education Inc. TrueBiue
BofAML ticker
APOL ARCL CPLA CECO EXBD DV ECL LOPE LRN MAN RECN STRA TBI CBG
Bloomberg symbol
APOLUS ARCLUS CPLA US CECOUS EXBDUS D VUS ECLUS LOPE US LRN US MAN US RECNUS STRA US TBIUS CBG US
Analyst
Sara Gubins Sara Gubins Sara Gubins Sara Gubins David Ridley-Lane Sara Gubins David Ridley-Lane Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins
NEUTRAL
CB Richard Ellis Group Inc Corinthian Colleges Inc Education Management Corporation ITI Educational Services
coco
EDMC ESI
coco us
EDMCUS ESIUS
10 August 2010
US-Business, Education & Professional Services Coverage Cluster Investment rating Company
Jones lang LaSalle Inc Lincoln Educational Services Corp UNDERPERFORM Robert Half International Universal Technicallnslilule
BofAML ticker
Jll LING RHI UTI
Bloomberg symbol
JLLUS LING US RHIUS UTI US
Analyst
Sara Gubins Sara Gubins Sara Gubins Sara Gubins
Business, Education & Professional Services
10 August 20 10
Investment Rating Distribution: Education & Training Services Group (as of 01 Jul 2010) Coverage Universe Count Percent lnv. Banking Relationships Count Percent 60.0()0,{, Buy 10 55.56% Buy 6 Neutral 6 33.33% Neutral 5 83.33% Sell 2 11.11% Sell 2 100.00% Investment Rating Distribution: Global Group (as of 01 Jul 2010) lnv. Banking Relationships Coverage Universe Count Percent Count Percent Buy 1922 54.14% Buy 1042 59.85% 24.62% Neutral 874 Neutral 496 62.78% 754 21.24% Sell Sell 362 51.86% *Com panies in respect of which MLPF&S or an affiliate has received compensa tion for investment banking services within the pasl12 months. For purposes of this distribution, a stock rated Underperformis included as a Sell. FUNDAMENTAl EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A -low, B Medium and C High. INVESTMENT RATINGS reflect the analyst's assessment of a stock's: (Q absolute total return potential and (iQ attractiveness for investment relative to other stocks within its Coverage Cluster(detined below). There are three investment ratings: 1 Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster; 2 Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a stock and the firm's guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst's view of the potential price appreciation (depreciation). Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster Investment rating Buy ;:: 10"k s; 70"k Neutral ;:: 0% s; 30"k Underperform N/A ;:: 20"k Ratings dispersions may vary fromlime to time where BofAML Research believes it beHer reflects the investment prospects of stocks in a Coverage Cluster.
INCOME RATINGS, indicators of potential cash dividends, are: 7 same/higher (dividend considered to be secure), 8 same/lower (dividend not considered to be secure) and 9 pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock's coverage cluster is included in the most recent BofAML Comment referencing the stock.
Price charts for the securities referenced in this research report are available at ht1p:l/www.ml.com/research/pricecharts.asp, or caii1 -888-ML-CHART to have them mailed.
MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, Grand Canyon, ITI, Lincoln, Strayer, Universal Tech. MLPF&S or an affiliate was a manager of a public offering of securities of this company within the last 12 months: Education Mgmt, Grand Canyon. The company is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: Apollo Group, Career Education, Corinthian Coli, DeVry, Education Mgmt, Lincoln. MLPF&S or an affiliate has received compensation from the company for non-investment banking services or products within the past 12 months: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, ITI, Strayer, Universal Tech. The company is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, ITI, Strayer, Universal Tech. MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months: Apollo Group, Career Education, Corinthian Coli, DeVry, Education Mgmt, Lincoln. MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company or an affiliate of the company within the next three months: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, Lincoln. MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the company on a principal basis: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, Grand Canyon, ITT, Lincoln, Strayer, Universal Tech. The company is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: Apollo Group, Career Education, Corinthian Coli, DeVry, Education Mgmt, ITT, Strayer, Universal Tech. The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Bank of America Corporation, including profits derived from investment banking revenues. Merrill Lynch is affiliated with an NYSE Designated Market Maker (DMM) that specializes in one or more securities issued by the subject companies. This affiliated NYSE DMM makes a market in, and may maintain a long or short position in or be on the opposite side of orders executed on the Floor of the NYSE in connection with one or more of the securities issued by these companies: Corinthian Coli
Bank of America~ Merrill Lynch 10 August 20 10
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10 August 20 10
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From:
To: CC: Date:

Subject:

8/25/2010 11:40:38 AM
FYI Robert H . James Liaison for Career Institutions ofHigher Education U.S Department ofEducation FAX: 317-257-2098 Call first Cell Phone #202-557-5835 D.C.# 202-377-4301 Indianapolis Office 317-257-2098 8527 Quail Hollow Road Indianapolis. IN 46260-2208
.~~APOLLO ~J~ GROUP, INC.

Higher Education at a Crossroads
August 2010 Apollo Group, Inc.
The Current State of Higher Education in America and the Vital Role of Proprietary Colleges and Universities
America is at a crossroads with respect to how the nation's higher education system will adapt to meet the needs of today's learners. At Apollo Group, we are concerned that the country will not meet the national education goals set forth by President Obama without an adaptable postsecondary system that operates differently than it has in the past-a system that embraces diversity and innovation. More Americans than ever need a college degree and are seeking access to higher education. Jobs today require higher education, yet out of 132 million people in the labor force, more than 80 million don't have a bachelor's degree, and 50 million adults have never even started college. These individuals are increasingly looking for ways to remain competitive and advance in their careers in today's global economy. Those seeking access to higher education are less prepared than in the past and require greater support. High school dropout rates are now approximately 55% in many major cities like New York and Los Angeles. Even more concerning, many students who do graduate cannot perform at the twelfth grade level in reading or math. Over 70% of today's students are now categorized as "non-traditional" students. Our colleges and universities must meet the needs of today's learners who have families and professional obligations that make it incrementally challenging to pursue a college degree. Traditional colleges and universities are the backbone of the U.S. higher education system, but they alone cannot meet the country's needs. This system, which is exclusive by design, was built to meet the needs of a different era when only a small portion of the nation's workforce needed a college degree. Today's globally competitive, knowledgebased economy requires a more broadly educated society. President Obama has set forth three important goals for the U.S. higher education system which are critical to the country regaining its standing as a global leader in education. On a sobering note, we estimate that without proprietary schools, meeting these goals would cost U.S. taxpayers more than $800 billion over the next ten years. Accredited, degree-granting proprietary institutions, which have been a strong source of innovation, play a critical role in the future of education. These institutions provide access to students who previously have been left behind by or excluded from the traditional higher education system. Well managed proprietary institutions can meet the demand for education at a significantly lower cost to society. At Apollo Group, we strive to demonstrate responsible, ethical leadership in higher education. We agree that thoughtful and consistent regulation is critical to the future success of the higher education system. Apollo Group is focused on ensuring regulatory compliance at University of Phoenix and our other institutions, providing robust student protections for our current and prospective students, and delivering quality educational offerings to today's non-traditional learners.
Gregory W. Cappelli Co-Chief Executive Officer of Apollo Group and Chairman of Apollo Global
Legal Disclosure: The statements and claims made are the position of Apollo Group, Inc. based on information and analysis from vanous sources referenced in the Appendix of this report, rncluding the U.S. Department of Education, various independent third-parties, and Apollo Group company data. For more information, please refer to the Appendi>< of this report.
~~GROUP. INC.
,\.~APOLLO
August 2010
Table of Contents
Executive Summary ....................................................................................................... 3 The Current State of Higher Education ........................................................................... 8
Why Does Higher Education Matter? ...................................................................................................................... 8 Can the Higher Education System Stand Still When the World is Changing Around It? ......................................... 8 What is Needed for America to Remain Competitive? .......................................................................................... 10 Why is the Solution Easier Said than Done? .......................................................................................................... 10 Can America's Higher Education System Rise to Meet These Challenges? ........................................................... 12
The Role of Proprietary Institutions ............................................................................. 14

What are the Realities ofToday's "Non-traditional" Students? ............................................................................ 14 Do Students at Proprietary Institutions Receive a Disproportionate Share of Student Aid Funding? .................. 16 Do Proprietary Institutions Overburden Students with Debt? .............................................................................. 18 Do Students of Proprietary Institutions Default Too Frequently? ......................................................................... 19 Are Proprietary Institutions a Good Investment for Taxpayers? ........................................................................... 20 Can America Meet Its Educational Goals Without Proprietary Institutions? ........................................................ 22
Apollo Group is Leading
by Example ............................................................................ 24
Aligning Our Educational Offerings with the Realities ofToday's "Non-traditional" Students ............................. 24 Embracing Ethical Enrollment Practices ................................................................................................................ 24 Implementing Enhanced Student Protections throughout the Student Experience ............................................. 26 Offering a Quality Education that is Valued by Employers .................................................................................... 27 Investing in the Future of Higher Learning ............................................................................................................ 30 Recognizing the Importance of Regulatory Compliance ....................................................................................... 31 What is Management's Philosophy? ..................................................................................................................... 32
Conclusion ................................................................................................................... 33
Appendix ..................................................................................................................... 34
Apollo Group, Inc.
I Higher Education at a Crossroads
~~GROUP. INC.
,\.~ APOLLO
August 2010
Executive Summary
What kind of nation will we be a decade or two from now? Will our system of higher education be the bridge that takes us to a safer, stronger future, or will it be a burden that holds us back? We will address these questions in this report.
At Apollo Group, we believe America is at a crossroads with respect to the future direction of higher education. We find ourselves at a point in time when we-as a nation, as citizens, as policy makers and as leaders in education-must make a choice between defining ourselves 51 as a nation in the 21 century with a limited, educated elite class who enjoy the benefits of a college degree (and all of the corresponding professional, finan cial and personal benefits that a degree brings) or a society with a broadly educated, productive and globally competitive workforce. The choice is clear. It is imperative to recognize that the world and the labor force of today is much different than the one of a century ago when much of the traditional higher education system was established and when the United States was still a largely agrarian economy, or even several decades ago when it was the world's manufacturing powerhouse. Salient evidence supports this position. In 1950 (when the U.S. economy was largely driven by manufacturing and assembly line workers) only about 20% of jobs required a skilled or educated worker. Today, with knowledge as the backbone of our information-based 1 economy, more than 60% of jobs require advanced skills training or education. And not surprisingly, it is expected that the fastest growing jobs in the coming decade will require a 2 college level degree or higher. As a result, more Americans than ever need a college degree and are seeking access to higher education in order to remain competitive and advance in their careers. However, despite the shift in educational requirements for jobs over the years, currently only 35% of American workers over the age of 25 have achieved a four-year degree. There are approximately 132 million Americans in the U.S. labor force over the age of 25, of whom over 80 million do not have a bachelor's degree. What's worse, 50 million Americans have never started college 3 and more than 30 million have never completed their degree. According to the World Economic Forum's Global Competitiveness Report, the U.S. has lost its number one 4 competitive ranking in the world. Recognizing this problem, the Obama administration last year set forth three important goals 5 for the U.S. higher education system that are critical to the country regaining its standing as a leader in education and to remain competitive in an increasingly global economy. Those goals include: To have every American receive at least one year of college education; To once again have the highest graduation rate among developed countries by 2020; and To encourage lifelong learning.
"Let me be crystal clear: forprofit institutions play a vital role in training young people and adults for jobs. They are critical to helping America meet the President's 2020 goal. They are helping us meet the explosive demand for skills that public institutions cannot always meet. "
- Secretary of Education Arne Duncan, May 11, 2010
We applaud these goals and agree with the President's recognition of the importance of fostering a broadly educated society in order to keep America competitive as a nation.
"At the start of my administration I set a goal for America: by 2020, this nation will once again have the highest proportion of college graduates in the world. We used to have that. We're going to have it again."
- President Barack Obama, July 14, 2010
Unfortunately, the country faces numerous challenges in achieving these goals. First among them is a K-12 system that is not preparing students for college-level study as well as it once did . The nationwide dropout rate of high school students in 2008-2009 was
Apollo Group, Inc.
~~GROUP. INC.
,\.~ APOLLO
August 2010
approximately 30% and it was significantly higher in major urban areas, reaching 55% in both 6 New York City and Los Angeles. Equally striking, of students who make it to the twelfth grade, 65% of them cannot read at a twelfth grade level and 77% are not proficient in math at 7 a twelfth grade level. Despite the U.S. spending more on K-12 education per pupil than almost any other country, deficiencies at the K-12 level have caused the U.S. position in international testing to slip when compared to other nations, and we now rank 21st out of 30 OECD (Organization for Economic Co-operation and Development) countries in science scores and 25th out of the 9 same 30 countries in math scores (both measured at age 15). In addition to more students being inadequately prepared for college-level study, increasing numbers of working learners who never started or never completed their college education (many of whom have not been in a classroom environment in years) are now recognizing the need for a college degree in order to retool their skills or advance in their careers. Both of these factors-a greater number of less prepared high school graduates and a greater number of working adults now looking to attain a degree-are placing burdens on a higher education system that was not built to accommodate the needs of these individuals. And these burdens come at a time when public funding for higher education is under pressure and budgets and capacity are being cut at traditional schools. Without the skills essential to a knowledge-driven economy, America will continue to lose ground in its economic competitiveness.
8
At Apollo Group, we are concerned that our country will not meet the national education goals set forth by the President without a postsecondary system that can serve the needs of more non-traditional students than was originally intended. Traditional schools-public and independent private colleges and universities-are the backbone of the U.S. higher education system, but they alone cannot meet the demands of our society. We believe innovation and new alternatives are required to adapt to our rapidly changing world. In order to meet just one of President Obama's national education goals-ensuring that every American receives one year of college-we estimate it would require the traditional education system to provide access to more than 50 million first-time students, hire and train 500,000 new faculty members, create 1-2 million additional classes, and build the equivalent 1 of thousands of new colleges and universities. Furthermore, we estimate that utilizing public institutions alone would cost the taxpayers more than $BOO billion over the next ten years to educate the additional 13.1 million graduates necessary to meet President Obama's goal of America once again having the highest graduation rate among developed 11 countries by 2020.
Achieving this feat would be monumental in itself, but to do so at a time when traditional schools' resources are under pressure makes the task a near impossibility. Thirty-nine states 12 have cut funding to public colleges and universities in the past year alone and schools are being forced to cut faculty positions and student seat capacity just to remain viable.
Accredited, degree-granting proprietary institutions (also known as for-profit institutions) play a critical role in the future of education by providing access to students who previously have been left behind by or excluded from the traditional higher education system in the U.S. Today's students have families and professional obligations that make it challenging to pursue a college degree and successfully make it through to graduation. Already, 73% of U.S.
Apollo Group, Inc.
~~GROUP. INC.
,\.~ APOLLO
August 2010
students are classified as non-traditional by the Department of Education, meaning they have risk factors that make it more difficult to reach graduation, such as working while attending school or having dependents of their own. Proprietary institutions like University of Phoenix (a subsidiary of Apollo Group) are meeting the needs of today's working learners, and students are responding to the value proposition of this educational offering. We do this by providing flexible scheduling, a choice of onl ine or campus-based classrooms, small class sizes, degree programs relevant to today's workforce, faculty who have professional experience in their field of instruction, and high levels of student support to help students succeed. These adaptations and innovations have enabled University of Phoenix to provide strong academic outcomes as well as career enhancement opportunities to students who in many cases carry a higher level of educational risk as defined by the Department of Education. This does not mean that these students are less talented or incapable of learning, but rather it's a recognition that sometimes life gets in the way. Funding for education is provided directly to students, and students are choosing to attend certain proprietary institutions because of the factors mentioned above. By questioning whether proprietary institutions are the recipients of too much financial aid funding, critics are actually questioning whether non-traditional and socioeconomically disadvantaged individuals deserve the right to have access to the same student financial aid funds, and thus access to an education, as more affluent students do. If we are to meet any of President Obama's goals, we believe the answer must be yes. It is important to note that proprietary institutions do not burden the taxpayer nearly as much as traditional publicly funded or independent private universities, as they do not receive direct state subsidies and do not benefit from tax-free endowment contributions. Rather, proprietary institutions pay significant taxes back to the public coffers. We estimate the annual net cost to society, inclusive of defaults on student loans, is approximately $1,509 per student at University of Phoenix compared with a cost of $7,051 per student at 14 independent private institutions and $11,340 per student at public institutions. Given these figures, we estimate that having a properly regulated and healthy proprietary postsecondary education system in this country would allow the President to reach his higher education goals while spending less than half the $800 billion necessary to do the same thing through 15 the traditional college system alone.
13
Apollo Group is playing a leadership role in higher education, and we are proud of our heritage in helping to pioneer higher education for the working learner over 35 years ago, followed by the introduction of online education over 20 years ago. In addition, we are currently investing hundreds of millions of dollars into the next-generation of learners by developing a world-class adaptive learning platform designed for the classroom of tomorrow. Critics of the proprietary postsecondary sector have raised concerns about industry recruiting practices, student outcomes and student debt levels. While Apollo Group and University of Phoenix strive for excellence in all of these areas, we recognize that we can continue to improve. In this paper, we discuss some of the misperceptions about University of Phoenix and our students, as well as some of the initiatives we have undertaken to deliver continued improvement. Importantly, we are committed to delivering a quality education to those who are willing to work hard enough to realize its benefits. Recognizing that we were experiencing an increasing number of students who were less prepared for the rigors of our degree programs, in early 2009 University of Phoenix began testing and recently announced the full implementation of a University Orientation program. This three week program will be offered at no cost to students and is designed to ensure that prospective students understand the time and commitment required to be successful in our rigorous programs of study prior to
Apollo Group, Inc.
~~GROUP. INC.
,\.~ APOLLO
August 2010
enrolling in our University. This is especially important as it allows students to make a fully informed decision about attending our University before taking on college debt. Apollo Group and University of Phoenix strive to always act in the best interests of our students. Our goal is to help educate some of the SO million Americans in our labor force today who have never attempted college either because they didn't realize it was available to them or didn't think it was possible. And, importantly, we understand that simply enrolling students for the sake of financial gains will never prove successful in the end. Why? Because we believe that only by consistently providing a strong value proposition to our students can our shareholders generate sustainable returns over time. It's that simple. To that end, we've implemented a series of additional student protections including financial literacy tools such as our Responsible Borrower Calculator, which encourages students to borrow only the amount they need for their education. Critics are right to point out that the cost of college has increased dramatically over the past several decades, causing students in certain institutions to take on unusually high levels of debt. At University of Phoenix, the majority of our degree granting programs are either at or below the federal Title IV loan limits set by Congress. And, importantly, despite the fact that we cannot restrict a student's ability to borrow up to the federally set Title IV limits, total student debt levels at University of Phoenix are within national averages when compared to both public and independent private four-year colleges and universities. Robust and enforced regulatory compliance is critical to the future of any university, and our universities are no exception. Our students have access to a compliance hotline 24 hours per day, and we monitor over 30,000 conversations per day between our current as well as prospective students and our counselors. To further reinforce that our counselors are not pressured in any way to enroll a student who is not ready or prepared for University of Phoenix, we have announced that a new evaluation and compensation plan for our counselors will be rolled out University wide beginning this fall. In this new plan, no part of a counselor's compensation will have any link to the number of students they enroll at our University. Rather, our counselors will be evaluated on and compensated for always acting in the best interest of the student-essentially, advising the student the way they would a brother, sister, son, daughter, or close friend. We feel strongly that the new plan will further solidify our goal of always putting the student first. At Apollo Group, we strive to demonstrate responsible, ethical leadership in higher education. We recognize that it is Apollo Group's role to ensure regulatory compliance at University of Phoenix and our other institutions. To help ensure this, we have a large dedicated team of full-time compliance professionals at Apollo Group. Compliance starts at the top, and we are striving to be the best in this critical area. Further, on occasions where we find mistakes or compliance violations, we strive to handle them with the urgency, care and attention they deserve.
Above all, University of Phoenix invests heavily in its students' education and student services, as well as in building the learning environment of tomorrow. Educational and instructional spending is by far our highest category of expenditure, while our marketing costs 16 to enroll a new student are generally in-line with the average of all schools in the U.S. Ultimately, the value of the education we deliver to our students is the determinant of the long-term success of our institution, as positive outcomes yield success for our graduates. The University delivers value to its students and transparently publishes its outcomes so that students can make informed decisions. We are proud of our record and highlight the following achievements:
Apollo Group, Inc.
~~GROUP. INC.
,\.~ APOLLO
August 2010
University of Phoenix students enter with lower average assessment scores than the national average but substantially close that gap by their senior year, meaning they 17 demonstrate a greater rate of learning compared to national averages; University of Phoenix associate students graduate at a slightly higher rate than the national average, and bachelor's students graduate below the national average owing, in part, to the greater numbers of risk factors (as defined by the Department of Education) 18 that non-traditional students like ours exhibit; University of Phoenix students' two-year loan default rate for the 2008 cohort is 19 estimated to be just 6.7% on a dollar-based calculation; For students who have graduated with a University of Phoenix degree, we estimate our cumulative default rate is less than 1% (using the official 2005, 2006 and 2007 cohort 20 files); and University of Phoenix students realize average increases in annual compensation of 8.5% for bachelor's graduates and 9.7% for master's graduates during the course of their 21 program compared to the 3.8% national average increase during that same period.
In today's world we need on-demand, rapidly deployed, effective education. Today's working learners need industry-adaptive faculty and curriculum-faculty who are active in their fields of instruction and teach curriculum that can immediately be applied in the workforce. Educational programs need to prepare students for today's economy, not the economy of yesterday. By providing an accessible, high quality education, University of Phoenix is producing successful outcomes-graduates who are better positioned to enjoy the professional, financial and personal benefits that a degree brings, as well as a more educated, competitive society as a whole. Through a framework of thoughtful and consistent regulation, well managed proprietary colleges and universities-those that are committed to responsible, ethical practices and regulatory compliance-play a vital role in the future of America's higher education system, helping it to rise to the challenge of meeting the needs of the millions of non-traditional learners and producing the graduates necessary to achieve the nation's shared educational and economic goals. Apollo Group is committed to leading the nation towards this future.
Apollo Group, Inc.
~~GROUP. INC.
,\.~ APOLLO
August 2010
The Current State of Higher Educat1on

We believe America is at a crossroads with respect to the future direction of higher education in this country. We are standing at a point in time when we-as a nation, as citizens, as policy makers and as leaders in education-must make a choice. We must either define ourselves as a nation with only a small, educated elite class who enjoy the benefits of a college degree (and all of the corresponding professional, financial and personal benefits that it brings) or as a society with a broadly educated, productive and globally-competitive workforce.
Why Does Higher Education Matter? In case that choice isn't clear, it is imperative to recognize that postsecondary education brings considerable benefits to both individuals who attain higher degrees, as well as society as a whole. Individuals benefit from greater professional opportunity, higher earnings 22 potential and a lower incidence of unemployment.
Exhibit 1: Unemployment Rate and Earnings by Level of Educational Attainment Unemployment Rate
!
Median Weekly Earnings

Doctoral degree
$1,532 $1,529
2.5% -
3.9% 5.2% 6.8% 8.6% ...__ _ _ _ __ 9.7% ....__ _ _ _ __
Master"s degree Bachelor's degree Associate degree Some college High school diploma
$761 $699 $626
$1,257 $1,025
_ o- - - - - - - - - - - - t No high school diploma 14 6
---
s454
Source: 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.
Society as a whole benefits from widespread productivity increases, a higher tax base at the local, state and federal levels from increased earnings, and reduced dependence on public 23 assistance programs, according to the College Board report Education Pays.
Can the Higher Education System Stand Still When the World is Changing Around It? Despite the obvious personal and societal benefits of higher education, it is imperative to recognize that the world and the labor force of today is much different than the one of a century ago. The traditional higher education system was originally established when the United States was still a largely agrarian economy and thrived as America became the manufacturing powerhouse of the world. The world, and our economy, has changed significantly.
Apollo Group, Inc.
~~GROUP. INC.
,\.~APOLLO
August 2010
Consider a few facts. In 1950 (when the U.S. economy was largely driven by manufacturing and assembly line workers) only about 20% of jobs required a skilled or educated worker. But the days when an individual could raise a family on an unskilled manufacturing or assembly line job are in rapid decline. Today, with knowledge as the backbone of our information24 based economy, more than 60% of jobs require advanced skills training or education. Exhibit 2: Jobs of the Past versus Today
Jobs in 1950
Jobs Today
Unskilled
Semi-skilled
Skilled
Unskilled
Semi-skilled
Skilled
Source: Milken Institute, 2010 Global Conference.
And not surprisingly, it is expected that the fastest growing jobs in the coming decade are 25 those that will require a college level degree or higher. Exhibit 3: Future Job Growth by Education Level (2008-2018)
Associate First professional Master's Doctoral Bachelor's Vocational award Related work experience On-the-job training
19% 18% 18% 17% 17% 13% 8% 8%
Source: U.S. Bureau of Labor Statistics, Occupational Outlook Handbook, 2010-11 Edition.
As a result, more Americans than ever need a college degree and are seeking access to higher education in order to remain competitive and advance in their careers. However, despite this shift, currently only 35% of American workers have achieved a four-year degree. The remaining two-thirds of all U.S. workers over the age of 25 (more than 80 million people in the labor force today) do not have a four-year degree. Of those individuals, approximately 50 26 million never started college and an additional 30+ million never completed their degree.
Apollo Group, Inc.
~~ GROUP. INC.
,\.~ APOLLO
August 2010
Exhibit 4: Educational Attainment of the U.S. Labor Force

(132 million workers over 25 years of age)
Bachelor's degree or ___ higher, 35%
Less than bachelor's degree, 65%
Source: U.S. Bureau of Labor Statistics, Current Population Survey.
Importantly, today's knowledge-based jobs are portable across geographic boundaries. If American workers do not have the necessary education and skills to meet the job requirements, it is likely someone else will. Unfortunately, according to the World Economic Forum's Global Competitiveness Report, the U.S. has already lost its number one competitive 27 ranking in the world.
What is Needed for America to Remain Competitive?

Recognizing this problem, the Obama administration last year set forth three important goals 28 for the U.S. higher education system that are critical to the country regaining its standing as a leader in education and to remain competitive in an increasingly global economy. Those goals include: To have every American receive at least one year of college education; To once again have the highest graduation rate among developed countries by 2020; and To encourage lifelong learning.
We applaud these goals and agree with the President's recognition of the importance of fostering a broadly educated society in order to keep America competitive as a nation.
Why is the Solution Easier Said than Done?

Unfortunately, the country faces numerous challenges in achieving these goals. Students Less Prepared for College Level Study. First among these challenges is a K-12 system that is not preparing students for college-level study as well as it once did. The 29 nationwide dropout rate of high school students in 2008-2009 was approximately 30%, and significantly higher in major urban areas.
Apollo Group, Inc.
10
~~GROUP. INC.
,\.~ APOLLO
August 2010
Exhibit 5 : High School Dropout Rates (2008-2009)
Source: Milken Institute, 2010 Global Conference.
Equally striking, for students who make it to the t welfth grade, 65% of them cannot read at a 30 twelfth grade level and 77% are not proficient in math at a twelfth grade level. Despite the U.S. spending more on K-12 education per pupil than almost any other country, deficiencies at the K-12 level have caused t he U.S. position in international testing to slip 51 when compared to other nations, and we now rank 21 out of 30 OECD countries in science 1 32 scores and 25 h out of the same 30 countries in math scores (both measured at age 15).
Exhibit 6: International Science and Mathematics Assessment Scores
31
Science scores (at age 15)

1. 2. 3. 4. 5. 6. 7.
Antand
C~U'8d.{t
Math scores (at age 15)

1. 2.
Finland
563
534 531 530 527 525
New Zealand Austmtro Nvthwtands
J""'n
3.
4. 5. 6. 7. 8.
South Korea Netl>et1ands SWfU:e1land
548 547
$31 530 527 523
c.noo.
Jap!lfl
e.
9.
10. 11. 12. 13. 14. 15. 16. 17. 18. 19.
Soue>Korea Germny Unlt>d Klngdam

Czoch~IIC
522 516
515 513 512 511
9.
10. 11. 12 . 13. 14. 15. 16. 17. 18. 1&. 20.
NewZoalancl Belgl<m Aus1ralla

Czec;h
$20 520
513 510 506 $05 $04 502 501
522
SWitz.e1land AustM
Belgium
troland
HUngl!IY
510
5()6
Denmark Rspublic Iceland Austria

lr'eland
S.vedEHl
504 503
Germany sw.otn
OECD average
P Oland Denma1 k
500
498 496 498 491
OECD average
FI"':f'IC. Unl1ed Kitlgdom
498
496 495
FraMe
Iceland Slovak Ros>ubllc
Spain Norway
luxt~nbotdg
20.
Potond Stovai<Republk:
Hu~ry
-495 492
21. United States

Italy
489
48e 48e 487 486 475 474 473 424 410
21.
22. 23.
22. 23. 24. 25. 26. 27. 28. 29. 30.
L-.-.rg
Norway
24.
26.
27. 28. 29. 30.
Spain
25. United States

Porlugol
Portugol Greece Turkey MoJUco
JtWy
Greece
Tu~y
MexiCO
474
482 459 424 406
491 400 490 480
Source: U.S. Department of Education, National Center for Education Statistics, Highlights from Program for International Student Assessment (PJSA) 2006.
Apollo Group, Inc.
11
~~GROUP. INC.
,\.~ APOLLO
August 2010
In addition to more students leaving the K-12 system inadequately prepared for college-level study, increasing numbers of working learners who never started or never completed their college education (many of whom have not been in a classroom environment in years) are now recognizing the need for a college degree in order to retool their skills or advance in their careers.
Can America's Higher Education System Rise to Meet These Challenges?

Greater numbers of less prepared high school graduates and greater numbers of working learners now looking to attain a degree are placing burdens on a higher education system that was not built to accommodate the needs of these individuals, as it requires significantly expanding capacity to reach greater numbers of students who also require a higher level of academic and student support services than students of the past. In addition to this dynamic, these factors are placing increased burdens on the traditional postsecondary system at a time when public funding for higher education is under pressure and budgets and capacity are being cut at traditional schools.
Traditional Schools Cannot Meet the Demand Alone. Traditional schools-public and independent private colleges and universities-are the backbone of the U.S. higher education system, but they alone cannot meet the demands.
In order to meet just one of President Obama's national education goals-ensuring that every American receives one year of college-we estimate the traditional education system would have to provide access to more than SO million first-time students, hire and train 500,000 new faculty members, create 1-2 million additional classes, and build the equivalent of thousands 33 of new colleges and universities. Furthermore, to increase the capacity of public institutions to meet President Obama's goal of America once again having the highest graduation rate among developed countries by 2020, we estimate that it would cost hundreds of billions of 34 dollars over the next ten years, as we detail later in this report.
Exhibit 7: What Obama's National Education Goals Would Require
Access for over
50 million students 500,000
new teachers
1-2 million additional classes
Thousands of new colleges and universities
Source: Apollo Group estimates.
Achieving this feat would be monumental in itself, but to do so at a time when traditional schools' resources are under pressure makes the task a near impossibility. Thirty-nine states 35 have cut funding to public colleges and universities in the past year alone and schools are being forced to cut faculty positions and student seat capacity just to remain viable. During 2010, the California State University system alone is cutting enrollment by 40,000 students, and University of Illinois furloughed 11,000 employees earlier in the year when it was
Apollo Group, Inc.
12
~~ GROUP. INC.
,\.~ APOLLO
August 2010
reported that the State of Illinois owed its flagship University over $400 million in overdue 36 subsidies.
As we discuss in this paper, traditional public and independent private institutions play an important role within the higher education system; however, due to the physical and financial limitations of the traditional university model, they do so at a significantly higher cost to the taxpayer than proprietary institutions (even when considering higher student loan default rates at proprietary institutions). For traditional institutions, delivering quality education generally relies upon a high fixed-cost, ground-based system of learning that requires significant investments in physical infrastructure-dormitories, cafeterias, athletic centers, parking facilities, etc. It also requires both locally domiciled students and locally available faculty, meaning that it can serve only a limited population of students within a limited distance. This system-whether by design or due to resource constraint- is rigid and, at times, inflexible in the way that it adapts educational curriculum and incorporates advances in technology and information systems to meet the needs of today's working learners. As such, the economics underlying the traditional schools' asset-intensive, high cost structure have been essentially unchanged over time. We believe it would be extremely difficult to scale the traditional model to meet the increasing demand for higher education generated by a globally competitive, knowledgebased economy without either major public funding increases (borne by a tax revenue system currently under significant budgetary strain) or a dramatic restructuring of the way in which the entire postsecondary system currently operates. Given this, we are concerned that the country will not meet the national education goals set forth by the President without a postsecondary system that operates differently than it has in the past-one that is able to effectively and efficiently deliver quality academic programs and student service to best serve the needs of today's working learners. Proprietary colleges and universities are playing an increasingly critical role in meeting these needs.
Apollo Group, Inc.
13
~~GROUP. INC.
,\.~ APOLLO
August 2010
The Role of Propr" etary Institutions

Despite the staggering demand for higher education and the challenges that will need to be met in order to satisfy it, some industry observers have questioned the role proprietary institutions play in the postsecondary education system. The U.S. postsecondary education system is very sizeable with approximately 6,600 schools. Included in this number are approximately 4,400 degree-granting institutions and 2,200 nondegree granting institutions. The proprietary sector represents about 2,800 of the total, of 37 which approximately 1,100 are degree-granting and 1,700 are not. This sector is extremely diverse as it includes technical and vocational schools (massage, beauty and culinary) that are typically nationally accredited, as well as regionally accredited degree-granting institutions such as University of Phoenix. There are six regional accrediting bodies in the U.S. We firmly believe that while not all proprietary institutions are the same, accredited, degreegranting schools that comply with regulations play a critical role in meeting the needs of today's non-traditional students, and they do so at a significantly lower cost to the taxpayer than traditional public or private independent schools. Well managed proprietary institutions provide strong academic quality and career outcomes for their students, providing them with services and capabilities that are not found at many traditional institutions. These proprietary institutions have been strong sources of academic and educational innovation deploying new technologies including online and distance learning, networking and technology infrastructure, new learning models and systems, networked faculty, distributed campus footprints, and service and support critical to helping working learners complete their educational degrees. In fact, without proprietary colleges and universities, we believe America will not be able to meet President Obama's national education goals.
W hat are the Realities of Today's "Non-tradit ional" St udents?

Accredited, degree-granting proprietary institutions play a critical role in the future of education by providing access to students who previously have been left behind by or excluded from the traditional higher education system. Today's students have family and professional obligations that make it challenging to pursue a college degree and successfully make it through to graduation. Already, 73% of U.S. students are classified as non-traditional 38 by the Department of Education, meaning they have risk factors that make it more difficult to reach graduation, such as working while attending school or having dependents of their own.
Apollo Group, Inc.
14
~~GROUP. INC.
,\.~APOLLO
August 2010
Exhibit 8: Undergraduates with Non-traditional Characteristics

l'lly 1;.n..:red norel ~hir!l(:teisli'
73% 51% 48% 46% 39% 27% 13% ~
Fira'ICially lrceoerce"'t
A:terde<l pert-: -ne
Ce a~~ encllrant
'"'orked lull-: :n~

1-< 9d cepancen:s
Sw~
&oare'1t
Nc h Jh scm c1p o-ne
7%
10%
2il\\>
~i)\\;
~J\\1
5~
6()'1,
7(l'f
80'~
Source: U.S. Department of Education, National Center for Education Statistics, National Postsecondary Student Aid Study (NPSAS), 2000.
These non-traditional students are typically older, financially independent (meaning they lack parental financial support), from lower income families, minority and female. These demographic differences largely drive adverse reported quality metrics, such as lower retention and graduation rates, and higher loan default rates.
Exhibit 9: Student Demographics by Institution Type
F'lm;ent of Population Uncler .25

80%
70
60
For-Proftt
Financial Status
80% 70 60
Fcr-Ptont
Public
Priva-ta
4YearPublle
50
so
40
30
20 10
0
R ZfnrPubhc
40
30
20
10
0
4Yo~r
2Year
lndopelldnnt
Depondont
Pvrcenl or Independent St~Jdente
with AnnWJIIncome < $30,000

100"/t
Non-Whit2 Students n Percent of Stutlent Body

50% -
80
40
For Profit
II
45 40 35 JO
25
For-Profit Public
Privato
20
15 10
-1
5
0
Public
Prfvato
4Yoor
2Yaar
Source: U.S. Department of Education, National Center for Education Statistics.
Apollo Group, Inc.
15
~~GROUP. INC.
,\.~APOLLO
August 2010
Proprietary institutions like University of Phoenix are meeting the needs of today's working learners by innovating to provide flexible scheduling, a choice of online or campus-based classrooms, small class sizes, degree programs relevant to today's workforce, faculty who have professional experience in their field of instruction, and high levels of student support to help students succeed. If we as a nation are to meet President Obama's goals of once again having the highest proportion of college graduates in the world by 2020, encouraging every American to have at least one year of college, and encouraging lifelong learning for all Americans, finding the means and capacity to successfully educate non-traditional students is essential.
Do Students at Proprietary Institutions Receive a Disproportionate Share of Student Aid Funding?

Some industry critics point to the growth in federal aid dollars that have gone to proprietary institutions in recent years, while not recognizing the fact that student aid dollars follow the students (not the institutions) and student demographics are a primary determinant of the amount of financial aid and student debt. Students from lower socioeconomic backgrounds, who are more prevalent at institutions that choose not to focus on only the elite, disproportionately qualify for need-based Pel I Grants. In addition, the recent introduction of the year-round Pell Grant program creates the potential for the neediest students to receive up to 100% of additional Pell Grants in the same award year provided they are continuously enrolled. Since many proprietary institutions are typically based on a continuous enrollment model, it is likely that even more Pell Grant funds will be granted to students attending these institutions. On the other hand, the traditional termbased institutions generally have limited numbers of students enrol led continuously (i.e., a small percentage of students attend the summer term). Additionally, institutions (proprietary or otherwise) have no legal right to limit the amount of debt a student is entitled to borrow, which inhibits an institution's ability to put controls on students who over borrow. For many students at University of Phoenix, this results in their being able to borrow up to the maximum of the Title IV loan limits, which are set by Congress. Not surprisingly, financial independence (the lack of parental financial support) of nontraditional students drives higher borrowing needs among students at proprietary institutions. Despite these needs, students at four-year proprietary institutions still borrow 39 less, on average, than those at four-year independent private institutions.
Apollo Group, Inc.
16
~~GROUP. INC.
,\.~APOLLO
August 2010
Exhibit 10: Average Student Debt Levels by Institution Type
$30,000
97%
120%
98%
25,000
100
20,000
61%
71%
80
15,000
64'/o
60
10,000
37%
40
5,000
20
0
.a Yeoi"PubUc4 'lear Privcrte Nol-for-Prollt
4 Ycor Private
For Profit
2Yctr PubJic
0
2 YcC!f Prlvote
Not-for.P"OHt
2 Vc:or Pflotc For Profit
A\'*'89& Debt
Avaraae &p.tctaD Family Contribution
% of SwCI&!U Bot'tOINtng
Source: U.S. Department of Education, National Center for Education Statistics, 2007-2008 National Postsecondary Student Aid Study (NPSAS: 08).
In addition, although total Pell Grant and Stafford loan usage has increased, the amount of total funding from the government per student relative to average tuition at proprietary 40 institutions is dramatically below previous highs. Exhibit 11 : Federal Loans and Pell Grant Funding at Proprietary Institutions
$12,6-JO
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n ti<
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8tl<l!>
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Source: U.S. Department of Education, National Center for Education Statistics, National Postsecondary Student Aid Study (NPSAS), Data Analysis System. Undergraduate Survey, 1987, 1990, 1993, 1996, 2000, 2004, 2008.
Apollo Group, Inc.
17
~~GROUP. INC.
,\.~APOLLO
August 2010
While t he average Pell Grant per eligible student at all inst itutions, including Universit y of Phoenix, has increased over time, the average Pell Grant per eligible student at University of Phoenix is below t he average for students at other inst itutions ($2,826 in fiscal 2009 41 compared with $2,971 at all institutions ). Exhibit 12: Average Pell Grant per Eligible Student
University of Phoenix versus All Institutions
$5,000 $4,500 $4,000 $3,500
..
$2,971 $3,000 + - - - - - - - - - - - - - - - - - - - - - - - - -$&,8211==-$2,500 $2,000 $1,500 2005 2006 2007

A ll Institut ions
2008
Max Pell
2009
University of Phoenix Average
Source: Apollo Group internal analysis; U.S. Department of Education Common Origination and Disbursement, 2008 - 2009 Federal Pel/ Grant Program End-of-Year Report: U.S. Department of Education, Office Postsecondary Education.
By questioning whether proprietary institutions are the recipients of too much financial aid funding, critics are actually questioning whether socioeconomically disadvantaged i ndividuals deserve the right to have access to the same student financial aid funds, and thus access to an education, as more affluent students do. If we are to meet any of President Obama's goals, we believe the answer must be yes.
Do Proprietary Institutions Overburden Students with Debt?

The average borrowing of students in proprietary bachelor's degree programs is $24,635, which equates to a mont hly loan payment of $283.50 over ten years (assuming t he current 6.8% interest rate associated with most student loans, as set by Congress). The net monthly cost to the student is even lower when taking into consideration the personal income t ax benefit t hey receive on deductible st udent loan expenses.
42
According to t he Bureau of Labor Stat ist ics (Current Populat ion Study), t he difference in weekly earnings between a high school graduate and a person with a bachelor's degree is 43 $399 per week, or $1,729 per month, well in excess of the cost of the average loan repayment. Furthermore, this higher level of earnings for a college graduate continues beyond just the ten-year loan repayment period.
Apollo Group, Inc.
18
~~GROUP. INC.
,\.~APOLLO
August 2010
Do St udents of Proprietary Institutions Default Too Frequently?

Some industry observers point to higher default rates for students of proprietary schools as evidence that proprietary institutions are not providing a quality education that is valued in the marketplace. These observers do not recognize that demographics (not institution type) have a more meaningful impact on default rates. According to a report by the Government Accountability Office (GAO), "Academic researchers have found that higher default rates at proprietary schools are linked to the characteristics of the students who attend these schools. Specifically, students who come from low income backgrounds and from families who lack higher education are more likely to default on their loans, and data shows that students from proprietary schools are more likely to come from low income families and have parents who do not hold a college degree." The report went on to say that "student age was also linked to default rates in some of the research studies, with borrowers who take out student loans at an older age being more likely to default on their loans ... because they tend to have other obligations besides paying for college. [The GAO] analysis of the Department of Education's data shows that proprietary schools serve a higher percentage of older students than public and private non-profit schools and the majority of students at proprietary schools are 25 years old and older." Academic research further indicates that normalizing for demographics would eliminate the reported cohort default rate (CDR) gap with traditional institutions: Herr and Burt (2005): "Individual student background characteristics outweighed school characteristics;" Flint (1997): "Once one statistically controls for the kinds of students who attend proprietary schools, that effect almost completely vanishes;" and Jennie Woo (2002): "Institutional type only accounts for approximately 5% of the total contribution to increased default for high-risk students. The remaining 95% is comprised of student risk factors." Exhibit 13: Relative Contribution of Major Factors to the Higher Default Rates of Riskier Students
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Source: NASFAA Journal of Student Financial Aid, Jennie Woo, Factors Affecting the Probability of Default: Student Loans in California, 2002.
Note: Baseline is white, female, U.S . citizen , high school graduate, father attended college, completed postsecondary education at a non-graduate or professional private four- year school, did not study business or computers, did not file for unemployment, and did not have a loan in deferment or forbearance, sold, rehabilitated, or repurchased, did not default on a prior loan, and had average family assets, family income, GPA, age, dependents, delinquency periods, current wages, and number of servicers; two-year college contribution calculated usi ng a weighted average of two-year public, private, and proprietary and four-year public school change in probabilities.
Apollo Group, Inc.
19
~~ GROUP. INC.
,\.~ APOLLO
August 2010
Perhaps equally important, the official CDR, as reported by the U.S. Department of Education, is a measure of default incidence, not a measure of dollar default. Students who drop out drive CDRs, and based on our experience at University of Phoenix, drop-outs have lower average debt levels since those who drop tend to do so early in their programs. This is not an excuse or reason to manage an institution of higher learning with unacceptably high default rates, but we believe the early drop-outs represent well intentioned students who begin their program and quickly realize that they cannot meet the strict obligations we require to successfully complete one of our programs given their work or family obligations which can sometimes be overwhelming. As a result, the dollar-value default percentage (the true economic impact of defaults) is significantly lower than the incidence-of-default percentage at University of Phoenix. University of Phoenix students' two-year default rate for the 2008 48 cohort is estimated to be just 6. 7% on a dollar-based calculation.
Are Proprietary Institutions a Good Investment for Taxpayers?

Beyond the general societal benefits of education, which include a more productive and competitive workforce, lower unemployment rates and more stable communitiesproprietary institutions educate citizens more cost effectively than traditional institutions. Despite the fact that socioeconomic and other risk-factors impact the average amount of financial aid borrowed by non-traditional students and also the rate at which non-traditional students default on that debt, it is important to note that proprietary institutions do not burden the taxpayer as much as traditional publicly funded or independent private universities. Yes, it is true that the taxpayer must bear the losses on defaulted Title IV loans, but according to the recent budget submitted by the White House, the Department of Education recovers more than 100% of the principal amount on defaulted loans to students through the federal Title IV programs. After accounting for collection costs and unaccrued interest, we estimate 49 the net recovery rate ranges between 60-65%. The costs of student loans are further offset by corporate income taxes paid by proprietary institutions. Therefore, it's hard to imagine that proprietary institutions of higher learning are producing huge financial liabilities for taxpayers as suggested by critics of the sector. In fact, proprietary institutions cost the taxpayers significantly less than traditional schools, as they do not receive direct state subsidies and do not benefit from tax-free endowment contributions, but rather they pay significant taxes back to the public coffers. We have undertaken an extensive analysis (detailed below) based on publicly available sources to understand the relative cost to the taxpayer to educate students at various types of postsecondary institutions. We calculate the net cost to society, inclusive of defaults on student loans, is approximately $1,509 per student per academic year at University of Phoenix compared with a cost of $7,051 per student at independent private institutions and 50 $11,340 per student at public institutions.
Apollo Group, Inc.
20
~~ GROUP. INC.
,\.~ APOLLO
August 2010
Exhibit 14: Annual Per Student Taxpayer Costs by Institution Type

Public (2-and 4-year) Direct Government Support (Grants, Appropriations, etc.) Federal Support on Subsidized Loans Defaults on Title IV Loans Recovery on Title IV Loans Donor Tax Benefit on Gifts Sales and Other Taxes Taxes on CO !Orate Profits Net Cost to Taxpayer per Student $1 0,785 Independent Private (2-and 4-year) $5,621 85 1,324 (802) 823 Proprietary (2-and 4-year) $3,751 146 4,515 (2,736) (65) (1,092) $11 ,340 $7,051 $4,519 University of Phoenix $1 .082
40
507 (307) 315
94
3,032 (1,838) (38) (824) $1 ,509
[vs]
Source: Apollo Group analysis.

Notes: Institutions: Analysis includes all U.S, degree granting institutions that are eligible for Title IV. Student Enrollment Data: Information obtained from IPEDS for all schools as reported under the IPEDS definition for Fall 2008 full-ti me equivalent students. Direct Government Support: Information obtained from IPEDS for GASB institutions and private non-profit institutions or public institutions using FASB includes federal/state/local government operating contracts and appropriations (Pell awards included). Information obtained from IPEDS for FASB proprietary institutions includes statenocal government grants and federal/state/local government appropriations (Pell awards excluded). Pell award information for FASB proprietary institutions was obtained from the Department of Education website . Interest on Subsidized Loans: Subsidized Title IV loan information obtained from the Department of Education website. The three m onth Treasury bill rate was used assuming a one year interest subsidy for amounts loaned. Loan Defaults: Assumes that although more than 100% is collected on average for each Tttle IV dollar loaned by the government, the government could eam the equivalent amount of interest through the issuance of treasury bills. In addition, data is not available to determine if interest repayment trends are different between institutional types. However, lifetime default rates vary significantly between institutional types. The lifetime budgeted default rates for the 2007 cohort of students , per a report by the Department of Education issued in December 2009, along with 2007 two year cohort default rates, also published b y the Department of Education, were used to determine expected default rates by institutional type. Public and Private Non-Profit: The lifetime budgeted default rates of 17.2% used for the public and private non-profit institu tions is based on an average of four-year freshman - senior rates. Proprietary: The lifetime budgeted default rate of 39.5% used for the proprietary institutions is based on the two-year proprietary institutions lifeti me budgeted default rate. The two-year proprietary institutions lifeti me budgeted default rate of 47% was weighted at 20% based on the number of full-ti me equivalent students in the two-year category as a percentage of the total in the proprietary institutions. The four-year proprietary institutions rate was determined based on the relationship of the four-year proprietary institutions 2007 cohort default rate of 9.8% as compared to the two-year proprieta ry institutions rate of approximately 12.25% and applyi ng this ratio to the two-year proprietary institutions lifetime budgeted default rate of 47%. This rate for the expected four-year proprietary institutions lifeti me budgeted default rate was then weighted at 80% based on the number of full-time equivalent students in the four-year category as a percentage of the total in the proprietary institutions . Recovery on Loans: The recovery rate used for defaulted loans is the same for all institutions, 60.6%. This was then multiplied by the defaulted loans total to get the recovery dollar amount. The recovery rate was calculated using information from the Department of Education - SFA Collections, The White House - Office of Management and Budget ("The President's Budget 20og), student loan collection industry's collection fees, and Apollo Group estimates. Donor Tax Benefit: Public and private non-profit institutions adjusted for the estimated tax benefit that donors receive for the gifts at a 35% tax rate. The gift amounts were obtained from IPEDS. Sales & Other Taxes : Credit given to proprietary institu tions for sales and use tax paid based on total revenue as reported in IPEDS to make comparable to public and private non-profit institutions. Taxes on Corporate Profits: Credit given to proprietary institutions for corporate taxes based on net income as reported in IPEDS to make comparable to public and private non-profit institutions.
We note that this analysis is based on the most current, independent third-party data available to us (much of which comes directly from the Department of Education), and we believe it to be the most reasonable case scenario for the relative per student costs to taxpayers. Importantly, however, we would also direct readers to a recent study by Delta Cost 51 Project which reported comparable figures to our calculation for subsidies at public institutions ($10,267 for federal, state and local appropriations, grants and contracts at public community colleges and $10,302 for federal, state and local appropriations, grants and contracts at public master's institutions), which most closely relates to the Direct Government Support line item for public institutions in our analysis above. The similarity of our figures to other third-party studies provides us with greater comfort with the reasonableness of our figures.
Apollo Group, Inc.
21
~~GROUP. INC.
,\.~APOLLO
August 2010
Can America Meet Its Educational Goals Without Proprietary Institutions?

Meeting President Obama's national graduation goals would require an additional 13.1 52 million college graduates (including five million community college graduates} by 2020 according to the National Center for Higher Education Management Systems. The following graph shows the cumulative growth needed by state over the next 10 years to reach that goal. Exhibit 15: Number of Additional Graduates Needed per State by 2020 to Meet President Obama's National Education Goals
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Source: National Center for Higher Education Management Systems and The Chronicle of Higher Education.
Furthermore, since not all students who start a degree program complete it, the system will need to accommodate tens of millions of additional new students in order to yield the incremental 13.1 million graduates. At a time when states are having difficulty even maintaining budgetary resources for higher education and are cutting both faculty positions and student enrollment capacity, how can states afford to educate tens of millions of additional students and produce 13.1 million additional college graduates? Using our previously discussed per student cost to the taxpayer estimate for public institutions of $11,340 (see Exhibit 14} and publicly available graduation rates, we estimate an additional five million community college graduates will cost the American taxpayer $214 billion over the next 10 years. In addition, we estimate an incremental 8.1 million four-year 53 college graduates will cost the American taxpayer $520 billion over the next 10 years. (And neither of these figures includes the capital spending to construct new classrooms and schools, nor cost increases at all over that 10-year period.}
In total, we estimate the cost to the U.S. taxpayer to educate the additional 13.1 million graduates necessary to meet the President's American Graduation Initiative utilizing public institutions would be an additional $734 billion in federal, state and local support over the next decade (assuming no cost increases). More realistically, assuming just 2% annual cost increases, we estimate the cost to the U.S. taxpayer would be more than $800 billion over the next decade.
Apollo Group, Inc.
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~ ~GROUP. INC.
,\.~ APOLLO
August 2010
Exhibit 16: Cost to Government of President Obama's American Graduation Initiative

Using Only Public Schools
Cost of 5 Million Additional Community College Graduates Subsidy per Public two-year Student Time to Complete Associate Degree Total Subsidy per Associate Deg ree Graduation Rate at Public Schoolsb Targeted Public two-year Graduates< Gross New Students Enrolledd Averaqe Lenqth of Stay for Dropouts" Cost to Government of 5 Million Public Two-Year Graduates $11 ,340 2 years $22,680 22.0% 5,000,000 22,727,273 6 months $213,913,636,364 Cost of 8.1 Million Additional Other Graduates Subsidy per Public four-year Student Time to Complete Bachelor's Degree Total Subsidy per Bachelor's Degree Graduation Rate at Public Schoolsb Targeted Public four-year Graduates< Gross New Students Enrolledd Averaqe Lenqth of Stay for Dropouts $11,340 4 years $45.360 54.9% 8,132,522 14,813.337 2 years
Cost.to Government of 8.1 Million $ 520' 412 ' 081 ' 583 Public Four-Year Graduates
Total Cost to Government in 2008 Dollars of American Graduate Initiative if Onl~ Using Public Schools
$734,325,717,947
I
Total Cost to Government assuming 2% annual cost increases of American Graduate Initiative if On I~ Using Public Schools
Source: Apollo Group analysis.
Notes:
$820,147,496,914
"Apollo Group estimates (see Exhibit 14: Per Student Taxpayer Costs I (Benefits) by Institution Type). bNCES, Enrollment in Postsecondary Institutions, Fall 2008, based on 2004 cohort for associates and 2002 cohort for bachelor's completing in 150% of normal program completion time. "National Center for Higher Education Management Systems. dBased on 5 million targeted 2-year graduates at a 22% graduation rate and 8.1 million targeted 4-year graduates at a 54.9% graduation rate. "Apollo Group estimate.
Using this same framework, but assuming our previously discussed per student cost to the taxpayer estimate for proprietary institutions of $4,519 (see Exhibit 14), we estimate the comparable cost to the taxpayer to meet the President's American Graduation Initiative with proprietary institutions would be $293 billion in 2008 dollars (assuming no cost increases) or $327 billion assuming just 2% annual cost increases. Thus, meeting the goal of educating an additional 13.1 million graduates through proprietary institutions instead of public institutions could save taxpayers nearly $500 billion dollars over the next ten years (assuming 2% annual cost increases). And as noted previously, the per student cost to the taxpayer of $1,509 for University of Phoenix (see Exhibit 14) is lower than the proprietary institution average. Accredited, degree-granting proprietary colleges and universities serving non-traditional students, alongside the traditional public and private independent institutions, are essential to expanding capacity within the higher education system and meeting President Obama's goal of having the largest percentage of college graduates in the world by 2020.
Apollo Group, Inc.
23
~~GROUP. INC.
,\.~ APOLLO
August 2010
Apolfo Group ;s I .eading by Example

Apollo Group is playing a leadership role in higher education and is an important part of the future of higher education in America. Apollo Group is proud of its heritage in helping to pioneer higher education for the working learner more than 35 years ago and introducing online education 20 years ago, and we are currently investing hundreds of millions of dollars into the next-generation of learners. Critics of the proprietary postsecondary sector have raised concerns about industry recruiting practices, student outcomes and student debt levels. While Apollo Group and University of Phoenix strive for excellence in all of these areas, we recognize that we can continue to improve. Below, we discuss some misperceptions about University of Phoenix and our students, as well as some of the initiatives we have undertaken to deliver continued improvement.
Aligning Our Educational Offerings with the Realities of Today's "Non-traditional" Students
Our students choose to attend University of Phoenix because our learning model and our educational offering is tailored to the unique educational needs of today's working learner. The majority of University of Phoenix students are working, or actively looking for work. If these students attended school full time at a community college or state university, it would mean a loss of income, which is simply not an option for most working adults who have rent or mortgage payments and are raising a family. To help meet the needs of today's working learners, University of Phoenix offers: Flexible scheduling (courses offered throughout the day and evening; classes starting throughout the year rather than just two times per year); Choice of online or campus-based classrooms (over 200 locations conveniently located throughout the U.S.); Small class sizes (average of 15 students); Degree programs relevant to today's workforce; Faculty who have professional experience in their field of instruction (nearly all of whom have either master's or doctoral degrees); and High levels of student support to help students succeed.
Embracing Ethical Enrollment Practices

While advertising informs and drives interest, it alone does not drive enrollment. Today, the internet affords students the opportunity to do a tremendous amount of research about University of Phoenix and other institutions, enabling them to make more fully informed decisions about their educational options.
Comparable Marketing Spending. Enrollment costs at University of Phoenix are generally inline with those of other institutions. The average cost to enroll a new student at University of 54 55 Phoenix was $2,606 in fiscal 2008 compared with $2,383 for all colleges and universities (which excludes certain promotional efforts used by traditional schools, such as athletic programs that can cost as much as $100 million annually). More specifically, the average marketing and advertising spend per new enrollment at University of Phoenix was $1,127 in
Apollo Group, Inc.
24
~~GROUP. INC.
,\.~ APOLLO
August 2010
fiscal 2008 compared with $1,648 for all colleges and universities certain promotional efforts used by traditional schools).
Exhibit 17: Average Marketing Spend per New Enrollment
$3,000
56
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(which, again, excludes
$2,606 $2,500
$2,000
$1,500
$1,000
$500
$0
All Colleges & Universities Marketing & Advertising University of Phoenix Total Enrollment Costs
Source: National Association for College Admission Counseling, 2009 State of College Admission, and Apollo Group SEC filings and internal data.
Purpose of Marketing is to Inform. We believe that ethical advertising serves the purpose of informing students of the options they have in higher education. We view this as an important part of helping working learners, who may have both professional and family responsibilities, to understand that there is an option in higher education specifically designed to meet their needs. We also believe it is critically important for us, as a nation, to ensure that individuals who came from backgrounds in which they never thought they had an opportunity to go to college, individuals who for financial reasons had to start working or chose to join the military immediately after high school, or who simply did not appreciate the value of an education until later in life, recognize that there is a way for them to attain a college degree, and thus an opportunity to improve their position in life. That Being Said, Not Everyone is Prepared for College. University of Phoenix is committed to delivering a high value education to those who are willing to work hard enough to realize its benefits. That means that while we are committed to our mission of providing access and opportunity, we do not want to enroll students who we do not believe have a reasonable chance of succeeding at our institution. It does not benefit the student, and it does not benefit us. Students who drop out adversely impact important quality metrics such as cohort default rates and graduation rates for which we are accountable to our students and our regulators. Furthermore, from a purely economic standpoint, students who drop out tend to do so early in their programs at University of Phoenix, which adversely impacts us financially. It is not beneficial to us over the long term to enroll students who we do not believe will succeed.
Recognizing that, over the past couple of years, we were seeing increasing numbers of students who were less prepared for college-level study, we began to develop certain initiatives to help deter unprepared or uninformed students from enrolling in our programs.
Apollo Group, Inc.
25
~~GROUP. INC.
,\.~APOLLO
August 2010
Investing in More Sophisticated Evaluation Tools. As a result, a portion of the cost of enrolling a student for University of Phoenix has gone to enhancing and developing sophisticated tools and data analytics that we can use to help students identify their likelihood of success. University Orientation. University Orientation provides prospective students with the opportunity to make sure college, and specifically University of Phoenix, is right for them without incurring any extra cost. It is a free, three-week non-credit bearing course that all students with less than 24 credit hours will be required to take. Recognizing that we were experiencing an increasing number of students who were less prepared for the rigors of our degree programs, in early 2009 University of Phoenix began testing and recently announced the planned implementation of this program which is designed to ensure that prospective students understand the time and commitment required to be successful in our degree programs before they enroll and, importantly, before they take on debt.
After 18 months of testing and preparation with over 30,000 students having gone through our pilot, we plan to roll out this Orientation program to all incoming students with fewer than 24 credit hours, as these are the students who have limited experience with college-level study. Based on the results of our Orientation pilot, approximately 20% of all prospective students going through the program opt out and do not enroll at University of Phoenix. We are implementing this program because it is the right thing to do for our students.
Student-centric Advisors. In addition to the University Orientation program, in early 2009, we initiated a comprehensive review of how our counselors, who advise and enroll students, perform their duties and how they are evaluated and compensated. We have announced the planned rollout of a new evaluation and compensation structure for our counselors this fall that is consistent with our goal of focusing on the student and enhancing the student experience. We are committed to completely eliminating admission targets as a component of compensation for our counselors. Our primary goal is to ensure that students receive informative counseling and advice in a non-pressure environment to help them make wise decisions about their academic future.
Implementing Enhanced Student Protections throughout the Student Experience

The University has proactively implemented several other initiatives focused on student protections and we will continue to add protections on an ongoing basis. One tool that we use during the admissions process (in states where it's allowed) is our digital call recording system. This system monitors over 30,000 conversations per day between students and our admissions advisors and counselors for quality control and compliance purposes to help ensure we are interacting with current and prospective students in a manner that is consistent with our institutional policies and procedures. Additionally during the admissions process, we strive to provide prospective students with accurate and informed advice with respect to their financial aid opportunities (and the corresponding obligations). To this end, while we cannot legally restrict the amount a student borrows under the Title IV funding program, we tested and implemented a Responsible Borrower Calculator in 2009, which teaches and encourages students to borrow only the amount they need for their education. Since the implementation of this new tool, the percentage of students who choose to borrow the maximum allowed has significantly declined. We estimate that the percentage of students who now choose to borrow the maximum amount of student financial aid allowed has dropped from approximately 90% to 58 approximately 60-70%.
Apollo Group, Inc.
26
~~GROUP. INC.
,\.~ APOLLO
August 2010
In addition to the Responsible Borrower Calculator, in the coming months we plan to roll out an enhanced, user-friendly tool, that will transparently show the total program costs (including tuition and fees} for any of our degree programs at any location, as well as any expected borrowing costs associated with student loans and the expected interest rates on those loans. Beyond these student protections, we are also developing a pair of videos for students to view prior to enrolling, which we expect to roll out in the coming months. These videos-one delivered during the admissions process that will reinforce the required time commitments and other information necessary for success in our programs, and the other delivered during the financial aid process that will explain the key components of financial aid, the importance of responsible borrowing, and repayment obligations on loans-are intended to ensure that prospective students are fully informed prior to making an enrollment decision or taking on debt. Finally, our focus on student protections does not stop once students are enrolled and attending classes. For example, during the past year we implemented a new self-service withdrawal process so that students do not feel pressured into remaining enrolled if they determine University of Phoenix is not right for them.
Offering a Quality Education that is Valued by Employers

Investments in Education. University of Phoenix invests heavily in its students' education and student services, as well as the learning environment of tomorrow. Educational and instructional spending is by far our highest category of expenditure. In fiscal 2009, approximately 55% of our total expenses (or slightly higher when excluding the impact of 59 certain litigation expenses} were direct educational and instructional costs. This compares to 48% for public institutions and 52% for all traditional institutions (public and independent private schools} for the 2006- 2007 academic year (latest available}, according to the 60 Department of Education's 2009 Digest of Education Statistics.
We are able to invest significant resources in our students' education because we operate more efficiently by utilizing our classroom facilities nearly year round (whereas traditional schools often have unused facilities during summer and holiday breaks) and not spending our resources on dormitories, cafeterias, athletic complexes and other non-educational infrastructure that our students don't ask for and don't require. Ultimately, the value of the education we deliver to our students is the determinant of the long-term success of our institution, as positive outcomes yield success for our graduates. Our University delivers value to its students and is one of the few institutions of higher learning in the country to transparently publish its outcomes, which we do in our Academic Annual 61 Report.
learning Outcomes. For nearly 35 years, University of Phoenix has measured the learning outcomes of its students in order to verify what they've learned. University of Phoenix students typically enter with lower average assessment scores than the national average but substantially close that gap by their senior year, meaning they demonstrate similar levels of improvement through the course of their educational experience and even better improvement in the critical areas of English and mathematics compared with students from other schools. 62 Improvement in MAPP Scores demonstrates our students' accomplishments.
Apollo Group, Inc.
27
~~ GROUP. INC.
,\.~ APOLLO
August 2010
Exhibit 18: Percentage Improvement in MAPP Scores: Freshmen to Seniors

).')'.
Source: Educational Testing Service (ETS), Measure of Proficiency and Progress (MAPP).
Note: Master's Universities reference institutions that offer baccalaureate through graduate degrees.
Graduation Rates. As reported in University of Phoenix's 2009 Academic Annual Report, our associate students graduate at a slightly higher rate than the national average, and bachelor's students graduate below the national average owing, in part, to the greater numbers of risk factors (as defined by the Department of Education) that non-traditional students like ours 63 exhibit. Exhibit 19: Completion Rates by Various Demographic Characteristics
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Source: U.S. Department of Education, National Center for Education Statistics.
Normalizing for these demographic differences in non-traditional students helps account for much of the observed differences in completion rates between proprietary and traditional 64 schools. In addition, proprietary institution completion rates are substantially higher than community colleges, which have the most similar student mix based on demographics. Despite the demograph ic challenges of our non-traditional student base, we are proud that
Apollo Group, Inc.
28
~~GROUP. INC.
,\.~APOLLO
August 2010
University of Phoenix produced approximately 90,000 graduates in the past year alone. With more than 500,000 alumni, our graduates are employed by thousands of companies and organizations-large and small, including Fortune 500 companies and the White Housewithin a variety of industries and in various capacities, including entrepreneurs, senior level executives and CEOs.
Tuition and Student Debt. Tuition increases have historically been in-line with those of other types of institutions. We estimate that annual tuition and fee increases at University of Phoenix have generally ranged between 4-6% (depending on degree program) over the past ten years compared with 7.6% at public four-year institutions, 4.4% at public two-year 65 institutions, and 5.4% at independent private institutions according to the College Board.
Student debt levels at University of Phoenix are within national averages compared to both public and independent private four-year colleges and universities. For University of Phoenix, our bachelor's degree students (graduating between July 2007 and June 2008) had student loan debt on par with independent private four-year institutions. According to the College 66 Board, in 2007-08, 28% of bachelor's degree students in independent private four-year institutions graduated with no debt, 48% graduated with less than $30,500 in debt, and 24% graduated with more than $30,500 in debt. During the same timeframe looking at federal debt incurred while attending University of Phoenix, 21% of our bachelor's degree recipients graduated with no debt, 56% graduated with less than $30,500 in debt, and 23% graduated 67 with more than $30,500 in debt.
Default Rates. While default rates are a lagging indicator and are likely to go higher over the near term owing to the economic downturn of the last few years, as well as due to the significant growth in our associate student population in recent years, the draft 2008 2-year cohort default rate (CDR) for University of Phoenix students is 13.1% despite the demographic factors previously mentioned that place non-traditional students at a higher risk of default.
CDRs for our associate students tend to be significantly higher than those of bachelor-level and graduate students, which, as mentioned, is expected to drive our reported rates up for the next couple of years. However, we believe our efforts to shift our student mix to bachelor's and higher-level students, as well as our new University Orientation program, will favorably impact our CDRs over time. Interestingly, as noted earlier, the official CDR metric is a measure of default incidence, not a measure of dollar default. Students who drop out drive CDRs and drop-outs have lower debt levels as individuals who drop tend to do so early in their programs. As a result, two additional data points are worth noting. First, if we only look at students who have graduated with a University of Phoenix degree, we estimate our cumulative default rate is less than 1% 68 (using the official 2005, 2006 and 2007 cohort files). Second, the dollar value default percentage (the true economic impact of defaults) is about half of the incidence percentage. We estimate that the 2-year default rate on student loans for students at University of 69 Phoenix in the 2008 cohort was just 6. 7% on a dollar-basis calculation, despite one of the worst economic recessions in modern history. Importantly, we expect our University Orientation program to significantly reduce the number of students who drop out early in a given program, which we would expect over time to improve the relatively lower dollar loan default rates.
Apollo Group, Inc.
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Exhibit 20: University of Phoenix Default Rates (2-Year)
13.1%
9.3%
2006 Official CDR
2007
2008 (Draft)
Dollar-based Default Rate
Source: U.S. Department of Education, Apollo Group internal analysis.
Salary Improvement. University of Phoenix students realize average annual salary increases in annual compensation of 8.5% for bachelor's graduates and 9.7% for master's graduates during the course of their program compared to the 3.8% national average increase during 70 that same period.
Investing in the Future of Higher learning

Now that we've discussed our learning model as it stands today, we want to highlight some of the substantial investments we've been making into the future of learning at the college level. While being a for-profit entity in higher education generates some criticism, and in some cases rightfully so when profit motives drive bad behavior, one undeniable benefit is the fact that profits often drive innovation in a free market society. We are living proof of this at Apollo Group, as we helped pioneer education for the working learner over 35 years ago, and we have always been committed to the use of technology innovation and advances in information systems to improve the access to and outcomes of education for our students. Like so many industries that have leveraged technology advances to enhance product, service and productivity, we have invested significantly in the use of technology to increase our students' learning experience and to expand the accessibility of education to working learners in general. We are currently investing hundreds of millions of dollars in research, development, information systems, networking infrastructure and data centers. We are making advances in the field of adaptive learning in order to personalize education so that every individual - no matter what their learning style- can have a chance at a successful education. We strive to create a system that learns with each student and adapts the way in which it delivers curriculum to maximize the learning experience. We are investing in the most current community and networking technologies, so that we can connect our students, faculty and alumni into learning communities across the country and the globe in order to create an environment from diverse communities and gain access to the most relevant and highest quality information wherever it may physically reside. Importantly, our advancements in distance learning enable a larger pool of faculty and knowledge workers to bring their skills and techniques in every critical field of the economy to a global audience of students.
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We imagine a future in which learning can happen at any moment in whatever format or modality an individual needs to be successful, whether it is listening to downloads on their commute to work on a smart phone or in a traditional classroom. We believe in a world in which the most relevant information and the most engaging learning experiences inspire millions of citizens to pursue an education in an environment that instills confidence and accomplishment and empowers teachers and innovators to invest in learning. Over the long term, we hope that by integrating technology effectively with innovations in learning, we can make substantial breakthroughs in the future of education.
Recognizing the Importance of Regulatory Compliance

Apollo Group believes that effective regulatory oversight is critical to the postsecondary system for both traditional and proprietary institutions, and we strive to be leaders in regulatory compliance. At the most fundamental level, our institutions' policies, procedures, actions and outcomes are reviewed and scrutinized by a regulatory triad consisting of (1) federal agency and federal law, (2) multiple state regulatory authorities, and (3) regional and various programmatic accrediting bodies to help ensure quality educational outcomes, effective student protections, and responsible stewardship of Title IV funding. These are objectives that we share with those charged with overseeing the postsecondary system in this country. At the federal level, the U.S. Department of Education, as authorized by Congress through the Higher Education Act and subsequent reauthorizations, has conducted numerous program reviews and audits of University of Phoenix over its 35 year history and has, after extensive periodic reviews, fully recertified the University's eligibility to participate in student financial aid programs under Title IV of the Higher Education Act. Additionally, the University is required to submit annual student financial aid compliance audits conducted by an independent accounting firm and continuously abide by the terms of our Program Participation Agreement. In addition, we are subject to numerous state-level regulatory visits, reviews, license renewals, and various other criteria depending on the state. University of Phoenix has been approved or has authorization to operate in 43 states and currently does so in 40 of them. Lastly, University of Phoenix has achieved regional accreditation from the Higher Learning 71 Commission (HLC) of the North Central Association of Colleges and Schools -one of six accrediting bodies considered to be the gold standard of accreditation-in 1978 and has been subsequently reaffirmed five times based on thorough reviews and site visitations from academicians at peer institutions charged with scrutinizing our academic quality and student learning outcomes. In addition, several of our degree programs are accredited by programmatic accrediting bodies, including our teaching, nursing, counseling and business programs: Nursing, CCNE (Commission on Collegiate Nursing Education)
72
Counseling, CACREP (Council for Accreditation of Counseling and Related Educational 73 Programs) Business, ACBSP (Association of Collegiate Business Schools and Programsf Education, TEAC (Teacher Education Accreditation Councilf
5
4
We take our responsibility to our regulators, and ultimately to students, seriously, and while we will never rest, we have initiated a rigorous process designed to improve oversight of our policies and procedures. Earlier this year, we hired a new Chief Compliance Officer, who has
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more than a decade of experience in senior leadership roles specific to ethics and compliance, to ensure that the policies and procedures we have in place with respect to the interaction of our employees, faculty and staff with prospective and current students and our handling of student funds is fully compliant with the law and our regulators' directives. Furthermore, we have an internal team dedicated to identifying cases of potential fraud, and have self-reported numerous instances of suspected fraud and abuse to the U.S. Department of Education Office of Inspector General for them to further pursue investigations and take legal action when appropriate. Some critics of the proprietary sector have recently pointed to specific instances of inaccurate or misleading interactions with prospective students as the basis of claiming a culture of aggressive sales tactics and inappropriate behavior at certain institutions. While we cannot think of a company or government entity that has zero errors in the area of compliance, noncompliance is neither acceptable nor permitted at any of our universities. There are clear consequences for breaches of compliance. To that end, we have instituted comprehensive compliance training and control processes within our institutions. When we discover instances of impropriety, they are dealt with quickly and fully-up to, and including, termination. Our intent is to ensure that our employees understand and act on both the letter and the spirit of the law and the many regulations that are already in place through the regulatory triad. Simply, we ask our employees to always comply with policies and procedures and do the right thing for the student. We are committed to fostering a culture within the organization, advocated and supported by our senior leaders, that aligns our policies and procedures with the goal of creating a world-class student experience at each of our universities.
What is Management's Philosophy?

Apollo Group is proud of its record of positive student outcomes and our leadership in the field of higher education with respect to the transparency of those outcomes, as demonstrated through the publication of our 2008 and 2009 Academic Annual Reports. Importantly, while we are a publicly traded company with shareholders, for us ''for-profit" does not mean "profits before students." It does mean that we do not need to ask the taxpayer to directly subsidize our operations beyond the usage of federal loans and grants for which our students qualify (using the same criteria that students of all institutions use to qualify}. Our management philosophy is, first and foremost, to always do what is right for the student. Internally, our senior leaders have explicitly directed faculty, advisors and staff that they must always be of the mindset of doing the right thing for the student; treat each student as if he or she were a close friend or family member; and if something does not seem right, elevate that concern until the concern is resolved. Externally, management has expressed this philosophy to our shareholders so that they can understand how our leadership team operates University of Phoenix and our other institutions. We believe this philosophy is borne out not just by our words, but more importantly by our actions, including responsible enrollment practices, student protections, and performance management systems to reward the right behaviors. Ultimately, our shareholders can only realize sustainable returns on their investment if we consistently provide a strong value proposition to our students.
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Conclusjon
In today's world we need on-demand, rapidly deployed, effective education. Today's working learners need industry-adaptive faculty and curriculum-faculty who are active in their fields of instruction and teach curriculum that can immediately be applied in the workforce. Educational programs need to prepare students for today's economy, not the economy of the past. We believe that University of Phoenix through our technological investment, advanced learning methodologies, and our national reach can dramatically accelerate the innovation that is essential to transform education in America. The U.S. higher education system must evolve from one that caters to a small, selective elite to one that also produces a broadly educated society in order for the U.S. to remain competitive in today's global, knowledge-based economy. While an important part of the higher education system, traditional colleges and universities cannot meet the Obama administration's national education goals alone. University of Phoenix's mission is to provide access to high-quality education through innovation and by delivering consistent, valuable learning outcomes. We built and manage our differentiated learner model with small class sizes, convenient locations and online 24/7 availability for our working learners. We successfully serve the non-traditional students that now represent 73% of the total 76 student population, as defined by the Department of Education. Although non-traditional students assume debt to fund their education, their return upon graduation is very attractive. University of Phoenix continues to aggressively invest in our students' future with hundreds of millions of dollars spent on innovative technologies, service platforms and products, providing opportunities for our students to achieve their personal and professional goals. By providing an accessible, high quality education, University of Phoenix is producing successful outcomes-graduates who are better positioned to enjoy the professional, financial and personal benefits that a degree brings, as well as a more educated, competitive society as a whole. Through a framework of thoughtful and consistent regulation, well managed proprietary colleges and universities-those that are committed to responsible, ethical practices and regulatory compliance-play a vital role in the future of America's higher education system, helping it to rise to the challenge of meeting the needs of the millions of non-traditional learners and producing the graduates necessary to achieve the nation's shared educational and economic goals. Apollo Group is committed to leading the nation towards this future.
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Append"x
Mil ken Institute, 2010 Global Conference, Panel on Science, Technology, Engineering+ Math {STEM) = Formula for Global Competitiveness, http://www.milkeninstitute.org/presentations/slides/GC10-2329.pdf. 2 U.S. Bureau of Labor Statistics, Occupational Outlook Handbook, 2010-11 Edition, http://www.bls.gov/oco/. 3 U.S. Bureau of Labor Statistics, Current Population Survey, http://www.bls.gov/web/empsit/cpseeaS.pdf. 4 World Economic Forum, The Global Competitiveness Report 2009-2010, http://www.weforum.org/en/initiatives/gcp/Giobai%20Competitiveness%20Report/index.htm. 5 President Barack Obama, American Graduation Initiative, July 14, 2009, http://www.whitehouse.gov/the press office/Excerpts-of-the-Presidents-remarks-in-Warren-Michigan-and-fact-sheet-onthe-American-Graduation-Initiative/. 6 Milken Institute, 2010 Global Conference, Panel on The Next Chapter in Charter Schooling: Taking Reform to Scale, http://www.milkeninstitute.org/presentations/slides/GC10-2096.pdf. 7 U.S. Department of Education, National Center for Education Statistics, 1ih Grade Reading and Mathematics 2005: National Assessment of Educational Progress, http://nces.ed.gov/nationsreportcard/pdf/main2005/2007468.pdf. 8 Organisation for Economic Co-operation and Development, Education at a Glance, 2004. 9 U.S. Department of Education, National Center for Education Statistics, Highlights from PISA 2006: Performance of U.S. 151
Year-Oid Students in Science and Mathematics Literacy in an International Context,

http://nces.ed.gov/pubs2008/2008016.pdf. 10 Apollo Group estimates based on the number of individuals in the U.S. labor force without any college experience, assumed student to teacher ratio of 100:1 and assumed average class size of 25-50 students. 11 Apollo Group estimate (see Exhibit 16 and accompanying notes). 12 Center on Budget and Policy Priorities, http ://www.cbpp.org/cms/index.cfm?fa=view&id=1214. 13 U.S. Department of Education, National Center for Education Statistics, National Postsecondary Student Aid Study (NPSAS}, 2000, http://nces.ed.gov/surveys/npsas/index.asp. 14 Apollo Group analysis (see Exhibit 14 and accompanying notes). 15 Apollo Group analysis (see Exhibit 16 and accompanying notes). 16 Apollo Group SEC filings and internal data and National Association for College Admission Counseling, 2009 State of
College Admission,
http://admin.nacacnet.org/PublicationsResources/Marketplace/research/Pages/StateofCollegeAdmission.aspx. Educational Testing Service (ETS}, 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. 18 U.S. Department of Education, Integrated Postsecondary Education Data System (IPEDS) and University of Phoenix data reported in University of Phoenix Academic Annual Report, http://www.phoenix.edu/about us/publications/academicannual-report.html. 19 Apol lo Group internal analysis; certain assumptions were made in the preparation of this analysis due to limitations in the source data. 20 Apollo Group internal analysis; using the official 2005, 2006 and 2007 cohort files. 21 University of Phoenix data based on institutional research on entering student income, registration survey completing student income and end-of-program survey of 2008 graduates; 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. 22 U.S. Bureau of Labor Statistics, Current Population Survey, http://www.bls.gov/emp/ep chart OOl.htm. 23 College Board, Education Pays: The Benefits of Higher Education for Individuals and Society 2007, http://www .college board .com/prod down loads/about/news info/cbsen ior/yr2007/ed-pays-2007 .pdf. 24 M il ken Institute, 2010 Global Conference, Panel on Science, Technology, Engineering+ Math {STEM) = Formula for Global Competitiveness, http://www.milkeninstitute.org/presentations/slides/GC10-2329.pdf. 25 U.S. Bureau of Labor Statistics, Occupational Outlook Handbook, 2010-11 Edition, http ://www.bls.gov/oco/. 26 U.S. Bureau of Labor Statistics, Current Population Survey, http://www.bls.gov/web/empsit/cpseea5 .pdf. 27 World Economic Forum, The Global Competitiveness Report 2009-2010, http://www.weforum.org/en/initiatives/gcp/Giobai%20Competitiveness%20Report/index.htm. 28 President Barack Obama, American Graduation Initiative, July 14, 2009,
17
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http://www.whitehouse .gov/the press office/Excerpts-of-the-Pre sidents-re rna rks-i n-Wa rren-M i ch iga n-and-fact-sheet -onthe-American-Graduation-Initiative/. 29 Mil ken Institute, 2010 Global Conference, Panel on The Next Chapter in Charter Schooling: Taking Reform to Scale, http://www.milkeninstitute.org/presentations/slides/GC10-2096.pdf. 30 U.S. Department of Education, National Center for Education Statistics, 1ih Grade Reading and Mathematics 2005: National Assessment of Educational Progress, http://nces.ed.gov/nationsreportcard/pdf/main2005/2007468.pdf. 31 Organisation for Economic Co-operation and Development, Education at a Glance, 2004. 32 U.S. Department of Education, National Center for Education Statistics, Highlights from PISA 2006: Performance of U.S. 15-
Year-0/d Students in Science and Mathematics Literacy in an International Context,

http://nces.ed.gov/pubs2008/2008016.pdf. Apollo Group estimates based on the number of individuals in the U.S. labor force without any college experience, assumed student to teacher ration of 100:1 and assumed average class size of 25-50 students. 34 Apollo Group internal analysis (see Exhibit 16 and accompanying notes). 35 Center on Budget and Policy Priorities, http://www.cbpp.org/cms/index.cfm?fa=view&id=1214. 36 Chicago Tribune, University of lflinois Orders Furloughs, Other Cost-cutting Measures, January 6, 2010. 37 U.S. Department of Education, National Center for Education Statistics, Digest of Education Statistics 2009, http://nces.ed.gov/pubs2010/2010013.pdf. 38 U.S. Department of Education, National Center for Education Statistics, National Postsecondary Student Aid Study (NPSAS}, 2000, http://nces.ed.gov/surveys/npsas/index.asp. 39 U.S. Department of Education, National Center for Education Statistics, 2007-2008 National Postsecondary Student Aid Study (NPSAS: 08), http://nces.ed.gov/pubs2009/2009166.pdf. 40 U.S. Department of Education, National Center for Education Statistics, National Postsecondary Student Aid Study (NPSAS), Data Analysis System, Undergraduate Survey, 1987, 1990, 1993, 1996, 2000, 2004, 2008. 41 Apollo Group internal analysis; U.S. Department of Education Common Origination and Disbursement, 2008-2009 Federal Pel/ Grant Program End-of-Year Report, U.S. Department of Education, Office Postsecondary Education. 42 U.S. Department of Education, National Center for Education Statistics, 2007-2008 National Postsecondary Student Aid Study {NPSAS: 08}, http://nces.ed.gov/pubs2009/2009166.pdf. 43 U.S. Bureau of Labor Statistics, Current Population Survey, http://www.bls.gov/emp/ep chart OOl.htm; figures are based on average earnings all individuals in the labor force at each degree level, not starting salary data. 44 U.S. Government Accountability Office, GA0-09-600, August 17, 2009. 45 Elizabeth Herr and Larry Burt, Predicting Student Loan Default for the University of Texas at Austin, 2005, http://www.nasfaa.org/Annualpubs/Journai/Voi35N2/Herr Burt.PDF. 46 Thomas A. Flint, Journal of Higher Education, Predicting Student Loan Defaults, 1997. 47 NASFAA Journal of Student Financial Aid, Jennie Woo, Factors Affecting the Probability of Default: Student Loans in California, 2002. 48 Apollo Group internal analysis; certain assumptions were made in the preparation of this analysis due to limitations in the source data. 49 2011 White House Budget, Table 3, Direct Loans: Assumptions Underlying the 2010 Subsidy Estimates; net recovery rate estimate based on 2011 White House Budget and discussions with industry sources. 50 Apollo Group internal analysis (see Exhibit 14 and accompanying notes). 51 Delta Cost Project, Trends in College Spending 1998-2008, figures in 2008 dollars, http://www.deltacostproject.org/resources/pdf/Trends-in-College-Spending-98-08.pdf. 52 National Center for Higher Education Management Systems, http ://www.nchems.org/. and the Chronicle of Higher Education, February 24, 2010, How Far States Have to Go to Meet Obama's College-Completion Goal, http:l/chronicle.com/article/Chart-How-Far-States-Have-to/64361/. 53 Apollo Group analysis (see Exhibit 16 and accompanying notes). 54 Apollo Group SEC filings, internal data. 55 National Association for College Admission Counseling, 2009 State of College Admission, http://admin.nacacnet.org/PublicationsResources/Marketplace/research/Pages/StateofCollegeAdmission.aspx. 56 Apollo Group SEC filings, internal data. 57 National Association for College Admission Counseling, 2009 State of College Admission, http://admin.nacacnet.org/PublicationsResources/Marketplace/research/Pages/StateofCollegeAdmission.aspx; as a proxy
33
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for all colleges, the data provided by NACAC Survey for Marketing and Advertising is assumed to be the data offered for admissions budget less salaries and benefits presented. 58 Apollo Group internal data; assumed all students were eligible for the maximum amount. 59 Apollo Group SEC filings, internal data. 60 U.S. Department of Education, National Center for Education Statistics, Digest of Education Statistics 2008, http://nces.ed.gov/pubs2009/2009020.pdf. 61 University of Phoenix Academic Annual Report, http://www.phoenix.edu/about us/publications/academic-annualreport.html. 62 Educational Testing Service (ETS), 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. 63 U.S. Department of Education, Integrated Postsecondary Education Data System (JPEDS) and University of Phoenix data reported in University of Phoenix Academic Annual Report, http://www.phoenix.edu/about us/publications/academicannual-report.html. 64 U.S. Department of Education, National Center for Education Statistics, Digest of Education Statistics 2009, http://nces.ed.gov/pubs2010/2010013.pdf. 65 The College Board, Annual Survey of Colleges, weighted by full-time undergraduate enrollment. 66 College Board, Trends in Student Aid 2009, http://www.trendscollegeboard.com/student aid/pdf/2009 Trends Student Aid.pdf. 67 Apollo Group internal analysis; certain assumptions were made in the preparation of this analysis due to limitations in the source data; figures include only federal debt incurred while attending University of Phoenix. 68 Apollo Group internal analysis; using the official 2005, 2006 and 2007 cohort files. 69 Apollo Group internal analysis; certain assumptions were made in the preparation of this analysis due to limitations in the source data. 70 University of Phoenix data based on institutional research on entering student income, registration survey completing student income and end-of-program survey of 2008 graduates; 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. 71 University of Phoenix is accredited by The Higher learning Commission (HlC) and is a member of the North Central Association. The Higher learning Commission can be reached at http://www.ncahlc.org/ or by phone at (312) 263-0456. 72 The Bachelor of Science in Nursing and the Master of Science in Nursing programs are accredited by the Commission on Collegiate Nursing Education (CCNE). Commission on Collegiate Nursing Education (CCNE), One Dupont Circle, NW, Suite 530, Washington, DC 20036-1120. 73 The Master of Science in Counseling program in Community Counseling (Phoenix and Tucson, Arizona campuses) and Master of Science in Counseling program in Mental Health Counseling (Utah campuses) are accredited by the Council for Accreditation of Counseling and Related Educational Programs (CACREP). For additional information, visit http://www.cacrep.org. 74 University of Phoenix School of Business has achieved voluntary from the Association of Collegiate Business Schools and Programs (ACBSP) demonstrating it has met standards of business education that promote teaching excellence. 75 The Master of Arts in Education program with options in Elementary Teacher Education and Secondary Teacher Education is preaccredited by the Teacher Education Accreditation Council (TEAC). 76 U.S. Department of Education, National Center for Education Statistics, National Postsecondary Student Aid Study {NPSAS}, 2000, http://nces.ed.gov/surveys/npsas/index.asp.
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About Apollo Group1
nc.
Apollo Group, Inc. is one of the world's largest private education providers and has been in the education business for more than 35 years. The Company offers innovative and distinctive educational programs and services both online and on-campus at the high school, undergraduate, master's and doctoral levels through its subsidiaries: University of Phoenix, Apollo Global, Institute for Professional Development, College for Financial Planning and Meritus University. The Company's programs and services are provided in 40 states and the District of Columbia; Puerto Rico; Canada; Latin America; and Europe, as well as online throughout the world. For more information about Apollo Group, Inc. and its subsidiaries, call (800) 990-APOL or visit the Company's website at www.apollogrp.edu.
About University cf Phoenix

University of Phoenix is constantly innovating to help students balance education and life in a rapidly changing world. Through flexible schedules, challenging courses, small classes and highly interactive learning, students achieve academic and career aspirations without putting their lives on hold. University of Phoenix serves a diverse student population, offering associate, bachelor's, master's, and doctoral degree programs from campuses and learning centers across the U.S. as well as online throughout the world. It is accredited by the Higher Learning Commission of the North Central Association of Colleges and Schools.
Forward ...ooking Statements Safe Harbor

Statements about Apollo Group and its business in this position paper which are not statements of historical fact, including statements regarding Apollo Group's business outlook, future enrollment and future strategy and plans, are forward-looking statements, and are subject to the Safe Harbor provisions created by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current information and expectations and involve a number of risks and uncertainties. Actual results realized and actual plans implemented may differ materially from those set forth in such statements due to various factors, including changes in the overall U.S. or global economy, changes in enrollment or student mix, including as a result of the roll-out of the Company's University Orientation program to all eligible students, the impact of changes in the manner in which the Company evaluates and compensates its counselors that advise and enroll students, changes in law or regulation affecting the Company's eligibility to participate in or the manner in which it participates in U.S. federal student financial aid programs, including the proposed program integrity regulations published for comment by the U.S. Department of Education on June 18, 2010, and the proposed regulations relating to "gainful employment" published for comment by the U.S. Department of Education on July 23, 2010, changes in the Company's business necessary to remain in compliance with U.S. federal student financial aid program regulations and the accrediting criteria of the relevant accrediting bodies, and other regulatory developments. For a discussion of the various factors that may cause actual results to differ materially from those projected, please refer to the risk factors and other disclosures contained in Apollo Group's Form 10-K for fiscal year 2009 and subsequent Forms 10-Q, and other filings with the Securities and Exchange Commission, all of which are available on the Company's website at www.apollogrp.edu.
Apollo Group, Inc.
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From:
To: CC:
Date: Subject:
Robert MacArthur <nnacarthur@altresearch com> Woodward, Jennifer

8/30/2010 1 :42: 10 PM
Rob MacArthur Alternative Research Setvices, Inc.

203-244-5174
nnacarthur@altresearch.com
This material has been prepared by Alternative Research Setvices Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Setvices Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The finn does not make a market or hold positions in the securities mentioned herein, nor does the finn maintain any investment banking relationships in such securities.
Total Rev up 18.4% yoy to $290.9M, vs $245.8M in 3q07: Tuition Rev up 17.3% yoy to $265.3M, vs $226.1Min 3q07. Other Educational Rev up 30.7% to $25.7M, vs $19.7M in 3q07.
Total Op Costs & Exp up 11.2% yoy to $240.4M, vs $216.2M in 3q07: Student Svc & Admin Exp up 21.4% yoy to $109.6M, vs $90.3M in 3q07. Cost ofEducational Svcs up 4% yoy to $l30.8M from $125.8 Min 3q07.
Total Op Inc up 70.9% yoy to $50.6M from $29.6M in 3q07. Net Income up 67.2% yoy to $38.3M from $22.9M in 3q07. EPS up 65.6% yoy to $0.53 from $0.32 in 3q07. " investments in marketing, recruiting, information technology and human resources will continue into the fourth quarter." New undergraduate student enrollment up 12.1% yoy to 12,410 from 11,075 in 3q07. Total student enrollment up 10.3% yoy to 44,814 from 40,637 in 3q07. Jan 08 session at Keller Graduate School of Management (KGSM), number of graduate coursetakers was 17,377, up 13 .7% yoy from 15,278 in Jan 07. March 08 session at KGSM, number of graduate coursetakers was 17,005, up 15.2% yoy from 14,756 in March 07. Total number of online undergraduate and graduate coursetakers in March 2008 up 25.0% yoy to 43,889 from 35,111 in March 07. Overall sector growth in the online market was 17.0% yoy for same period, according to Eduventures. "{l)The term "coursetaker" refers to the number of courses taken by a student. Thus one student taking two courses is counted as two coursetakers." "System-wide, 92.6 percent ofDeVry University's graduates for the year ending June 2007 were in the active job market and employed in their fields within 6 months of graduation at an average starting salary of $42,805." "(2) Graduates who actively pursued employment or who were already employed when they graduated and held positions in their chosen fields within six months of graduation. Include bachelor's and associates degree gaduates."
"We do not provide quarterly guidance; emphasize long-term growth guidance."
lnt'l growth strategy concentrates on Latin America, as well as India and China. Further growth strategy emphasizes online education. Re: Student Loan Crisis- "Recent new House legislation appears to be positive for students .. . lenders have exited and are still exiting, but, as outlined in 4/21 press release, this will not impact DV. Here's why" : 1) 2) 3) 4) 5) Increased Fed Loan Limits reduces need for private loans; Quality and placement ofDV graduates; State grant eligibility; DV students have historically lower default rates; DV has Educard system to directly finance students, and can ramp up this program."
Auction on securities failed has to do with lack of liquidity, and not credit-worthiness. When auction fails, rate is reset for 35 days. Near-term strategy is to hold until liquidity arrives.
%
ASSETS Cash and Cash Equivalents Restricted Cash Accts Rec'vble LIABILITIES Accts Payable Advance Tuition Payments Deferred Tuition Rev 3/31/08 249,580 3/31/0 7 135,82 1
YOY
Chg
23,077 58,042 121523 95490 36,895 34,283 21405 12311 16706 195869 4
83.8% -60.2 % 27.3% 7.6% 73.9% 17.2%
Q&A Q: (Jerry Herman) Early in the week, your press release stated no material impact on DV from student loan changes/crisis- what is your relationship with your six lenders on a FFELP and/or private loan basis? A: New student recruiting has not been impacted ... kudos to our professionals ... (bunch of other self-congratulatory bull shit). BoA, Chase, Citi, Wachovia, Wells Fargo, and SLM are our 6lenders ... getting good terms from them on both the FFELP and the Private Loan sides. Q: Just to be clear- all are active on BOTH the FFELP and the Private Loan side? A: (stalling ... searching for right words) Have had a ... uh.. " disruption" with
Wachovia ... but that' s a matter of weeks to fix ... has to do with their guaranty agency. N o issues that will last more than a few weeks for any lender on both the FFELP and private side. Q: High School recruiting update?
A: Efforts going well.

Q: Movement to your Direct Lending Program - how long to implement and how much are we talking? A: We have had the program ready ... pipes/processes in place ... would only take weeks to pull off. But at this point, it's all hypothetical. There' s no need to implement our direct lending program at present. Q: Incremental investments . . $9-$12M per quarter impact ... where did you come in on this estimate? A: Pretty much on target. Will continue at this rate going forward.
Q: You;ve talked about increasing compensation packages on employee side ... will we see impact on the P & L from this in coming quarter?
A: (Doesn' t really give an answer. .. defends decision saying that it is best for DV in the long term.) Q: Strategic Plan of areas you want to get into - can you gi ve us a roadmap of how you' re thinking about it, in terms of sequence/timing? A: DV core is still top priority. But, growth opp is there in health. Q: Are you doing dilutive deals, or accretive? ... A: AJmost everything we do is dilutive on day one ... Q: Professional and training business doing really well ... how much longer can you keep growth up like this? How much higher can margins go? A: Kudos to our team ... at the end of the day, margin dollars are what matter, not margin %ages ... margin dollar will continue to increase, but %ages will not. Q: Can you talk about other sources of student funding, i.e. credit cards and direct funding, corporate reimbursements ... perhaps breakout as a %age of sales those sources provide? Are you seeing any signs of weakness on those fronts? A : Not seeing any signs of weakness or any significant change with corp reimbursement, direct payments, military tuition reimbursements .. .all those have not changed as a %age of the mix ... there's been a lot ofbuzz, a lot of noise, but it really doesn' t look all that different from what it did 6 months. Q: Retention - How should we think about new enrollment growth at DeVry
University being so much stronger than total enrollment growth? Is there a slippage in retent1on? A: No. (emphatic.) There is no slippage ... we're seeing some early signs of improvement there, in fact. There' s a lag between new and total. .. Total is catching up with new enrollment from past quarters ... Q: Sa1es and Marketing- does model suggest that you could continue low double dig1t new undergrad enrollment growth? A: Yes, that's why we' re continuing to invest in that, so that we can continue reasonable growth. Growth rate will probably come down in the longer term. Q: Near-term low double digit doesn' t seem unreasonable? A: I don ' t want to put a number on that, but given the averages over the past few quarters, it's not unreasonable. Q: Given sales & marketing investments, is it reasonable to think that there is st111 enough room for efficiency in Student Svcs & Admin expense that there' s potential for leverage there in the next year, in terms of whole year, in spite of increased Sales and Marketing spend? A: It's possible for the whole year, as opposed to quarter to quarter. As long as we see the opp to invest in marketing & recruiting with the metrics not deteriorating - not getting to diminishing returns, and our data says that we're far from that point - we' re going to cont1nue to spend in that area .. . and since the spend isn' t accretive until next year, you' re going to see continued spend in marketing and recruiting. Q: Color on trend within faculty? Adjunct vs full-time? Course load? Cl.ass sizes? Of DVU facilities? A: Sure. Thanks. There is some leverage there. Looking at improving course load. Lot offocus on that. Showing early signs ofimprovement.. .lot of room on that one. Room for scheduling efficiencies. Q: If you look at avg students/class or per faculty member- are you happy where you are? Have you hit a wall there? A: Have not hit a wall. Not happy with where we are. Lot of room for upside there. Q: Ross- expansion in clinical space, but in terms of actual infrastructure in Caribbean, what sort of cap ex in the coming quarters? A: Wouldn 't be surprised to see a little bit more cap ex there in FY09, vs FY08. Investments in Ross Capacity are in the core science program . Also, 51 semester in Miami location and semesters 6 through 10 in clinical programs. Q: Do you expect exposure with SLM on private side to come down in coming quarters? Could you speak to your relationship with Citi and Chase, given their announcements last week?
A: Sure. Chase remains unchanged. Citi continues as a lender. There are some areas where we will not be touting Citi as a preferred lender. And let' s see ... um ..you asked about SLM exposure ... SLM continues, and our relationship moves forward, with no change. Q: You' ve mentioned SLM as your largest lender on your private side, so I'm just curious if you' re going to see more diversification among your private lenders? A: Sure. There will be more diversification among preferred lenders, but our SLM relationship continues to be strong. We really don' t see a big change there ... more color on overall statement that we've made that we don ' t see any material impact on our students. Q: You' ve been asked a lot about this acquisition strategy, and I guess it makes sense in terms of price, but wouldn ' t it drag you further into credit challenges for programs that are diploma and certificate programs? How much did you think about this before making the decision? A: We thought about it a lot, and I disagree with the premise of your question. Career college programs does not equal lower quality programs. Shorter programs does not equal more risk. You have to look at the whole confluence of factors (program quality, length, employment potential, etc.)
Q: When you talk about Allied Health program then, are you not talking about the typical 10-month programs?
A: Oh we are! If you take a 10 month respiratory assistant program, where you come out making $35K ... (pause) ... with multiple job offers, then that's a great value proposition. Q: So you're not talking about serving the same population that a typical medical assistant program serves, because it' s typically a no credit or low credit group? A: Urn ... sure! Some of the students do not have the credit scores that you or I have. That's why I get u p every morning and slog it out 30 miles on the tollway to come to work. .. to provide those opportunities. Some of those students are eligible for Perkins loans and Federal grants ... it's not as simple as - and I know you know this, but many people don' t - " if it's a short program then it's a lower quality program." Q: What about from your balance sheet. .. your ability to borrow ... you don ' t see any obstacles to this? A: Currently, we have a very strong cash balance. A very strong credit facility that let' s us tap into $275M. We have the resources to make the sort of deal, if the opp arises, as we have outlined. Q: Clarification - incremental spend in 2h08 previous guidance - up $13.5M in 3q08, and then $9M-$12M in 4q08. So when you said that spend would be up, are you talking about vs 3q08 or 4q08?
A: Well, we came within spitting distance. It wouldn ' t surprise me if 4q08 is up relative to 3q08.
Q: How many states are you working on getting approval in?

A: If I could just go back to previous question on spend - I just want to give some kudos to Rick and finance/accounting team, for stepping up our game. In terms of Chamberlain, just because it's such a highly regulated environment, we've taken particular care ... what I would emphasize is that it's our goal is to open 1 new location per year, and here we are having opened 2 in 3q08. Also, this co-location of Chamberlain campuses with DVU campuses is exceeding our expectations .. .it' s more than just the dollars and cents of improved utilization.
Q: You' ve lowered cap ex guidance twice significantly .. .is there a project that's taking longer or has been dropped?
A : Yeah, the Project Delta is taking longer, but it's worth taking the time to get it right.
DV Name Title Company Last Mentioned jtorres@browardalliance o President DeYry University (past)
Torres Julio C
(773) 929-8500 12/ 19/2008 r Davey Rick rdavey@yorkvilleu ca President DeVey University (past) (773) 929-8500 10/15/2008 Brown Steve stevebrown@cfef net President DeVey Universi ty (past) (773) 929-8500 ~Last 30 days r lfranklin@alexchamber com President DeYry University (past) Franklin Loretta
1
(773) 929-8500 12/3/2008 r Hackett. Reed President DeVey University (past) (773) 929-8500 l 0/11/2008 r Fateri. F ardad faterif@iecglobal com President Devey University (past) (773) 929-8500 MlLast 30 days r President DeVey University (past) Field Darryl W.
(773) 929-8500 11/ 1/2008 r Van Zwol Bill President DeVry University (past) (773) 929-8500 3/14/2008 r Grevesen. Chris W. President DeVey University (past) (773) 929-8500 3/28/2008 r Moore. Jeff Georgia President DeVry University (past) (773) 929-8500 11/112008 r Ireleaven. James jtreleaven@itaa org President, Chicago Metro DeVry University (past) (773) 929-8500 12/16/2008 r Hamburger Daniel J. Executive Vice President D eVry University (past) (773) 929-8500 12/9/2008 Ri cordati Timothy H tri cordati@aQs.org Vice President, Enrollment Management and Vice President, Student Affairs DeVr:y University (past) (773) 929-8500 6/27/2008 Babel, Thomas A babel@studentcl earinghous... Vice President DeVey University (past) (773) 929-8500 jQ!Last 30 days Drescher, Drew mailto:drew@stillplayingw Vice President and Business Manager DeVry University (past)
(773) 929-8500 ~Last 30 days r Parrott. Sharon T Vice President for External Relations and Regulatory Assurance DeVcy University (past) (773) 929-8500 12/ll/2008 r Mayers Patrick L. patrickmayers@b-einc.com Vice President of Academic Affairs DeVcy University (past) (773) 929-8500 11117/2008 r Loraine Donna M. Vice President for Academic Affairs and Dean DeYr:y University {past) (773) 929-8500 12/1 1/2008 r Perlmutter Jane Regional Vice President of Operations DeYry University (past) (773) 929-8500 11 /8/2008 r Odom-Wesley. Barbara barbara odom-wesley@ahima Chair of the Health Information Technology Program DeVr:y University (past) (773) 929-8500 ~Last 30 days Abooja Anjuli (905) 845-4681 ext-306 aahooja@appleby on ca Chair ofElectronics Engineering Technology Programs DeVry College of Technology DeYr:y University (past)
1
(773) 929-8500 10/14/2008 r Tasooji Matthew Senior P rofessor and Chairman of the EET Department DeYr:y University (past) (773) 929-8500 9/5/2008 3127555499 psi mpson@acgme.org
Simpson, Peggy
;J Director, Graduate Student Services DeYcy University {past)

(773) 929-8500 11 /16/2008 r Sullivan William S. (562) 997-5354 wsullian@devry edu Director DeVey University (past) (773) 929-8500 4/ 1/2008 ' Graham Shawn Director, Student Finance DeYr:y University (past) (773) 929-8500 10/12/2008 r Overbye David davido@aaua org Director of Curti culum DeV r:y University (past) (773) 929-8500 12/14/2008 Sullivan. Pat psullivan@devcy.edu Director of Career Services DeVey University (past) (773) 929-8500 ~Last 30 days Lisko, Adele (816) 941-0430 alisko@kc.devcy edu Director of Community Relations DeVry University (past} (773) 929-8500 ";Last 30 days Sevak Amit National Director of Strategy and New Business Enrollment DeVry University (past)
(773) 929-8500 9/ 15/2008 Suhrid Amita Director for Master In Information Systems DeVey University {past) (773) 929-8500 10/23/2008 r 847-214-7161 mchahino@elgin edu
~
Chahino. Michael
Director of Information Technology and Adjunct Faculty DeVry University (past) (773) 929-8500 'WLast 30 days r Selman John A john@selmanhouse.com Assistant Director of Admissions DeYry University (past) (773) 929-8500 3/1/2008 r Sims Tommy Director of Student Finance DeVry University (past) (773) 929-8500 9/17/2008 r Kane Kim kkane@usafunds org Director of Student Finance DeVzy University (past) (773) 929-8500 11/ 13/2008 925-787-4215 Kay Anderson@comcast net
;]
Anderson Kay
Director of Student Services DeVr:y University (past) (773) 929-8500 11/l 0/2008 678 327-5518 lanytaffel@corncast net
~
Taffe! Larry H.
National Corporate and Strategic Alliance Manager DeVry University {past) (773) 929-8500 517/2008 r Strassburger Richard rstrassburger@cbdmarketi n Manager, Interactive and Media Efforts DeYcy University {past) (773) 929-8500 12/16/2008 r Robinson. loes Human Resources Manager DeVry University (past) (773) 929-8500 10/25/2008 r Chumley. Chris Program Manager DeVry University (past) (773) 929-8500 11/3/2008 Simon Leanne Finance Team Manager DeVry University (past) (773) 929-8500 10/12/2008 Carroll. Wayne Patent Attorney DeVry Un iversity (past) (773) 929-8500 9/26/2008 McCoy Douglas dmccoy@trhsa org Consultant DeYry University (past) (773) 929-8500 11/19/2008 Stucbly Ray rstuchly@teamlmi .com Certified Instructor In Quality Management DeYry University {past)
(773) 929-8500 12/ 11/2008 r
Rambish. Medea
Developmental English Instructor DeVey University (past) (773) 929-8500 7/26/2008 r Arce. Diego Senior Student Finance Advisor D eVzy University (past) (773) 929-8500 2/15/2008 r Dalessandro James G. (330) 392-6140 , ext-14 james@regionalchamber com Field Academic Advisor DeVry University (past) (773) 929-8500 12/ 12/2008 r Newton. Jim Admjnistrator DeYry University {past) (773) 929-8500 12/26/2008 r Fejgert. Don dfeigert@verizon. net Administrator DeVry University (past) (773) 929-8500 ~Last 30 days r Wille. Steve swille@teamsontarget com Member, Advisory Boards DeVzy University (past) (773) 929-8500 12/1/2008 Cherney Marc I mchemey@strate2osinc.com Adjunct Facul ty Member DeVry University (past) (773) 929-8500 12/3/2008 r Quigley John G Adjunct Faculty Member DeVry University (past) (773) 929-8500 10/25/2008 r Johnson Indigo D. indigo@career-transition ... Faculty Member DeYry University {past) (773) 929-8500 10/25/2008 r Leonard Hem:y S. Adjunct Facul ty Member DeVry University (past) (773) 929-8500 1 1/12/2008 r Heyl. Jon W. jonh@spie org Member, Advisory Board DeVry University (past) (773) 929-8500 3/31 /2008 Ratcliffe. Iris Member, Faculty DeYry University (past) (773) 929-8500 12/9/2008 Reitzel. M ichael mi chael reitzel@d igitalre Member, Business Faculty D eVry University (past) (773) 929-8500 51 15/2008 Hong Stan!ey stanley.hong@worldsourcei ... Certified Public Accountant DeVry University (past) (773) 929-8500 6/5/2008 Webb Josh j webb@edutechsystems.com Seni or Technician for the Inform ation Technology Department DeVey University (past)
(773) 929-8500 5/31/2008 Donovan Mike Teaching Assistant DeVzy University {past) (773) 929-8500 11 I 14/2008 r Phillips. Jerry Maintenance Assistant DeVry University (past) (773) 929-8500 7/6/2008 r 916-612-1385 michaeladwsn@yahoo.com
~
Dawson. Michaela R
Faculty Assistant DeYry University {past) (773) 929-8500 8/29/2008 r McDonald Ron (705) 728-1968 x1447 rmmcdonald@georgianc on. c ... Senior Management Positions DeVry University (past) (773) 929-8500 12/16/2008 r Dabsys Tadas G (800) 367-1565 , ext-203 tadas@psionline.com Position, Career Counseling Department DeYry University {past) (773) 929-8500 ~Last 30 days .- Jean. Mary Position, Career Center DeVry University (past) (773) 929-8500 IWLast 30 days r Seah Gilbert Senior Professor DeVry College of Technology DeVry University (past) (773) 929-8500 11/ 14/2008 r Meyers John (773) 243-1603 j meyers@sunbeltoetwork.co. Senior Management Roles DeVry University (past) (773) 929-8500 7/l 5/2008 r Meyers John (847) 533-7115 jmeyers@sunbeltnetwork co Senior Management Roles DeVry University (past) (773) 929-8500 12/9/2008 r Everhart Nicki Professor DeVey University (past) (773) 929-8500 9/29/2008 r Graham. Kay kayg@hgtc.org Educator DeYry University (past) (773) 929-8500 ~Last 30 days mba! ouchestani@devry. edu Professor DeYry University {past) Baloucbestani Mehdi
(773) 929-8500 ~Last 30 days Rutherfoord, Andrea Technical Writer for Another Software Development Company, A Professor DeVry University (past) (773) 929-8500 12/17/2008 Homan Student DeYry University {past)
An~ie
(773) 929-8500 12/2/2008 r Weiss Barry A Professor DeVcy University (past) (773) 929-8500 10/14/2008 r DeCosa Brandy Professor DeVry University (past) (773) 929-8500 ~Last 30 days DeYry University {past)
Smith Alan
(773) 929-8500 8/30/2008 Merkow. MarkS. Mark Merkow@aexp com Faci litator DeYcy University (past) (773) 929-8500 5/30/2008 r Petrik. John Dean of Career Services DeVry University (past) (773) 929-8500 10/26/2008 r Perren Ray Dean of Academic Affairs DeVry University (past) (773) 929-8500 8/ 15/2008 Brauer. Susan susan@dreamerstapestry.co... Technology Dean DeVry University {past) (773) 929-8500 11/22/2008 r Isele, William P wisele@archerlaw com Adjunct Professor of Law and Ethics DeVey University (past) (773) 929-8500 7/1 7/2008 joe alexander@bull com
~
Alexander. Joe B.
Adjunct Professor DeVry University (past) (773) 929-8500 ~Last 30 days r Quinones John P. Dean of Computer Information Systems, Information Technology and Telecommunications Management DeYcy University (past) (773) 929-8500 9/15/2008 r Culpepper, Reginald G Adjunct Professor DeVry University (past) (773) 929-8500 ~Last 30 days r Kraft James Adjunct Professor DeVry University (past) (773) 929-8500 8/5/2008 Henderson Elaine elaine henderson@hcca com Communication, Marketing and Writing Classes Teacher DeVcy University (past) (773) 929-8500 'mLast 30 days Bartlett Carol English Teacher DeVcy University {past) (773) 929-8500 2115/2008 Marquez, Andrew Undergrad Student DeVry University (past) (773) 929-8500 7/22/2008 (403) 207-3182 bovellp@cadvision com DeVry University (past) Bovell, Peter
(773) 929-8500 9/20/2008 r Ramsey Tom Economics Teacher DeVry University (past) (773) 929-8500 8/6/2008 r rnjwhite@columbus rr com DeYcy University (past) White Margie J
(773) 929-8500 ~Last 30 days carolc@sandiegomagazine c ... DeVry University (past)
Cujec. Carol
(773) 929-8500 7/30/2008 r Denson. T.J. ti .denson@macedoniaminist Dean of Students DeVry University (past) (773) 929-8500 9/29/2008 r Hinrichs Mark P Dean of General Education DeVry University (past) (773) 929-8500 5/25/2008 DeYry Un iversity (past)
Schuler Vaughn
(773) 929-8500 7/6/ 2008 r Walker. Dave davidw@ storytron com Academic Dean of Game and Simulation Programming DeYry University (past) (773) 929-8500 12/9/2008 debe! st@devcy.edu DeYry University (past) (773) 929-8500 9/19/2008 DeYry University (past) Chelst Dov N
Mathes Jennifer
(773) 929-8500 5/17/2008 r Smith Jennifer Education Adviser DeVry University (past) (773) 929-8500 5/19/2008 r Hildebrand Andrew C. andrew@aarro com Dean of Business Programs DeVry University (past) (773) 929-8500 8/l/2008 Bass, Leonard lbass@mc3 .edu Dean of First Year Programs DeYry University (past) (773) 929-8500 9/2/2008
Name Title Company Last Mentioned Cuilla. Thomas Adjunct Faculty Role DeVry University (past)
(773) 929-8500 9/20/2008 Devoss Joe joe devoss@certtest.com Professor of Business and Operations DeYr:y University (past) (773) 929-8500 8/ 13/2008 (970) 763-7005 ddutmer@theyoutbfoundatio PeVry University (past) Dutmer Deb
(773) 929-8500 11/14/2008 DeVcy University (past)
Mcmillan Teey
(773) 929-8500 2/24/2008 r Strachman Peggy peggy@dnagateway com College Professor DeVey University (past) (773) 929-8500 11/24/2008 bhenderson@devcy edu
Henderson. Brittany
DeVry University-Washington DeVey University (past) (773) 929-8500 12/16/2008 I Benner Suzanne
iJ
Online and On site Classes In Composition, Ethics , and Career Development Teacher DeVcy Un iversity (past) (773) 929-8500 8/15/2008 abourc@aaua.org DeVey University (past)
Cherif. Abour
(773) 929-8500 12/14/2008 r Cumming. Gregory G Adjunct Professor of History DeVey University (past) (773) 929-8500 12/2/2008 DeVey University (past) (773) 929-8500 10/l2/2008 DeVey University (past)
Gabaga. Ruth Leizerowicz Joe
(773) 929-8500 10/ 12/2008 r Silk, Suzette ssilk@ohjocatholicfcu com Adjunct Facu lty DeVry University (past) (773) 929-8500 4/11/2008 greg.streich@galegroup co DeVzy Un iversity (past)
F"
Streich. Greg
(773) 929-8500 10/12/2008 I Bailey Barry Dean of Bakersfield Center Devey University (past) (773) 929-8500 6/ 13/2008 DeYzy University (past) (773) 929-8500 8/23/2008 DeVry University (past)
Draper Stacy Knight. Rebecca
Mohan. Ratish (773) 929-8500 10/12/2008 International Recruitment DeVey University (past) (773) 929-8500 10/ 12/2008 dpeper@crystalcity org DeVzy University (past) (773) 929-8500 9/4/2008 rrolda@shermanoaksnc org DeVry Un iversity (past) Peper. Denis
Rolda Rick
(773) 929-8500 1 1/15/2008 DeVry University (past)
Singh Jagj it K
(773) 929-8500 10/12/2008 r Telfer Deborah M Dean of Business, Computer Information Systems, Technical Management and Biomedical Informatics DeVcy University (past) (773) 929-8500 3/26/2008 Warland. Shannon L Accounting Teacher DeVcy University (past) (773) 929-8500 12/6/2008 QeYry University (past) (773) 929-8500 10/10/2008 cbri s@stillplayi ngwithtoyl DeVry Un iversity (past)
I I
Wilborn, Willy
Enterline. Chris
(773) 929-8500 illULast 30 days Buonacore, Mary Auto Mechanic DeVry University (past) (773) 929-8500 7/24/2008 1 Cerney, Jac A. Adjunct Professor of Business DeVry University (past) (773) 929-8500 11/6/2008 (909) 868-4075 kchao@devry edu DeVry University (past) (773) 929-8500 6/23/2008 DeVry University (past)
Chan, Ken
Collins Jennifer
(773) 929-8500 ~Last 30 days 8741 2401 1, ext. 251 221 steveborgmanlcpc@gmail.col
I I
Borgman Stephen
.GJ
Counselor DeYry University {past)
(773) 929-8500 12/29/2008
PaQuin, Dave
Director of Faculty Devry University Online (past) I l/29/2008 Celeste
Hansen
Adjunct Faculty Member Devry University Online (past) 12/ 10/2008
M.ant
Economics Researcher and Lecturer Universite d'Evcy Yal d'Essonne (past) B!Last
30 days Jeanblanc, Monique Universite d'Evcy Val d'Essonne (past) 10/12/2008
Let me comment now on two pending matters in the legislative and regulatory environment. First, as we mentioned briefly when we reported earnings last quarter, there's the likely conversion from FFELP to a direct lending program delivered as a result of our focus on academic quality. Full year revenue hit a record $1.461 billion, up approximately 34% versus prior year. Revenue was still up about 20% versus prior year, excluding the impact of the U.S. Education and Fanor acquisitions. Net income for fiscal 2009 also hit a record level of$165.6 million, up nearly 32% versus last year. Reported recent acquisitions that boosted top-line growth, along with continued focus on efficiency and margin improvement to increase the bottom line. Revenue of $396 million was up 43% versus last year and so grew 22.5% excluding the impact of U.S. Education and Fanor. Net income in the fourth quarter of $37 million was up 51% versus last year, with reported earnings per share of $0.51 , up 50% versus last year. And the pre-tax income margin was 15% in the quarter, up 300 basis points versus last year, excluding discrete items from both years. and our recruiter compensation system has been and continues to be fully compliant. Now earnings per share would have been $0.56, excluding this litigation reserve, or up about 65% versus last year in the quarter. Our net accounts receivable balance was about a $104 million versus $55 million last year. About 75% of this increase was the result of the addition of receivables for U.S . Education and Fanor. The balance of the increase can be attributed to strong enrollment and revenue growth in the quarter, as receivables per account across our schools are generally in line or lower
moves. Capital spending for fiscal2010 is expected to exceed $100 million. <A- Richard M. Gunst, ChiefFinancial Officer>: Yeah, I think you hit the nail on the head. I think as far as the year goes, our long-term goal is just that, and we think next year we'll be able to be in line with those goals. And for the first quarter, we got some hurdles. You know, could the margin be down versus prior year in any one quarter? I think that's --could be the case. But for the year, I think we're expecting to improve our margins. But we're not managing, as Daniel said, quarter-to-quarter. animal vets. You are going to see continued stories about the shortage among the other healthcare professionals that-- you might go to the doctor's office or the hospital , you meet with a doctor, and meet with a nurse, and then there's two or three or four or five other professionals, you know respiratory therapists or the, maybe you need physical therapy, there's the physical therapy . We're serving dentistry: dental assistants, dental hygienists. So, Medical and Healthcare is definitely a huge priority for investment. its kind. Now, we visit over 8,000 high schools. We see nearly a million high school students a year, and we are educating them on post-secondary
opportunities and careers and the part of that is our service to the community, as part of that is also helping to recruit them to DeVry University, and now we also had programs like that at Chamberlain College of Nursing and Apollo College and Western Career College.
So, that concludes my overview of the very strong results for fiscal 2009. As we look back to our- as we look to our new fiscal year, we still feel comfortable with our long-term financial objectives to deliver a double-digit revenue growth and roughly 20% compound annual earnings per share growth over the next few years. We'll be making investments in Advanced Academics, online
<Q- Sara Gubins>: Okay. And then I wanted to ask about the comment about expecting longer-term to be able to continue to grow revenue double-digits and earnings over 20%, or about 20%. Given the more challenging comparisons that you have from this year, do you think that's an achievable target next year? And I'm also just wondering about the seasonality of that, given your comments about some initiatives presenting hurdles for the first quarter. I'm wondering if you're expecting margins to actually be down year-over-year in the first quarter?
School Name
Number of students
1st Year Retention%
Graduation Rate%
%of students entering calculation graduation rate
UOP
DeVry Institute of Technology & Keller Graduate School of ManagementNew York DeVry UniversityArizona DeVry UniversityCalifornia DeVry UniversityColorado DeVry UniversityFlorida James Madison University University of Florida American University Florida State University University of Vermont Iowa State University Northeastern University SUNY at Albany SUNY at Buffalo Ball State University San Diego State University University of Rhode Island The University of Texas at Dallas
1,432
33%
31%
47%
1,538
49%
44%
53%
6,005
56%
43%
37%
1,079
n/a
n/a
n/a
2,940 17,393 50,912 11,378 39,973 11,870 25,462 23,411 17,434 27,823 20,030 33,441 15,062
48% 92% 94% 87% 88% 84% 84% 90% 84% 87% 75% 82% 81%
85% 80% 79% 71% 68% 67% 66% 65% 63% 61% 59% 58% 57%
91% 80% 69% 78% 74% 82% 69% 69% 60% 66% 74% 47% 78%
14,523
80%
55%
42%
ENTER NO JS-6 SEND

FILED -WESTERN DIVISION CLERK, U.S. DISTRICT COURT
ENTERED ClERK, u .S. DISTRICT COURT
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CfNTAAl. 01 SY ,,...;,
Of CALifORNIA DEPUTY
CENTRAL OISffiiCT OF CAUFO' ~ 0~ ~~~ t"
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6
7
8 9 10
11
UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA
12
SARO DAGHLIAN on behalf of himself and all others similarly situated, Plaintiff, vs. DEVRY UNIVERSITY, INC., DEVRY INC ., and DOES 1 through and including 100, Defendants.
----~----------------------
) CASE NO. CV 06-00994 MMM (PJWx)

) ) ) ) ) ) ) ) ) )
13
14
15
16
17
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS FIRST AMENDED COMPLAINT
18 19 20
21
) )
THIS CONSTITUTES NOTICt Ot tNfRY AS REQUIRED BY FRCP, RUL 77(d).
On December 23, 2005, Saro Daghlian commenced this putative class action against DeVry University , Inc., DeVry Inc., and Does 1 through 100 (collectively, "DeVry" or "defendants") in state court. Daglian alleges that defendants failed to inform students, including him, that academic units earned at DeVry probably would not transfer to other educational
,
22 23
24 institutions, and that students who sought further education elsewhere would have to earn the units 25 26 27 anew. Daghlian filed a first amended complaint on January 11 , 2006, which asserted four causes of action: (1) violations of the California Education Code; (2) violations of the California
28 Consumer Legal Remedies Act; (3) false advertising in violation of California Business &
1 Professions Code 17500 et seq.; and (4) unlawful, unfair, and deceptive business practices in 2 violation of California Business & Professions Code 17200 et seq. Defendants remove~iihe
12:
i::J
3 action to federal court on February 17, 2006. They now move to dismiss all causes of action in
~-I
(I)
4 plaintiffs first amended complaint. 5

6 7 I. FACTUAL BACKGROUND
The first amended complaint contains the following factual allegations, which are accepted
8 as true for purposes of this motion:
9 10 11 12 13 14 15 16
Defendant DeVry University provides career-oriented undergraduate and graduate degree programs in technology, business, and management. 1 In addition to an online program, it offers courses at seventy-five locations, including nine campuses in California. 2 Defendant DeVry Inc. is one of the largest publicly held for-profit higher education companies in North America. 3 It is the holding company for DeVry University and a number of other educational institutions. 4 Plaintiff Saro Daghlian was a sludent at DeVry University from Apri12002 until October 2005, attending the Electronics Computer Technology program at the West Hills Campus. 5 Prior to enrolling, Daghlian met with a DeVry recruiter, who represented that DeVry was an accredited
17 college where students were able to obtain degrees. The recruiter told Daghlian that unlike 18 technical colleges that give students certificates that cannot be used towards advanced degrees,
19 academic credits from DeVry were transferrable to a wide variety of other academic institutions. 6 20 The recruiter did not give Daghlian any documents explaining that DeVry credits were not likely 21 22 23 24
3
1
First Amended Complaint, , 5.
2/d.
25 26 27 28
/d.,, 6.
/d.,, 4.
to be accepted by other colleges, and that he would have to start his education over if he c~ose to attend another college. 7 In reliance on DeVry's representations, Daghlian signed an ehron~bnt
;~
Cl
3 agreement in the presence of the recruiter. 8 He has since incurred approximately $40,000.QQ of
Z r,
4 educational debt. 9 5 6
7
ll. DISCUSSION
A.
Legal Standard Governing Motions To Dismiss Under Rule 12(b)(6)
A Rule 12(b)(6) motion tests the legal sufficiency of the claims asserted in the complaint.
9 FED.R.CIV.PROC. 12(b)(6). A court may not dismiss a complaint for failure to state a claim
10 "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim
11 12
13
which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); see also Moore
v. City of Costa Mesa, 886 F.2d 260, 262 (9th Cir. 1989). For this reason, a court should not
dismiss a complaint if it states a claim under any legal theory, even if a plaintiff erroneously relies
14 on a different theory. Haddock v. Bd. of Dental Examiners, 777 F.2d 462, 464 (9th Cir. 1985). 15 In other words, a Rule 12(b)(6) dismissal is proper only where there is either a "lack of a 16 cognizable legal theory" or "the absence of sufficient facts alleged under a cognizable legal 17 18 theory." Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988). In deciding a motion to dismiss for failure to state a claim, the court's review is generally
19 limited to the contents of the complaint. See Campanelli v. Bockrath, 100 F.3d 1476, 1479 (9th 20 21 22 23 Cir. 1996); Allarcom Pay Television, Ltd. v. Genera/Instrument Corp., 69 F.3d 381, 385 (9th Cir. 1995). The court may also consider material that is properly submitted as part of the complaint or that is a proper subject of judicial notice under Rule 201 of the Federal Rules of Evidence. United States v. Ritchie, 342 F.3d 903, 907-08 (9th Cir. 2003); Gumataotao v.
24 Director of Dept. of Revenue and Taxation, 236 F.3d 1077, 1083 (9th Cir. 2001); Hal Roach 25 26 27 28
3
1 Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555 n. 19 (9th Cir. 1990). The court
Cl
2 must accept plaintiff's factual allegations as true, and construe them and draw all reason4Qie . ... 3 inferences from them in favor of the nonmoving party. Cahill v. Liberty Mutual Ins. Co . ::,?o
-~
~r-,
4 F.3d 336, 337-38 (9th Cir. 1996); Mier v. Owens, 57 F.3d 747,750 (9th Cir. 1995). It need not, 5 however, accept as true legal conclusions cast in the form of factual allegations. Western Mining 6 7 8
Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981).
B.
First Cause Of Action Alleging Education Code Violations
Dahglian's first cause of action alleges that defendants failed to comply with various
9 provisions of the Private Postsecondary and Vocational Education Reform Act of 1989 (the 10 11 "Reform Act"), which is part of the California Education Code. Daghlian contends that defendants violated Education Code 94816(b) by failing to provide written notification to
12 students that credits earned at DeVry would probably not transfer to other colleges or 13 universities. 10 He also asserts that, as part of their recruiting effort, defendants actively misled
14 students to believe that the credits would transfer to other institutions, 11 in violation of Education 15 16 17 Code 94832Y Finally, Daghlian alleges that defendants breached Education Code 94814, which requires that institutions give students and other interested persons, prior to enrollment, a brochure or catalogue that sets forth all material facts that are reasonably likely to affect their
18 decision to enroll. 13 19 20 21
1.
Whether Plaintiff Has A Private Right Of Action To Sue For Violation Of Education Code 94814, 94816, And 94832
Defendants argue that Daghlian lacks standing to enforce Education Code 94814,
22 94816, and 94832, because these sections are not listed in 94985(b), the Reform Act provision 23 24
10
25
11
/d., ,, 11, 12, 26, 27.
26 27 28
12
First Amended Complaint, ~, 10, 13.

/d., ~, 24, 27.
/d., ,, 25, 27.
4
13
I~
I
'*!
1 that confers a private right of action to sue for violations of specific sections of the act. 14
0
2 3
Defendants contend that in amending .94985, the California Legislature "expressly chos~o exclude a private right of action as a remedy for violations of Sections 94814, 94816, and 948~5,"
4 and therefore that Daghlian's first cause of action must be dismissed. 15 5 Daghlian disputes this, focusing on 94985(b)(6). That section states: "Notwithstanding any provision of the contract or agreement, a student may bring an action for a violation of this article or for an institution's failure to perform its legal obligations and, upon prevailing thereon, is entitled to the recovery of damages, equitable relief, or any other relief authorized by this article, and reasonable attorney's fees and costs." CAL. Eouc. CODE 94985(b)(6). Based on the legislative history of 94985, the purpose of the Reform Act and subsequent amendments, Daghlian contends that this provision should have been subdivision (c), and that its placement under subdivision (b) was a legislative drafting error. He asks that the court overlook this "blatant" error, and find that he has a private right of action to sue under Education Code
94814, 94816, and 94832.
6
7 8 9 10 11 12
13
14 15 16 17 18
a.
Principles Of Statutory Construction
The parties have not cited, nor has the court found, any case that directly addresses the question presented here. To resolve the issue, therefore, the court must interpret the pertinent
19 provisions of the Reform Act, following California's rules of statutory construction. See In re 20 First T.D. & Inv., Inc., 253 F.3d 520, 527 (9th Cir. 2001) ("With the exception of the 21 22 23 24 25 26 27 28 Memorandum of Points and Authorities in Support of Defendants' Motion to Dismiss First Amended Complaint ("Defs.' Mot.") at 5-7.
15
bankruptcy and district courts below, no state or federal court has had occasion to interpret [Cal. Prof. & Bus. Code] 10233.2. We therefore apply California's rules of statutory construction," citing Fed. Sav. & Loan Ins. Corp. v. Butler, 904 F.2d 505, 510 (9th Cir. 1990) (applying California's rules of statutory construction to interpret California Civil Code 877)); In re
14
Id. at 6-7.
1 Anderson, 824 F.2d 754, 756 (9th Cir. 1987) ("We can find no relevant California cases which 2 discuss the problems raised in this appeal. We are bound by California rules of constructi&~ in 3 our independent interpretation of the California starutes at issue, however"). See aisoDimido~ich
<.f)
:i~
v. Bell & Howell, 803 F.2d 1473, 1482 (9th Cir. 1986) ("Where the state's highest court has not
5 decided an issue, the task of the federal courts is to predict how the state high court would resolve
6 it").
7 Under California law, "the 'ultimate task' in statutory interpretation 'is to ascertain the
8 legislature's intent."' In re First T.D. & lnv., 253 F.3d at 527 (quoting People v. Massie, 19 9 Cal.4th 550, 569 (1998), cert. denied, 526 U.S. 1113 (1999)). See also S.D. Myers, Inc. v. City 10 and County ofSan Francisco, 336 F.3d 1174, 1179 (9th Cir. 2003) ("'Ofprimary importance the 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 court should ascertain the intent of the Legislature so as to effecruate the purpose of the law,'" quoting San Diego Union v. City Council, 146 Cal.App.3d 947, 953-54 (1983) (internal citation and quotation marks omitted)); Cal. Teachers Ass'n v. San Diego Community College Dist., 28 Cal. 3d 692, 697 (1981) ("In construing a statute 'we begin with the fundamental rule that a court should ascertain the intent of the Legislarure so as to effectuate the purpose of the law'" (citations and internal quotation marks omitted)). Generally, '"the words of the statute provide the most reliable indication of legislative intent.'" In re First T.D. & Inv., 253 F.3d at 527 (quoting Pacific Gas & Elec. Co. v. County of
Stanislaus, 16 Cal. 4th 1143, 1152 (1997)). In interpreting the words of a statute, a court "should
give the language ... 'its usual, ordinary import and accord[ ] significance, if possible, to every word, phrase and sentence in pursuance of the legislative purpose.'" !d. (quoting Dyna-Med, Inc.
v. Fair Employment & Hous. Comm'n, 43 Cal.3d 1379, 1386-87 (1987)). See also Mutual Life Ins. Co. of New York v. City of Los Angeles, 50 Cal. 3d 402, 407 (1990) ("'[I]n arriving at the
meaning of a [[starutory or] constitutional provision], consideration must be given to the words employed, giving to every word, clause and sentence their ordinary meaning,'" quoting State
Board ofEduc. v. Levit, 52 Cal.2d 441,462 (1959)); Cal. Teachers Ass'n, 28 Cal. 3d at 697 ("An
equally basic rule of statutory construction is, however, that courts are bound to give effect to statutes according to the usual, ordinary import of the language employed in framing them" 6
1 (citations and internal quotations omitted)). "[W]here the language of a statute is reasonably 2 susceptible of two constructions, one of which in application will render it reasonable, fai~~nd 3 harmonious with its manifest purpose, and another which would be productive of ab~rd
( )
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;r=
4 consequences, the former construction will be adopted." Pitney-Bowes, Inc. v. State of Cal., 108 5 Cal.App.3d 307, 313-14 (1980) (citations and internal quotations omitted)). 6 If the meaning of a stanltory provision is ambiguous, "a court may consider extrinsic
7 evidence of the legislature's intent, 'including the statutory scheme of which the provision is a 8 part, the history and background of the statute, the apparent purpose, and any considerations of
9 constitutionality."' In re First T.D. & lnv., 253 F.3d at 527 (quoting Hughes v. Bd. of
10 Architectural Exam 'rs, 17 Cal. 4th 763, 776 (1998)). If, on the other hand, "the language of the 11 12 13 statute is clear and ambiguous, the statutory analysis ends." Viceroy Gold Corp. v. Aubry, 75 F.3d 482, 490 (9th Cir. 1996) (citing Delaney v. Superior Court, 50 Cal.3d 785, 800 (1990) ("When statutory language is thus clear and unambiguous there is no need for construction, and
14 courts should not indulge in it" (internal citations omitted, emphasis original)). See also Mutual 15 Life Ins. Co., 50 Cal. 3d at 497 ("If doubts and ambiguities remain then, and only then, are we 16 17 warranted in seeking elsewhere for aid.. . . When, however, 'the language is clear and unambiguous there is no need for construction, nor is it necessary to resort to indicia of the intent
18 of the Legislature . . . " (citations omitted)). 19 20 21 22 23 24 25 26 27 28 This "'plain meaning' rule does not, [however,] prohibit a court from determining whether the literal meaning of a statute comports with its purpose or whether such a construction of one provision is consistent with other provisions of the statute." Lungren v. Deukmejian, 45 Cal. 3d 727, 735 (1988). The meaning of a statute should be construed in context, and the various parts of the statutory enactment should be harmonized to the extent possible. /d.; see Moyer v.
Workmen's Comp. Appeals Bd., 10 Cal. 3d 222, 230 (1973) ("When used in a statute [words] must
be construed in context, keeping in mind the nature and obvious purpose of the statute where they appear. Moreover, the various parts of a statutory enactment must be harmonized by considering the particular clause or section in the context of the statutory framework as a whole" (citations and internal quotation marks omitted)). Indeed, "[l]iteral construction should not prevail if it is
7
....
1 contrary to the legislative intent apparent in the statute." Lungren, 45 Cal. 3d at 735.
(:J
2
3
4
With these principles in mind, the court turns to the language of the statute.
b.
The Reform Act
z
7
~
lLl
..... ....
u {1)
In enacting the Reform Act, the California legislature sought "to promote the effective
5 integration of private postsecondary education into all aspects of California's educational system
6 and to foster and improve the educational programs and services of these institutions while
7 protecting the citizens of the state from fraudulent or substandard operations." CAL. Eouc. CODE
8 94705. It also intended "to provide for the protection, education, welfare of citizens of 9 California, its postsecondary education institutions, and its students by providing for all of the 10
11
12
following:
(a)
Ensuring minimum standards of instructional quality and institutional stability for all students in all types of institutions and thereby encouraging the recognition by public and private institutions of completed coursework and degrees and diplomas issued by private institutions, to the end that students will be provided equal opportunities for equal accomplishment and ability.
13 14 15 16 17 18 19 20
21
(b)
Establishing minimum standards concerning the quality of education, ethical and b~siness practices, health and safety, and fiscal responsibility to provide protection against substandard, transient, unethical, deceptive, or fraudulent institutions and practices.
22
23
(d)
Prohibiting misleading literature, advertising, solicitation, or representations by private educational institutions or their agents.
24 25
(f)
Protecting the consumer and students against fraud, misrepresentation, or other practices that may lead to an improper loss of funds paid for educational costs, whether financed through personal resources or state and federal student financial aid.
8
26
27
28
1
2 (h)
Recognizing and encouraging quality nongovernmental accreditation, while not ceding to that or any other nongovernmental process the responsibility for state oversight for purposes of approval, if the accreditation process fails either to protect minimum standards of quality or to acknowledge legitimate innovative methods in postsecondary education .... " ld.
3
4
5
6
7 The Reform Act defines ''private postsecondary education institutions" as "any person doing 8 business in California that offers to provide or provides, for a tuition, fee, or other charge, any 9 instruction, training, or education" under certain specified circumstances. /d., 94739(a). 16 The 10 Act creates a Bureau for Private Postsecondary and Vocational Education (the "Bureau") in the 11 12 13 14 Department of Consumer Affairs, which is charged with the duty of "approving and regulating private postsecondary educational institutions." /d., 94770. See also id., 94774 (detailing the Bureau's functions and responsibilities). The Reform Act is codified in the Education Code, Title 3, Division 10, Part 59, Chapter
15 7. Article 6, which encompasses Education Code 94800 through 94848, is titled "General 16 Standards for All Postsecondary Institutions Approved Under This Chapter." Section 94800 17 18 requires that all institutions comply with certain minimum standards - specifically, that they remain financially capable of fulfilling commitments to students; that they award students
19 appropriate degrees, diplomas, or certificates upon satisfactory completion of training; and that 20 they provide instruction as part of their educational program. /d., 94800. 17 21 Section 94814 mandates that institutions "provide to students and other interested persons,
22 prior to enrollment, a catalog[ue] or brochure containing . . . all . . . material facts concerning 23 24 25 26 27 28 Section 94739(b) enumerates the types of education institutions that are exempt from regulation under the Reform Act. See CAL. EDUC. CODE 94739(b). It does not appear, and DeVry does not argue, that it falls within any of the exceptions listed in 94739(b).
17
the institution and the program or course of instruction that are reasonably likely to affect the
16
This section became effective January 1, 2004.

9
1 decision of the student to enroll, as prescribed by rules and regulations adopted by the [BureauJ. " 2 /d., 94814(a). Failure to disclose this information renders a written contract between~~e ..,. J3 institution and a student unenforceable. /d., 94814(b).
C.:J
5
(})
Section 94816 requires that "[e]ach institution offering a degree program designed to
5 prepare students for a particular vocation, trade, or career field and each institution subject to 6 Article 7 (commencing with Section 94850) ... provide to each prospective student a statement 7 in at least 12-point type that contains the following [language]: 8 9 'NOTICE CONCERNING TRANSFERABILITY OF UNITS AND DEGREES EARNED AT OUR SCHOOL Units you earn in our _ _ _ _ (fill in name of program) program in most cases will probably not be transferable to any other college or university. For example, if you entered our school as a freshman, you will still be a freshman if you enter another college or university at some time in the future even though you earned units here at our school. In addition, if you earn a degree, diploma, or certificate in our _ _ _ _ (fill in name of program) program, in most cases it will probably not serve as a basis for obtaining a higher level degree at another college or university."' /d., 94816.
10
11 12 13 14 15 16 17
18 This disclosure must be signed by both the student and the institution, and dated. /d. 19 20 21 Section 94832 prohibits institutions and their representatives from "mak[ing] or caus[ing] to be made any statement that is in any manner untrue or misleading, either by actual statement, omission, or intimation." ld., 94832(a). It also requires that "[n]o institution or representative
22 of an institution ... engage in any false, deceptive, misleading, or unfair act in connection with 23 any matter, including the institution's advertising and promotion, the recruitment of students for 24 enrollment in the institution, the offer or sale of a program of instruction, course length, course 25 credits, the withholding of equipment, educational materials, or loan or grant funds from a 26 27 28 student, training and instruction, the collection of payments, or job placement." ld. , 94832(b).
c.
Section 94985
Article 13 is titled "Administrative and Judicial Procedures." Sections 94965 and 94975
10
-'
1 of the article govern administrative actions. !d., 94950(a). "Sections 94952 and 94955
{j
2 authorize the Bureau and the Attorney General to seek various forms of judicial relief in orde:i:;!to :r. 3 enforce this chapter." /d., 94950(d). ~]
J~
4
5
Section 94985, the provision at the center of the parties' dispute, "authorizes civil remedies for individual students in addition to those available under other provisions of law." /d.,
V'l
6 94985(f). Subdivision (a) declares that "[a]ny institution that willfully violates any provision
7 of Section 94800, 94810, 94814, or 94816, Sections 94820
to
94826, inclusive, Section 94829,
8 94831, or 94832 may not enforce any contract or agreement arising from the transaction in which 9 the violation occurred, and any willful violation is a ground for revoking an approval to operate
10 in this state or for denying a renewal application." /d., 94985(a). 11 12 13 14 15 Subdivision 18 (b) gives a private right of action to "[a]ny person who claims that an institution is operating in violation of subdivision (a) of Section 94831, subdivision (a) of Section 94900, or Section 94915, or [that] an institution is operating a branch or satellite campus in violation of subdivision (a) of Section 94857." /d., 94985(b) (stating that such person "may bring an action, in a court of competent jurisdiction, for the recovery of actual and or statutory
16 damages as well as an equity proceeding to restrain and enjoin those violations, or both"). 19 The 17 cited provisions require institutions to secure Bureau approval before operating or granting 18 degrees in the state. 19 A prospective plaintiff who intends to sue under 94985(b) must satisfy various pre-suit
20 notice requirements. Paragraph (b)(l) requires that anyone intending to sue give notice to, and 21 make a demand on, the institution at least thirty-five days prior to filing an action alleging
22 violationof94831(a), 94900(a), 94915, or94857(a). Seeid., 94985(b)(1). It also requires 23 24 25 26 27 28 In keeping with the format of the Education Code, the court refers lettered provisions ((a), (b), (c), etc.) as "subdivisions," and to numbered provisions ((1), (2), (3), etc.) as "paragraphs." See id., 94857(a) ("No institution shall establish a branch or satellite campus unless the council approves the branch or satellite campus before any students are enrolled for instruction, or any instruction is offered, at that campus").
11
19
18
-:
1 that the prospective plaintiff give the Bureau notice of intent to sue. The institution may avoid 2 suit by filing an application f~r Bureau approval within thirty days of receiving notice. If a~~it 3 if filed, however, and the court finds that the institution has violated any of 9483l;(a),
\~
(I)
4 94900(a), 94915, or 94857(a), it must grant certain remedies specified in subdivision (b)(2). See 5 id. ' 94985(b)(2). 20 6 7 8 9 Paragraph (b)(3) declares that "[a]ny violation of subdivision (a) of Section 94831, subdivision (a) of 94900, Section 94915, and subdivision (a) of Section 94857 shall constitute an unfair business practice within the meaning of Section 17200 of the Business and Professions Code." /d., 94985(b)(3). Paragraph (b)(4) provides that a certification from the Bureau that
10 the institution has not been approved gives rise to "a conclusive presumption that the institution 11 has violated this subdivision." !d., 94985(b)(4). Paragraph (b)(5) states that "[a]Il fines and
12 other monetary amounts that an institution is ordered to pay pursuant to this subdivision may be 13 14 15 16 17 18
20
collected from the institution itself and from the individuals who own the institution, whether or not the institution is organized as a corporation." !d., 94985(b)(5). Finally, paragraph (b)(6) provides: "Notwithstanding any provision of the contract or agreement, a student may bring
Section 94831, subdivision (a) of Section 94900, Section 94915, or subdivision (a) of Section 20 94857, all of the following shall occur: (A) The court shall order the institution to cease all operations and to comply with all procedures set forth in this code pertaining to the closure of 21 institutions. (B) The court shall order the institution to pay all students who enrolled while the school was in violation of subdivision (a) of Section 94831 , subdivision (a) of Section 94900, 22 Section 94915, or subdivision (a) of Section 94857 a refund of all tuition and fees paid to the 23 institution and a statutory penalty of one thousand dollars ($1 ,000). (C) The court shall order the institution to pay the prevailing party's attorneys' fees and costs. (D) The court shall order the 24 institution to pay to the bureau all fines incurred pursuant to subparagraph (E) of paragraph (1). 25 (E) Any instrument of indebtedness, enrollment agreement, or contract for educational services is unenforceable pursuant to Section 94838. The court shall order the institution to mail a notice 26 to all students who were enrolled while the school was in violation of subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section 94915, or subdivision (a) of Section 94857, 27 stating that instruments of indebtedness, enrollment agreements, and contracts for educational 28 services are not enforceable... ").
12
19
/d., 94985(b)(2) ("If the court finds that the institution has violated subdivision (a) of
1
2
an action for a violation of this article or for an institution's failure to perform its legal obligations and, upon prevailing thereon, is entitled to the recovery of damages, equitable relief, or any other relief authorized by this article, and reasonable attorney's fees and costs." /d. , 94985(b)(6). Section 94985 has no subdivision (c). The section contains eight additional subdivisions,
4 5
6 (d) through (k). 7

8
d.
Analysis
Defendants argues that subdivision (b) of 94985 creates a private right of action only for
9 violations of 94831(a), 94900(a), 94915, 94857(a), and that Daghlian's action is barred as a 10 consequence. They contend the fact that the legislature specifically cited 94814, 94816, and 11 94832 in subdivision (a) "vitiates any claims that the Legislature inadvertently failed to provide
12 a remedy for these sections" in subdivision (b). 21 Defendants assert the inclusion of 94831 in 13 both subdivisions (a) and (b) is evidence that "if the Legislature had intended to provide a private
14 and public right of action for violations of Sections 94814, 94816 and 94832 of the Reform Act, 15 16 17 18 it" could have done so, and "would have treated these sections in the same way that it treated Section 94831. " 22 Daghlian counters that "[a] plain reading of the legislation demonstrates, without a doubt, that the relocation of a student's private right of action as section 94985(b)(6) rather than section
19 94985(c) was inadvertent drafting error. "23 He contends that paragraph (b)(6)'s use of the word 20 21 22 23 24
21
"article" shows that it is an "omnibus" clause that reflects a legislative intent to afford students a private right of action to enforce any provision of the Reform Act. 24 Daghlian argues that the legislative history of Assembly Bill 201, which amended 94985 in 2001, supports this
25 26 27 28
23 24
Defs.' Mot. at 7.
PJ. 's Opp. at 10.
/d. at 12.
13
1 interpretation. He asserts that the purpose of A.B. 201 was to reform certain aspects of
()
California's Student Tuition Recovery Fund, and that nothing in the legislative history sugg~sts
2 !5
3 that the bill "was [designed] to eradicate, minimize or even change substantive student rights':C' 26
l ...)
t..-...
i,l)
Daghlian contends that limiting students' private right of action to 94831(a), 94900(a), 94915,
5 and 94857(a) would undermine the purpose of A.B. 201 and the objectives of the Reform Act. 27 6 He also maintains that defendants' construction creates internal inconsistencies in the legislative 7 scheme and that if the provision governing students' private right of action is denominated
8
paragraph (b)(6) rather than subdivision (c), subdivisions (d), (g), (h), (k), and the rest of
9 subdivision (b) would be meaningless. 28 10

11
i.
Language Of 94985(b)(6)
A plain reading of 94985(b)(6) indicates that the California legislature intended to grant
12 students a broad private right of action. Without specifying particular sections of the Reform Act, 13 14 15 the provision authorizes students to bring suit to enforce "a violation of this article or [to redress] . . . an institution's failure to perform its legal obligations." CAL. Eouc. CODE 94985(b)(6). This right cannot be waived; students may sue "[n]otwithstanding any provision of a contract or
16 agreement." !d. In addition, the provision affords students a wide range of remedies, including 17 legal damages, equitable relief, attorneys' fees, "or any other relief authorized by this article." 18 ld. 19 20 21 22 23 24
25
Defendants urge a narrower construction of paragraph (b)(6). Emphasizing the phrase " [n]otwithstanding any provision of a contract or agreement," they argue that the provision means only that "clauses in contracts that seek to void all private claims under the Education Code .. .
25 26 27 28
/d. at 8. /d. at 10.
26
27
/d. at 10-13.
28
/d. at 13-14.
14
1 are against public policy. "29 Defendants take the opening clause out of context. The balance of 2 the paragraph clearly provides that students may bring an action for "a violation of this articl~~r
~?:
3 an institution's failure to perform its legal obligations. " /d. See Dyna-Med, Inc., 43 CaHfat
u
1386-87 (in construing a statute, a court should "accord[ ] significance, if possible, to every
'.J)
5 word, phrase and sentence in pursuance of the legislative purpose"). Paragraph (b)(6)'s use of 6 7 8 the word "article" stands in stark contrast to prior paragraphs' references to specific "subdivisions." See, e.g., CAL. Eouc. CODE 94985(b)(1)(A) (plaintiff must "[n]otify the institution alleged to have violated subdivision (a) of Section 94831, subdivision (a) of Section
9 94900, Section 94915, or subdivision (a) of Section 94857, of the particular alleged violations"), 10 94985(b)(4) ("A certification, issued by the bureau ... shall establish a conclusive presumption
11
that the institution has violated this subdivision" (emphasis added)), 94985(b)(5) ("All fines and
12 other monetary amounts that an institution is ordered to pay pursuant to this subdivision may be 13 14 15 collected from the institution itself and from the individuals who own the institution, whether or not the institution is organized as a corporation" (emphasis added)). The use of the open-ended phrase "or an institution's failure to perform its legal
16 obligations" also distinguishes paragraph (b)(6) from prior paragraphs, all of which make clear 17 18 19 20 21 22 23 24 25 26 27 28 Defendants DeV ry, Inc. and DeVry University, Inc. 's Reply Brief in Support of Motion to Dismiss Plaintiff's First Amended Complaint ("Defs.' Reply") at 15 (emphasis added). Sections 94831, 94900, and 94915 require Bureau approval to operate, confer degrees, and offer educational services or programs. Section 94857 requires approval to operate a branch or satellite campus. See CAL. Eouc. CODE 9483l{a) ("No institution, or representative of that institution shall . . . [o]perate in this state a postsecondary educational institution not exempted from this chapter, unless the institution is currently approved to operate pursuant to this chapter. The council may institute an action, pursuant to Section 94955, to prevent any individual or entity from operating an institution in this state that has not been approved to operate pursuant to this chapter and to obtain any relief authorized by that section"), 94900(a) ("No private postsecondary educational institution may issue, confer, or award an academic or honorary degree unless the institution is approved by the council to operate in California and award degrees"), 94915 ("No private postsecondary educational institution ... may offer educational services or programs
15
30
that they address only an institution's operation without Bureau approval in violation of
94831(a), 94900, 94915, or 94857(a). 30 See id., 94985(b). The repetition of the phrase,
29
1 2 3 4 5
"subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section 94915, or subdivision (a) of Section 94857" in paragraphs (b)(l) through (b)(5), and its absence from paragraph (b)(~ .
1 strongly suggests that the California legislature did not intend to limit the applicability;,..,
l.n
i~\
of
paragraph (b )(6) to private claims under these particular sections.
See, e.g., id.,
94985(b)(l)(A) (plaintiff must "[n]otify the institution alleged to have violated "subdivision
6 (a) of Section 94831, subdivision (a) of Section 94900, Section 94915, Section 94915, or
7 8 9 10
11
subdivision (a) of Section 94857 of the particular alleged violations"), 94985(b)(l)(B) (same), 94985(b)(l)(C) (same), 94985(b)(l)(E) (same), 94985(b)(l)(F) (same), 94985(b)(l)(G) (same), 94985(b)(2) (same), 94985(b)(2)(B) (same), 94985(b)(2)(E) (same), 94985(b)(3) (same), 94985(b)(4) (same).
ii.
Context Of 94985
12
Reading 94985 in context also supports Daghlian's position that the private right of action provision should have been denominated subdivision (c), rather than paragraph (b)(6). See
13
14 15 16 17 18 19 20 21 22 23
Lungren, 45 Cal. 3d at 735 ("The meaning of a statute may not be determined from a single word
or sentence; the words must be construed in context, and provisions relating to the same subject matter must be harmonized to the extent possible," citing Dyna-Med, Inc., 43 Cal. 3d at 1386-87. Like paragraph (b)(6), subdivisions (e) through (k) are relatively broad in scope, referring to causes of actions under "this section" or "this article." Subdivision (e), for example, confirms that "[t]he remedies provided in this article supplement, but do not supplant, the remedies provided under any other provision of law." CAL. Eouc. CODE 94985(e) (emphasis added). Subdivision (f) imposes a three-year statute of limitations on actions "brought under this section. "
Id., 94985(f) (emphasis added). See also id., 94985(g) (referring to "any right or remedy"
(emphasis added)), 94985(h) (governing the assignment of any "cause of action for a violation of
24
25 26 27 28 unless the institution or locations at which these services or programs are offered have been approved by the council as meeting the requirements of this section"), 94857(a) ("No institution shall establish a branch or satellite campus unless the council approves the branch or satellite campus before any students are enrolled for instruction, or any instruction is offered, at that campus").
16
1 this article" (emphasis added)). 2 3 Furthermore, like paragraph (b)(6), many of these subdivisions address suits by "studen~~"
;~
l.J
in contrast to paragraphs (b)(l) through (b)(5), which concern suits by "any person." Subdivi~9n
i,l)
4 (g), for example, declares void and unenforceable ''[a]ny provision in any agreement that purports
5
to require a student to invoke any grievance dispute procedure established by the institution .... "
6 /d., 94985(g) (emphasis added). Similarly, subdivision (h) provides that "[a] student may 7 8 assign his or her cause of action for a violation of this article to the bureau, or to any state or federal agency that guaranteed or reinsured a loan for the student or that provided any grant or
9 other financial aid." ld., 94985(h) (emphasis added).
10
11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
Subdivision (k) of 94985 sets forth certain notification requirements for students who bring an action against an institution. It provides: "If a student commences an action or asserts any claim in an existing action for recovery on behalf of a class of persons, or on behalf of the general public, under Section 17200 of the Business and Professions Code, the student shall notify the bureau of the existence of the lawsuit, the court in which the action is pending, the case number of the action, and the date of the filing of the action or of the assertion of the claim. The student shall notify the bureau as required by this subdivision within 30 days of the filing of the action or of the first assertion of the claim, whichever is later. The student shall also notify the court that he or she has notified the bureau pursuant to this subdivision. Notwithstanding any other
provision of law, no judgment may be entered pursuant to this section until the student has notified the bureau of the suit and notified the court that the bureau has been notified. This subdivision only applies to a new action filed or to a new claim asserted on or after January 1, 2002." /d., 94985(k). Plaintiff argues that defendants' proposed construction of the statute, which would limit students' private right of action to violations of 94831(a), 94900, 94915(a), and 94857(a), would render
17
1 subdivision (k) meaningless. 31 The court agrees. Subdivision (b) sets forth a detailed pre-suit
2 notification procedure that must be followed by a party who wishes to sue for violation~bf
~~
94831(a), 94900, 94915(a), and 94857(a). Subparagraph (b)(l) requires that, "[a]t leasJ5
1,1'')
4 days prior to the commencement of an action pursuant to this subdivision," "'[a]ny person," 5 6 7 including a student, who intends to sue must notify the institution of "the particular alleged violations," and "[d]emand that the institution apply for the bureau's approval to operate as required by subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section 94915,
!d., 94985(b)(l)(A),
8 or subdivision (a) of Section 94857, whichever is applicable." 9
94985(b)(l)(B). This notice must "be in writing, and ... be sent by regular mail and certified
10 or registered mail, return receipt requested, to the location of the institution that is allegedly
11
12
13
operating in violation of subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section 94915, or subdivision (a) of Section 94857, whichever is applicable."
ld.,
94985(b)(1)(C). The institution then has thirty working days "from the receipt of the notice, to file an application for approval to operate with the bureau." !d., 94985(b)(l)(D). If, "within 30 working days after receipt of the notice, [it] applies for the bureau's approval to operate as required by subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section 94915, or subdivision (a) of Section 94857," the plaintiff is barred from bringing suit. /d.,
14 15 16 17 18 19 20 21
94985(b)(l)(E). If, however, "within 35 days after receipt of the notice, the bureau has not received an application from the institution, the bureau shall mail the plaintiff a certification that the institution has not applied or been approved to operate pursuant to subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section 94915, or subdivision (a) of Section 94857." Such certification "establish[es] a conclusive presumption that the
22 !d., 94985(b)(l)(F). 23 24 25 26 27 28
31
institution has violated this subdivision." /d., 94985(b)(4). The prospective plaintiff must also "notify the bureau by mail and by certified or registered mail, return receipt requested, that he or she intends to bring an action pursuant to this section against the institution." !d., 94985(b)( 1)(G). Upon receipt of this notice, the Bureau must
Pl. 's Opp. at 14.

18
1 investigate the institution's compliance or noncompliance with the approval provisions. See id.
b
2 ("Upon receipt of this notice, the bureau shall immediately investigate the institution's compliance
!~
3 with subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section
94915~5or
~I)
4 subdivision (a) of Section 94857, whichever is applicable ... "). If the investigation reveals "that 5 the institution has violated the applicable section, the bureau shall immediately order the 6 institution to cease and desist operations." /d. An institution that "continues to operate in 7 violation of the bureau's cease and desist order" can be fined $1,000 per day. /d. 8 Subdivision (b) allows an institution to avoid a suit for violation of 94831(a), 94900(a),
9 94915, or 94857(a), by applying for Bureau approval within thirty days of notification. It also 10 imposes a responsibility on the Bureau to determine whether the institution has complied with the 11 approval provision in question. These provisions make sense, as 94831(a), 94900(a), 94915,
12 and 94857(a) all concern an institution's obligation to obtain approval from the Bureau, not 13 duties owed to students or other persons. Furthermore, because an institution's failure to obtain
14 approval from the Bureau before conducting operations affects all of its students, subdivision (b) 15 16 17 18 requires that a court that finds a violation "order the institution to cease all operations." /d.,
94985(b)(2)(A). In addition, the court must "order the institution to pay all students who
enrolled while the school was in violation of subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section 94915, or subdivision (a) of Section 94857 a refund of all tuition and fees
/d.,
19 paid to the institution and a statutory penalty of one thousand dollars ($1 ,000)." 20 21 22 23 24 25 26 27 94985(b)(2)(B).
In contrast to the notice provisions set forth in subdivision (b), subdivision (k) requires a student who "commences an action or asserts any claim in an existing action for recovery on behalf of a class of persons, or on behalf of the general public, under Section 17200 of the Business and Professions Code" to inform the Bureau of the action. /d., 94985(k). If, as defendants contend, a student's private right of action is restricted to claims that an institution violated 94831(a), 94900(a), 94915, and 94857(a), there would have been no need for the legislature to have enacted subdivision (k). See id., 94985(b)(l) (governing actions in which
28 a "person ... claims that an institution is operating in violation of subdivision (a) of Section
19
1 94831, subdivision (a) of Section 94900, or Section 94915, or an institution is operating a branch
c:~
2 or satellite campus in violation of subdivision (a) of Section 94857"); see also id., 94985(ti)t3)
3 ("Any violation of subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section
~ ..)
VI
4 94915, and subdivision (a) of Section 94857 shall constitute an unfair business practice within the 5 meaning of Section 17200 of the Business and Professions Code"). 6 Moreover, the notification requirements in subdivision (k) conflict with those in
7 subdivision (b). Paragraph (b)(1) requires that a prospective plaintiff notify the Bureau that he 8 or she "intends to" commence an action against an institution. !d., 98945(b)(1)(G). Although 9 the paragraph does not specify a time limit, its use of the phrase "intends to" indicates that such 10 11 notice must be given prior to filing suit. Subdivision (k), by contrast, states that "[i]f a student commences an action or asserts any claim in an existing action" under 17200, he or she must
12 inform Bureau of the existence of the lawsuit "within 30 days of the filing of the action or of the 13 14 first assertion of the claim, whichever is later." !d., 94895(k). The student must also notify the Bureau of "the court in which the action is pending, the case number of the action, and the
15 date of the filing of the action or of the assertion of the claim." !d. Finally, subdivision (k) 16 17 mandates that a student advise the court that he or she has notified the Bureau; if a student fails to do so, no judgment can be entered in the case. !d. None of these additional requirements
18 appears in subdivision (b). Even more significantly, subdivision (k) differs from subdivision (b) 19 in that it does not require that the student give any notice or make any demand on the institution 20 prior to filing suit or asserting the claim. 21 22 23 24 25 Daghlian's construction avoids potential inconsistency between these sections. If, as he asserts, students have a private right of action to challenge any "violation of this article or an institution's failure to perform its legal obligations," then certain student suits fall outside the scope of paragraph (b)(l). Subdivision (k) provides a mechanism by which the Bureau can learn of large student class actions brought against institutions under 17200. It does not require the
26 Bureau to issue a certification or to conduct its own investigation, however, since such suits do 27 28 not implicate the approval process, but instead concern injury suffered by a particular group of students. Read in this way, subdivision (k) serves a purpose distinct from subdivision (b). See
20
1 Moyer, 10 Cal. 3d at 230 ("When used in a statute [words] must be construed in context, keeping
t,j
2 3 4
in mind the nature and obvious purpose of the statute where they appear. Moreover, the var!~us parts of a statutory enactment must be harmonized by considering the particular clause or sec~~m
1 .1)
in the context of the statutory framework as a whole" (citations and internal quotation marks
5 omitted)). See also Leslie Salt Co. v. San Franicsco Bay Conservation & Dev. Comm'n, 153 6 Cal.App.3d 605, 614 (1984) ("The meaning of the words of a statute or, to use the alternative
7 approach favored by many courts, the intent of the Legislature, can only be determined with 8 9 reference to the context in which the words are used; that is, with reference to such purpose as may be discerned from examining the entire enactment of which the words are part. A statutory
10 phrase may be said to be clear and unambiguous if the meaning assigned to it is not in conflict 11 12 13 14 15 16 17 18 19 with other language in the act" (citations and footnote omitted)). In sum, the language of the students' private right of action provision, as well as the overall context of 94985, suggest that it was erroneously numbered as the final paragraph of subdivision (b), and that the legislature's failure to denominate it subdivision (c) was an inadvertent drafting mistake.
iii.
Purpose And Legislative History
The history and purpose of the Reform Act, and amendments made subsequent to its enactment provide further support for Daghlian's position. The statute states that one of its principal objectives is to "protect[ ] the citizens of the state from fraudulent or substandard
20 operations." CAL. Eouc. CODE 94705. To this end, the legislature "[e]stablish[ed] minimum 21 standards concerning the quality of education, ethical and business practices, health and safety,
22 and fiscal responsibility to provide protection against substandard, transient, unethical, deceptive, 23 24 25 26 27 28 or fraudulent institutions and practices" (id., 94705(c)), and to "protect[] the consumer and students against fraud, misrepresentation, or other practices that may lead to an improper loss of funds paid for educational costs . . .. " (id., 94705(f)). In 1997, the California Legislature passed Assembly Bill 71, which made numerous substantive changes to the Reform Act. See 1997 Cal. Legis. Serv. ch. 78 (A.B. 71) (West). A.B. 71 added Chapter 7 to the act, which includes 94814, 94816, and 94832. See 1997 Cal.
21
1 Legis. Serv. ch. 78, 4. It also enacted 94985, which provides: 2 3 4 "(a) Any institution that wilifully violates any provision of Section 94800, 94810, 94814, or 94816, Sections 94820 to 94826, inclusive, Section 94829, 94831, or 94832 may not enforce any contract or agreement arising from the transaction in which the violation occurred, and any willful violation is a ground for revoking an approval to operate in this state or for denying a renewal application. (b) Notwithstanding any provision of the contract or agreement, a student may bring an action for a violation of this article or for an institution's failure to perform its legal obligations and, upon prevailing thereon, is entitled to the recovery of damages, equitable relief, or any other relief authorized by this article, and reasonable attorney' s fees and costs.... " Id. See also CAL. EDUC. CODE 94985(a)-(b) (2001). Subdivision (b) of the statute, as originally passed, gave students a broad right to sue under the Reform Act. See, e.g., Payne v. Nat'l Collection Systems, Inc., 91 Cal.App.4th 1037, 1040 (2001) (class action involving twenty-three plaintiffs for violation of Education Code 94831, 94832, and 94838, Business and Professions Code 17200 and 17500, and the Consumers Legal Remedies Act). In 2001, the California Legislature passed A.B. 201. See 2001 Cal. Legis. Serv. ch. 621 (A.B. 201) (West). A review of the legislative reports regarding A.B. 201 shows that its primary purpose was to reform the California's Student Tuition Recovery Fund ("STRF"). The report of the April 17, 2001 hearing before the Assembly Committee on Higher Education notes: "Under the Act, STRF was created to attempt to make students financially whole in the event a school prematurely closes without completing a student's term of education. STRF is paid into by certain qualified schools based on a formula that accounts for the number of students and the cost of tuition at the institution. The Act also gives the Bureau the ability to levy a special assessment, at virtually anytime in the fiscal year, upon these schools in the event STRF is insufficient to
6
7
8
9
10
11
12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
22
1 2
pay any necessary claims. Recent court cases (including Aguirre v. Hamilton- San Francisco Superior Court Case Number 308354) have ordered repayment from STRF to students who were owed monies as the result of the closure of several schools. Because the total repayments exceeded the funds available in STRF, the Bureau ordered further assessments that were to be paid immediately. The affected schools opposed this assessment and contend that the courLc; erred in their findings and subsequent order. The schools also contend that having all of the schools pay for the actions of the schools that closed is unfair. After much debate, the increased assessments were withdrawn. Subsequently, the Bureau, along with the regulated schools and advocacy groups, have searched for an alternative to make STRF solvent in order to pay the recent claims. This bill seeks to ensure the solvency of STRF by requiring schools to disclose the status of their STRF payments and in case of a deficiency, formulate a plan to become current. Furthermore, it allows the Bureau to track litigation against regulated schools and eliminates some confusion around STRF responsibilities for third-party payers." Cal. Bill Analysis, A.B. 201, Assembly Committee on Higher Education (Apr. 17, 2001). Although AB 201 was primarily concerned with reforms to the STRF, it did make other
4
5
6
7
8
9
10 11 12 13 14 15 16 17 18 19
20 substantive changes to the Reform Act. As pertinent here, the bill amended 94985 to add 21 22 23 24 25 26 27 28 subdivisions (b) and (k). See 2001 Cal. Legis. Serv. ch. 621, 10 (A.B. 201). Although the legislation did not alter the language of the students' private right of action provision, it renumbered the provision paragraph (b)(6). The enrolled bill contains no subdivision (c). The legislative reports do not reflect any reason for the omission of subdivision (c) from the final version of 94985. Nor do they reflect, expressly or implicitly, that, in amending
94985, the legislature intended severely to restrict students' private right of action. The April
17, 2001 report, for instance, summarizes the purpose of the bill as follows: "[T]his bill:
23
1
2
1)
Requires that any audit or financial report required to be prepared under the
Cl
act contain a statement signed by the individual who has prepared the report certifying that the institution has paid or not paid to the Bureau all amounts owed to the Student Tuition Recovery Fund (STRF). Requires that an institution that has not paid all amounts owed to the Bureau . . . report within 30 days on its plan to become current in these payments. 2) Requires a student who brings an action or asserts any claim in an existing action for recovery on behalf of a class of persons to notify the Bureau of the existence of the lawsuit, the court in which the action is pending, the case number of the action, and the date of the filing of the action or of the assertion of the claim, within 30 days of the filing of the action. Further requires the student to notify the court that he or she has notified the Bureau pursuant to this provision, and prohibits a judgment from being entered pursuant to this provision until the student has complied.
3)
z
z
llJ
3
4
5
:(
(_J
I,!)
6
7
8
9
10 11 12 13 14 15 16 17 18
4)
Requires the Bureau to send to such student who applies for payment from STRF a written notice specifying the rights of the student under these provisions. Requires the Bureau to submit an annual report to the chairpersons of the Assembly Committee on Higher Education, the Senate Committee on Education, the Assembly Committee on Budget, and the Senate Committee on Budget and Fiscal Review on the collection and expenditure of moneys collected as special assessments under this bill, as prescribed." Cal. Bill Analysis, A.B. 201, Assembly Committee on Higher Education (Apr. 17, 2001).
19
20 21 22
23
24
25 26 27 28
Other legislative reports are similarly devoid of any indication that the Legislature intended to effect such a radical change. See, e.g., Cal. Bill. Analysis, A.B. 201 Assembly Committee on Appropriations (May 9, 2001); Cal. Bill. Analysis, A.B. 201 Senate Committee on Education (June 27, 2001); Cal. Bill Analysis, A.B. 201 Senate Committee on Business and Profession
24
1 (Aug. 20, 2001); Cal. Bill. Analysis, A.B. 201 Assembly Floor (Sept. 13, 2001).
Cl
2 3 4
The legislative history of A.B. 201, therefore, does not support defendants' assertion :@at it is "clear ... the Legislature expressly chose to exclude a private right of action as a rerr@:ly for violations of Sections 94814, 94816, and 94832. " 32 Not only is defendants' proposed
I/)
~ ==
5 construction of the students' private right of action provision at odds with the legislative history, 6 it is also inconsistent with the overarching purpose of the Reform Act, which was to protect 7 "students against fraud, misrepresentation, or other practices that may lead to an improper loss 8 of funds paid for educational costs .... "
9
CAL.
Eouc. CODE 94705 (f). Consequently, the
purpose and history of the Reform Act militate against defendants' literal construction of
94985{b){6). See Lungren, 45 Cal. 3d at 735 ("Literal construction should not prevail if it is
10 11
contrary to the legislative intent apparent in the statute"); Cossack v. City of Los Angeles, 11
12 Cal.3d 726, 732-33 (1974) ("Statutes should be construed so as to be given a reasonable result 13 consistent with the legislative purpose . . . . The court should take into account matters such as
14 context, the object in view, the evils to be remedied, the history of the times and of legislation 15 upon the same subject, public policy, and contemporaneous construction. . . . The apparent
16 purpose of a statute will not be sacrificed to a literal construction" (citations and internal quotation 17 marks omitted)). See also Leslie Salt Co., 153 Cal.App.3d at 614 ("The courts resist blind
18 obedience to the putative 'plain meaning of a statutory phrase where literal interpretation would 19 defeat the Legislature's central objective"' (citation and footnote omitted)). 20 21 iv. Conclusion
Citing White v. E-Loan, Inc., 409 F.Supp.2d 1183, 1187 (N.D. Cal. 2006), defendants
22 argue that even if paragraph (b)(6) was the result of a drafting error, generally the legislature, not 23 24 25 26 27 28
32
the court, should correct the error. 33 In White, a prospective borrower brought a putative class action against a lender, alleging violation of the Fair Credit Report Act ("FCRA"), 15 U.S.C.
1681m(d). /d. at 1183. The lender moved for judgment on the pleadings, arguing that
Defs.' Mot. at 6-7. Defs.' Reply at 15.
33
25
1 2 3 4
1681m(h)(8)(A) authorized a private cause of action only for violation of 1681m, not for
0
violation of 1681m(d). See id. at 1184 (citing 15 U.S.C. 1681m(h)(8)(A) (''Section 16Bln and 168lo of this title shall not apply to any failure by any person to comply with this sectioizn u (emphasis added))). The district court agreed with defendant that the word "section" cle~?ly
!!:..
5 referred to 1681m, not 1681m(h), a "subsection." See id. at 1185 ("As the Supreme Court
6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 recently discussed, Congress follows a convention when it uses organizational terms in statutes. A 'section' is broken down into subparts as follows: 'subsections,' which begin with '(a)'; 'paragraphs,' which begin with '(1)' ... "). Plaintiff contended that the appearance of the word "sectionn at the end of 1681m(h)(8)(A) was merely "a scrivener's error attributable to the fact that 1681m(h) was enacted as Section 311 of the Fair and Accurate Credit Transaction Act. . . . " !d. After considering plaintiff's structural and policy arguments, the district court
"acknowledge[d) that there [was] no way to perfectly reconcile the contents of 168lm(h)(8) with the remainder of 168lm,n and noted that "[p]laintiffs may indeed be correct that the text of
1681m(h)(8) is the result of a scrivener's error." !d. at 1187. It declined to correct the error,
however, stating that "it is not for this Court to rewrite the words that Congress has chosen." /d. (citing Lamie v. United States Trustee, 540 U.S. 526, 542 (2004) ("If Congress enacted into law something different from what it intended, then it should amend the statute to conform it to its intent. 'It is beyond our province to rescue Congress from its drafting errors, and to provide for what we might think . . . is the preferred result.' This allows both of our branches to adhere to our respected, and respective, constitutional roles. In the meantime, we must determine intent from the statute before us")).
White is neither controlling nor persuasive, since this case involves a state, rather than a
federal, statute. As noted, when a federal court sitting in diversity interprets a state statute, it must apply state rules of statutory construction. In re First T.D. & Inv., 253 F.3d at 527; Fed.
Sav. & Loan Ins. Corp., 904 F.2d at 510; In re Anderson, 824 F.2d at 756. See also Dimidowich, 803 F.2d at 1482 ("Where the state's highest court has not decided an issue, the task
of the federal courts is to predict how the state high court would resolve it"). Under California law, as under federal law, statutory construction begins with the words of the statute itself.
26
1 Pacific Gas & Elec. Co., 16 Cal. 4th at 1152. The ultimate task of statutory construction,
Cl
2 however, is to "ascertain the intent of the Legislature so as to effectuate the purpose of the laW.t}" J_
"'"' 3 S.D. Myers, Inc. , 336F.3d at 1179 (internal citation and quotation marks omitted)). In carrying
I t"\
-~
~-'
4 out this task, California courts have corrected drafting errors. See Szold v. Med. Bd. of Cal., 127 5 Cal.App.4th 591 (2005) (after considering the text and legislative history of a statute, the court 6 found that insertion of the word "of" for "or" was an inadvertent drafting error and stated: "We 7 8 interpret statutes so as to avoid giving effect to drafting errors," citing People v. Superior Court
(Blanquel), 85 Cal.App.4th 768, 771 (2000)); In re Chavez, 114 Cal.App.4th 989, 998 (2004)
9 ("Our suspicion that the 1983 amendment was indeed a drafting error is strengthened by the fact 10 that SB 813 was not focused upon penal laws but was a voluminous bill devoted in large part to 11 educational reforms that required the simultaneous amendment of hundreds of code sections.
12 Such circumstances can create a 'dangerous potential for drafting errors.' Given the legislative 13 history and the surrounding circumstances we are convinced the 1983 amendment was a drafting
14 error and was not enacted for any deterrent purpose," citing People v. Alexander, 178 Cal.App.3d 15 1250, 1261-62 (1986) ("Chapter 1635's sudden inconsistent and incongruous treatment of PCP
16 offenses . . . strongly suggests confusion and errors in drafting the various amendments and 17 reenacted statutes that made up the chapter. This suggestion is further strengthened when one
18 considers the Act's complex scheme of interrelated complementary statutes, the complicated task 19 of updating the cross-references to reflect the new schedules, and the fact that chapter 1635 20 21 involved the simultaneous amendment of dozens of other statutes in the Business and Professions, Education, Government, Penal, Vehicle, and Welfare and Instirution Codes. Certainly such
22 circumstances created a dangerous potential for drafting errors" (footnotes omitted)); see 23 24 25 26 27 28
Alexander, 178 Cal.App.3d at 1263 ("The lack of intent to legalize sale of PCP becomes even
more evident in light of the absurd consequences such legalization would have. . . . [W]e conclude that where, as here, it is obvious that the Legislature inadvertently deleted the sanctions against selling PCP because of a drafting error, such a 'repeal' cannot and does not reflect an intent to pardon illegal sales that were committed prior to the error"). The California Supreme Court has cautioned, however, that courts should not rewrite a 27
1 statute unless necessary to effectuate the Legislature's clear intent. See People v. Garcia, 21 2 Cal.4th 1, 56 (1999) ("The parties' briefs, lower court opinions and our own research h~e ..... 3 disclosed a number of possible resolutions of this postulated internal conflict, all based on(:Jle
1~
l.r)
4 premise [that] the distinction between paragraphs (B) and (D) of section 667, subdivision (d)(3) 5 is a result of 'drafting error.' As we demonstrate later, however, each such resolution would
6 require the court to disregard one of the two assertedly conflicting paragraphs or to rewrite some 7 of their provisions. Although we may properly decide upon such a construction or reformation 8 when compelled by necessity and supported by firm evidence of the drafters' true intent, we 9 should not do so when the statute is reasonably susceptible to an interpretation that harmonizes 10 all of its parts without disregarding or altering any of them," citing People v. Skinner, 39 Cal. 3d 11 12 765, 775 (1985)). Here, the text of the student~' private right of action provision, the larger context of the
13 statutory scheme, and the purpose and history of the Reform Act and amendments to it all suggest 14 15 that the legislature's renumbering of the provision as paragraph (b)(6), rather than subdivision (c), was a drafting error. Even were this not so, however, the court would conclude that, regardless
16 of its placement, the language of the students' private right of action provision clearly grants 17 students a cause of action "for violation of this article," and does not limit the right to any single 18 section or subdivision. CAL. EDUC. CODE 94985(b)(6) (emphasis added). See Szold, 127 19 Cal.App.4th at 596 ("In construing any statute, '[w]ellestablished rules of statutory construction 20 require us to ascertain the intent of the enacting legislative body so that we may adopt the 21 construction that best effectuates the purpose of law. . . . We first examine the words themselves
22 because the statutory language is generally the most reliable indicator of legislative intent,"' 23 quoting Whaley v. Sony Computer Entertainment America, Inc., 121 Cal.App.4th 479, 484-85
24 (2004) (internal citations omitted; emphasis added)). Stated differently, even if the provision is 25 26 27 28 properly numbered paragraph (b)(6), its use of the word "article" stands in contrast to use of the word "subdivision" in other paragraphs of subdivision (b). See CAL. EDUC. CODE 94985(b)(1), (b)(5). Ordinary principles of statutory construction require that this difference be given effect. See Briggs v. Eden Council for Hope and Opportunity, 19 Cal.4th 1106 (1999) (examining 28
1 California Code of Civil Procedure 425.16(e), and concluding that because "[c]lauses (3) and
t:J
2 (4) of section 425 .16, subdivision (e), concerning statements made in public fora and 'omer 3 conduct' implicating speech or petition rights, include[d] an express 'issue of public interest'
r.J
!">
.;.::
4 5 6 7
limitation, n while "clauses (1) and (2), concerning statements made before or in connection with issues under review by official proceedings, contain[ed] no such limitation, n the court had to give effect to the "variation in phraseology," and "presume[] the Legislature intended different 'issue' requirements to apply to anti-SLAPP motions brought under clauses (3) and (4) of subdivision (e)
8 than to motions brought under clauses (I) and (2)"). Accordingly, the court concludes that 9 Daghlian's first cause of action is authorized by the Education Code, and rejects defendants' first
10 ground for dismissal of this claim.
11
12 13 14 15
2.
Whether The Consumer Protection Provisions Of The Reform Act

Apply To DeVry
Defendants next argue that Daghlian's first cause of action must be dismissed because the requirements of Education Code 94814, 94816, and 94832 do not apply to institutions like DeVry that have been accredited by a regional accrediting agency other than the Western
16 Association of Schools and Colleges ("non-WASC regionally accredited institutions"). 34 Daghlian 17 18 counters that Senate Bill 967, which added statutory language addressing regionally accredited institutions, merely streamlined the Bureau's process of approving such accreditations. He
19 contends that the Act does not exempt non-WASC regionally accredited institutions from 20 21 22 23 24 25 26 27 28
34
complying with the consumer protection provisions set forth in 94814, 94816, and 94832. 35
a.
Requests For Judicial Notice
On a Rule 12(b)(6) motion, the court's review is generally limited to the contents of the complaint. See Campanelli, 100 F.3d at 1479; Allarcom Pay Television , 69 F.3d at 385. Rule 12(b)(6) provides that when "matters outside the pleading are presented to and not excluded by the court, the motion shaH be treated as one for summary judgment and disposed of as provided
Defs.' Mot. at 3-4. Pl. 's Opp. at 16-18.

29
35
1 in Rule 56, and all parties shall be given reasonable opportunity to present all material made
l~
2 pertinent to such a motion by Rule 56." FED.R.CIV.PROC. 12(b)(6). "There are, however, t!Yo
~~~
3 exceptions to the requirement that consideration of extrinsic evidence converts a 12(b)(6) moti(>n
~.)
fJ)
4 5 6
to a summary judgment motion." Lee v. City ofLos Angeles, 250 F.3d 668, 688 (9th Cir. 2001) (citation omitted). Under the first exception, "a court may consider 'material which is properly submitted as part of the complaint' on a motion to dismiss without converting the motion to
7 dismiss into a motion for summary judgment."
Id. (citation omitted}.
"Second, under
8 Fed.R.Evid. 201, a court may take judicial notice of 'matters of public record."' ld. at 688-89 9 10 11 (citing Mack v. South Bay Beer Distrib., 798 F.2d 1279, 1282 (9th Cir. 1986)). In deciding a Rule 12(b)(6) motion, a court may judicially notice "not only ... the existence of a particular document, but the substance of the document as well." Miles, Inc. v. Scripps Clinic and Research
12 Foundation, 951 F.2d 361, 1991 WL 276450, *1 (9th Cir. Dec. 23, 1991) (Unpub. Disp.) (citing 13 14 15
Sinaloa Lake Owners Ass'n v. City of Simi Valley, 882 F.2d 1398, 1403 (9th Cir. 1989)).
In support of their motion to dismiss, defendants ask that the court take judicial notice of several documents outside the pleadings. First, defendants request that the court judicially notice
16 the fact that DeVry is an non-WASC regionally accredited institution. In support of this request, 17 defendants present the Higher Learning Commission's website36 and the Bureau's Directory of 18 Approved Institutions - Non-WASC Regionally Accredited (CEC 949095). 37 Second, defendants 19 20 21 22 23 Defendants DeVry, Inc. and DeVry University, Inc.'s Request for Judicial Notice in Support of Their Motion to Dismiss Plaintiff's First Amended Complaint ("Defs.' RJN"), Exh. A (Higher Learning Commission website, DeVry University, printed Apr. 5, 2006 ("HLC website")).
37
36
Defendants DeVry, Inc. and DeVry University, Inc.'s Request for Judicial Notice in Support of Their Reply in Support of Motion to Dismiss Plaintiff's First Amended Complaint 24 ("Defs. RJN 2"), Exh. 2 (California Department of Consumer Affairs, Bureau for Private 25 Postsecondary and Vocational Education Directory of Approved Institutions - Non-WASC Regionally Accredited (CEC 94905), dated May 11, 2006, available at 26 http://www.bppve.ca.gov/directories/cec90905.pdt) ("Bureau Non-WASC Directory")). In general, "[i]t is improper for the moving party to 'shift gears' and introduce new facts 27 or different legal arguments in the reply brief than [those that were] presented in the moving 28 papers." William W. Schwarzer, A. Wallace Tashima, and James M. Wagstaffe, FEDERALClVIL 30
1 request that the court judicially notice the Bureau's position on non-WASC regionally accredited
a
2 3 4 5
institutions, as reflected in the Bureau's Initial Report of the Operations and Administrative
f'-
Monitor dated September 26, 2005 (the "Operation Monitor's 2005 Initial Reporf': 38 f
t0
(/')
Specifically, defendants ask that the court take judicial notice of a passage that states, in part: "It is the Department's position that none of the consumer protection provisions contained in Article 6 and elsewhere in the Reform Act are applicable to these
7
8 9 10 11 12
13
14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
PROCEDURE BEFORE TRIAL, 12:107 (The Rutter Group 2005) . For this reason, the court has discretion to decline to consider new facts or arguments raised in a reply. See Stump v. Gates, 21 1 F. 3d 527, 533 (lOth Cir. 2000) ("This court does not ordinarily review issues raised for the first time in a reply brief.... The reasons are obvious. It robs the appellee of the opportunity to demonstrate that the record does not support an appellant's factual assertions and to present an analysis of the pertinent legal precedent that may compel a contrary result"); Burnham v. City of Rohnert Park, No. C 92-1439, 1992 WL672965, *5 (N.D. Cal. May 18, 1992) ("[R]eply briefs are limited in scope to matters either raised by the opposition or unforeseen at the time of the original motion"); Scott v. R.J. Reynolds Tobacco Co., No. Civ.A. 99-3091,2001 WL 797992, *5 (B.D. La. July 12, 2001) (same). The district court may, in its discretion, "consider the [new] issue even if it was raised in a reply brief." Glenn K. Jackson, Inc. v. Roe, 273 F.3d 1192, 1202 (9th Cir. 2001) (internal citation and quotation omitted). If the court elects to consider new material in a reply brief, however, it must afford the opposing party an opportunity to respond. Provenz v. Miller, 102 F.3d 1478, 1483 (9th Cir. 1996) ("We agree with the Seventh Circuit, which held that '[w]here new evidence is presented in a reply to a motion for summary judgment, the district court should not consider the new evidence without giving the [non-]movant an opportunity to respond'"); Black v. TIC lnv. Corp., 900 F.2d 112, 116 (7th Cir. 1990) ("Where new evidence is presented in a reply to a motion for summary judgment, the district court should not consider the new evidence without giving the movant an opportunity to respond" ); see El Polio Loco, Inc. v. Hashim, 316 F.3d 1032, 1040-41 (9th Cir. 2003) (indicating that the court may consider new issues raised on reply if it gives the opposition an opportunity to respond). Here, defendants submitted a second request for judicial notice in conjunction with their reply to plaintiff's opposition. They contend the documents were not available at the time the moving papers were submitted. (Defs.' RJN 2 at 1.) Because plaintiff responded to the second request (see Plaintiff's Memorandum of Points and Authorities in Opposition to Defendants' Request for Judicial Notice Submitted in Support of Their Reply in Support of Their Motion to Dismiss Plaintiff's First Amended Complaint ("Pl.'s Opp. to Defs. RJN 2")), the court will consider the request on its merits. Defs . RJN, Exh. B (Bureau for Private Postsecondary and Vocational Education, Initial Report of the Operations and Administrative Monitor, dated Sept. 26, 2005, at 136-37 ("Operation Monitor's 2005 Initial Report")). 31
38
[non-WASC regionally accredited] institutions, including requirements related to

(1) providing prospective students with a School Performance Fact Sheet and
2
3
4
transferability of credits disclosure; (2) incorporation of Bureau contact information in all student enrollment agreements, and (3) providing the Bureau with an annual report and copies of all accrediting agency reports and audit reports prepared by the U.S. Department of Education and student loan guarantee agencies. " 39
5
6
7 Third, defendants seek judicial notice of pages 3 and 7 of the Bureau's Annual Report to the
8 Legislature and California Postsecondary Education Commission for Fiscal Year 2004-2005, dated 9 April 20, 2006 ("Bureau's 2004-2005 Annual Report" or "Annual Report"). 40 These pages 10 outline the Bureau's general responsibilities, 41 and describe its position respecting the applicability 11 of the consumer protection provisions to non-WASC regionally accredited institutions. 42 Finally,
12 defendants request that the court judicialJy notice the text of S.B. 967. 43 13 14 15 16 17 Defs.' RJN, Exh. Bat 174 (Operation Monitor's 2005 Initial Report at 137). See Defs.' Mot. at 4-5.
40 39
Daghlian does not oppose the request for judicial notice of the Higher Learning
Defs.' RJN 2, Exh. 1 (Bureau for Private Postsecondary and Vocational Education Directory 's Annual Report to the Legislature and California Postsecondary Education 18 Commission, Fiscal Year 2004-2005, dated April 20, 2006, available at 19 http://www. dca.ca. govI reports/04_05_bppve_annrpt. pdf ("Bureau's 2004-2005 Annual Report")). 20 21 See id., Exh. 1 at 9 (Bureau's 2004-2005 Annual Report at 3 ("The Bureau for Private Postsecondary and Vocational Education (Bureau) approves and regulates private postsecondary and vocational institutions in California")).
42
41
See id., Exh. 1 at 13 (Bureau's 2004-2005 Annual Report at 7 ("SB 967 now exempts 23 these non-WASC regionally accredited institutions from most of the Reform Act, but still requires them to be approved by the Bureau based on a minimal number of requirements largely based on 24 the institution's financial stability and accreditation status. Consequently, SB 967 requires the 25 Bureau to approve these schools, but exempts them from providing protections for students such as enrollment and refund policies, disclosures regarding exam passage rates, transferability of 26 credit, complaint investigation and mediation, and other disclosures that institutions are required 27 to provide")). 28
43
22
/d., Exh. 3 (SB 967). 32
1 Commission's webpage, the Bureau's Non-WASC Directory, or S.B. 967. 44 Because DeVry's
~:;:;
2 accreditation status and the text of S.B. 967 are matters of public record, which are not subj~bt :2: 3 to reasonable dispute, the court will judicially notice these items. See FED.R.Evm. 201(b). ~je
C ,l)
4 also Territory of Alaska v. Am. Can Co., 358 U.S. 224, 226 (1959) (court may take judicial 5 notice of the legislative history of a bill); Palmer v. Stassinos, 348 F.Supp.2d 1070, 1077 (C. D. 6 Cal. 2004) (taking judicial notice of legislative history materials, as well as sampling of 7 complaints and default judgments filed in California courts, because they "constitute judicial facts 8 sufficiently capable of accurate and ready determination"); Korematsu v. United States, 584 9 F.Supp. 1406, 1414 (C.D. Cal. 1984) (a court may take judicial notice of legislative facts, such 10 as legislative history, which are "established truths, facts or pronouncements that do not change 11 12 13 from case to case but [are applied] universally, while adjudicative facts are those developed in a particular case" (citation omitted)). 45 Daghlian opposes defendants' request for judicial notice of the Operation Monitor's 2005
14 Initial Report and the Bureau's 2004-2005 Annual Report, however. 46 He argues that the Initial 15 Report is not a proper subject for judicial notice because it is not a formal opinion and therefore
16 constitutes hearsay,47 and that the court cannot judicially notice the cited portions of the Annual 17 18 19 20 21 22 23 24
4
Report because they contain information that is in dispute in this litigation. 48 The Bureau is an administrative body that was created pursuant to the Reform Act, and statutorily charged with "approving and regulating private postsecondary educational institutions."
See Plaintiff's Memorandum of Points and Authorities in Opposition to Defendants' Request for Judicial Notice ("Pl.'s Opp. to Defs' RJN") (opposing judicial notice of Operation Monitor's 2005 Initial Report only); Pl.'s Opp. to Defs.' RJN 2 (opposing judicial notice of Bureau's 2004-2005 Annual Report only). sFor the same reason, the court grants plaintiff's request for judicial notice. See Pl.'s Opp. to Defs' RJN; Pl.'s Opp. to Defs.' RJN 2. PI. 's Opp. to Defs.' RJN at 2. Pl. 's Opp. to Defs. ' RJN 2 at 1.
33
44
25 26 27 28
46
47
48
.,
CAL.
Eouc. CODE 94770.
See also id., 94774 (detailing the Bureau's functions and

!.:)
responsibilities). Under 94995, the Bureau is required to submit a written report to 1{!\e
3 legislature and the California Postsecondary Education Commission on or before January 3 (yf
tr)
;::
4 each calendar year "summarizing its activities during the previous fiscal year." /d., 94995(a). 5 These annual reports must include, but are not limited to, the following: 6 7
8
(2)
"(1)
Timely information relating to the enforcement activities of the bureau pursuant to this chapter. Statistics providing a composite picture of the private postsecondary educational community, including data on how many schools, as classified by subject matter, and how many students there are within the scope of the activities of the bureau." /d. , 94995(b).
9 10 11 12 13 14
The Reform Act requires that the Director of Consumer Affairs appoint a Bureau for Private Postsecondary and Vocational Education Operations and Administrative Monitor (the "Operations Monitor"). !d., 94779.2(a)(l). The Operations Monitor must "assess the Bureau's
15 administrative operations, including its school approval, applicant review, revenue collection, and
16 complaint and enforcement processes and procedures with the primary goals of improving the
17 18
bureau's overall efficiency, improving its effectiveness, and improving its compliance with state laws, particularly with respect to the bureau's approval, complaint, and enforcement processes."
19 /d., 94779.2(c)(1 ).49 The Reform Act requires that the Operations Monitor submit "an initial 20 21 22 23 24 25 Paragraph (c)(2) provides further details about the Operations Monitor's responsibilities. See id., 94779.2(c)(2) ("This monitoring duty shall be on a continuing basis for a period of no more than two years from the date of the operations monitor's appointment and shall include, but not necessarily be limited to, all of the following: (A) Assessing the bureau's revenue collections and needs, and its staffing. (B) Evaluating the relevant laws and regulations to identify revisions that would improve state regulation and maintain or improve student and public protection. (C) Improving the quality and consistency of the bureau's processes and performance, including complaint processing and investigation, and reducing timeframes for each. (D) Reducing any complaint back.Jog.
34
49
26
27
28
1 written report of his or her findings and conclusions to the director, the bureau, and the 2 Legislature no later than October 1, 2005, and every six months thereafter," and also ~'Ee ...,. .,._ 3 available to make oral reports to each if requested to do so." /d., 94779 .2(d). The Operations .,.; 4
5
b
Monitor must "make his or her reports available to the public and the media" as well. /d. As noted, under Rule 20l(b)(2) of the Federal Rules of Evidence, the court may take
6 judicial notice of a fact that is "not subject to reasonable dispute in that it is ... capable of 7 accurate and ready determination by resort to sources whose accuracy cannot reasonably be 8 questioned." FED.R.EviD. 20l(b). The records and reports of administrative bodies are proper 9 10 subjects of judicial notice, as long as their authenticity or accuracy is not disputed. See Mack, 798 F.2d at 1282 ("[A] court may take judicial notice of 'records and reports of administrative bodies'" (citation omitted)), overruled on other grounds, Astoria Federal Savings & Loan Ass'n
11
12 13 14 15 16 17 18
v. Solimino, 501 U.S. 104 (1991); Interstate Natural Gas Co. v. Southern Cal. Gas Co., 209
F.2d 380, 385 (9th Cir. 1953) (same); Lundquist v. Continental Casualty Co., 394 F.Supp.2d 1230, 1243 (C.D. Cal. 2005) ("'A court may take judicial notice of records and reports of administrative bodies,' such as notices and opinion letters issued by" an administrative agency (citation omitted)). Because the Operation Monitor's 2005 Initial Report and the Bureau's 2004-2005 Annual Report are administrative reports mandated by statute, and because Daghlian does not the
19 authenticity of the reports, the court takes judicial notice of their content. The court does not take 20 judicial notice of the Operation Monitor's and Bureau's opinions for their truth, however, since 21 22 23 24 25 26 27 28
(G)
whether the consumer protection provisions of the Reform Act apply to non-WASC regionally
(E) (F)
Ensuring consistency in the application of sanctions or discipline imposed on regulated institutions and persons. Improving the quality and timeliness of application and approval processes for regulated institutions and persons, the collection of fees, and the collection of information from, and the ability to disseminate information regarding, those entities or persons regulated by the bureau. Improving the bureau's ability to perform outreach to prospective students of private postsecondary and vocational educational institutions"). 35
1 accredited institutions is a fact in dispute in this action. See Korematsu, 584 F.Supp. at 1415 2 (finding it improper to take judicial notice of an agency's findings if "they are offered on ~Q\e 3 ultimate issue,,. since taking judicial notice the findings "would render them conclusive accorq.i_9g
'.0
to Rule 20I(g)"). Nor does the court view the reports as constituting or reflecting the official
5 position of the legislature. See CAL. Enuc. CODE 94779.2(d) ("The operations monitor shall
6
make every effort to provide the department and the bureau with an opportunity to reply to any facts, finding, issues, or conclusions in his or her reports with which the department or the bureau may disagree").
7 8 9 10 11 12 13 14 15
b.
Analysis
i.
Reform Act Provisions Concerning Non-WASC Regionally

Accredited Institutions
"A non-WASC regionally accredited institution" is defined in the California Education Code as "a degree-granting institution that has been accredited by one of the non-WASC regional accrediting agencies listed in Section 94740.3." CAL. Enuc. CODE 94740.5. DeVry has been accredited by The Higher Learning Commission of the North Central Association of Colleges and
16 Schools, which is one of the approved non- WASC regional accrediting agencies identified in
17 18 19
94740.3. See id., 94740.3(c). 50 Therefore, DeVry is a "non-WASC regionally accredited
institution" within the meaning of the Education Code. Article 8 of the Reform Act sets forth standards and evaluation procedures that degree-
20 granting institutions must satisfy in order to obtain approval to operate in the state. See id., 21 22 23 24 25 26 27 28 See Defs.' RJN, Exh. 1 (HLC Website). See also Defs. RJN 2, Exh. 2 (Bureau NonWASC Directory") (listing DeVry)).
36
50
94900 ("No private postsecondary educational institution may issue, confer, or award an academic or honorary degree unless the institution is approved by the [Bureau] to operate in California and award degrees"). Section 94900 describes the standards and procedures applicable to WASC-accredited institutions. To obtain approval under 94901(c)(l), or conditional approval under 9409l(c)(2), the Bureau must determine that the WASC-accredited institution
1 has met all of the following requirements: 2

3
"(1)
The institution has the facilities, financial resources, administrative capabilities, faculty, and other necessary educational expertise and resources to ensure its capability of fulfilling the program or programs for enrolled students.
lU
2.
( r)
~5
~~
5
6
(2)
The faculty are fully qualified to undertake the level of instruction that they are assigned and shall possess degrees or credentials appropriate to the degree program and level they teach and have demonstrated professional achievement in the major field or fields offered, in sufficient numbers to provide the educational services.
7 8
9
10
11
(3)
The education services and curriculum clearly relate to the objectives of the proposed program or programs and offer students the opportunity for a quality education.
12 13
14 (4)
The facilities are appropriate for the defined educational objectives and are sufficient to ensure quality educational services to the students enrolled in the program or programs.
15
16
17 18
19
(5)
The program of study for which the degree is granted provides the curriculum necessary to achieve its professed or claimed academic objective for higher education, and the institution requires a level of academic achievement appropriate to that degree.
20 21 22 23 24 25 26 27 28 (7)
(6)
The institution provides adequate student advisement services, academic planning and curriculum development activities, research supervision for students enrolled in Ph.D. programs, and clinical supervision for students enrolled in various health profession programs. If the institution offers credit for prior experimental learning it may do so only after an evaluation by qualified faculty and only in disciplines within the institution's curricular offerings that are appropriate to the degree to be pursued. The council shall develop specific standards regarding the criteria
37
1
2
for awarding credit for prior experimental learning at the graduate level,
b
including the maximum number of hours for which credit may be awarded."
/d., 94900(a).
llJ
<t} ..
4 Before approving a WASC-accredited institution for operation, the Bureau must conduct a 5 comprehensive onsite review and assessment in all the areas identified in 94900. See id.,
6 94901(a)(l).
7 Non-W ASC regionally accredited institutions must also obtain approval from the Bureau
8 to operate in California. See id., 94905 ("Any non- W ASC regionally accredited institution, as 9 defined in Section 94740.5, that is incorporated in another state and maintains its accredited status 10 11 throughout the period of a student's course of study, and that is approved by the bureau to
operate, may issue degrees, diplomas, or certificates" (emphasis added)). The approval process
12 for such institutions is much less rigorous, however. To receive approval, a non- W ASC
13
regionally accredited institution must comply with five requirements:

"(1)
14 15
16
The institution meets the financial responsibility requirements set forth in paragraph (2) of subdivision (a) of Section 94804.
(2)
The institution's cohort default rate on guaranteed student loans does not exceed 15 percent for the three most recent years, as published by the United States Department of Education.
17 18 19 20 21 22 23 24 25 26 27 28 (4) (5) (3)
The institution submits to the bureau copies of its most recent Integrated Postsecondary Education Data System Report of the United States Department of Education and its accumulated default rate. The institution pays fees in accordance with Section 94932. The institution has submitted an application to operate for itself or a branch or satellite campus pursuant to Section 94802 or an application for renewal pursuant to Section 94980." /d., 94905(b).
Defendants contend that 94905 clearly exempts non- WASC regionally accredited
38
1 institutions from the consumer protection provisions contained in Article 6. 51 The court disagrees. 2 The focus of 94905 is the approval process for non-WASC regionally accredited institutio~.
;r
~-
l:l
3 The statute outlines the various requirements such an institution must satisfy to obtain the BureaU.' s \.) 4 approval to operate within the state. 52 It does not purport to be the only provision of the Reform Act applicable to non-WASC regionally accredited institutions, nor does not it expressly exempt these institutions from the requirements of Article 6. To the contrary, when the section is read as a whole, the only reasonable interpretation is that while the Legislature sought to streamline the approval process for non-WASC regionally accredited institutions, it did not intend to exempt them from the minimum standards set forth in Article 6, including 94814, 94816, and 94832. Paragraph 2 of subdivision (a), for example, states that "a non-WASC regionally accredited institution approved to operate pursuant to this section, and any and all of its programs offerings, are subject to the requirements of Article 13 (commencing with Section 94950)." !d. ,
94905(a)(2). As discussed, 94985(a) of Article 13 makes unenforceable any contract or
'/')
5
6 7 8 9 10 11 12
13
14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
agreement arising from a transaction in which an institution willfully violated "any provision of Section 94800, 94810, 94814, or 94816, Sections 94820 to 94826, inclusive, Section 94829, 94831 , or 94832. " !d., 94985(a). If the Legislature had intended to exempt non-WASC regionally accredited institutions from complying with 94814, 94816, and 94832, surely it would not have adopted 94905(a)(2), which explicitly subjects such institutions "and any and all of [their] programs offerings" to the entirety of Article 13. The inclusion of subdivision (e) in 94905 also militates against defendants' proposed construction. That subdivision states: "A non-WASC regionally accredited institution approved to operate pursuant to this section is exempt from the requirements of Sections 94900 and 94901 , Article 9 (commencing with Section 94915), and Article 9.5 (commencing with Section 94931),
51
Defs.' Reply at 8.
s2See id. ("The plain language of Education Code section 94905 makes clear that Senate
Bi11967 established an approval process for non-WASC regionally accredited institutions that was different from the approval process applied to other institutions by Education Code section 97480"). 39
1 except for the applicable financial responsibility requirements referenced by paragraph (2) of a 2 subdivision (a) of Section 94804." !d., 94905(e). Had the Legislature wanted to exempt nolV
;~
3 W ASC regionally accredited institutions from the requirements set forth in other articles, it wouia
~ ~ . ;.'
V')
4 have done so in subdivision (e). The subdivision makes no mention of Article 6, however.
5
Defendants dispute this, citing 94780, found in Article 5. 53 Section 94780 provides: "No institution, subject to this chapter, shall offer any educational service unless the institution is first approved by the council and meets all of the requirements in the following articles: (a) This article, Article 6 (commencing with Section 94800) except as provided for institutions approved under Article 9.5 (commencing with Section 94931), Article 10 (commencing with Section 94932), Article 11 (commencing with Section 94940), and Article 12 (commencing with Section 94944). (b) (c) Article 8 (commencing with Section 94900), if the institution offers degrees. Article 9 (commencing with Section 94915), if the institution does not offer degrees. (d) Article 9.5 (commencing with Section 94931), if the institution is registered pursuant to that article. (e) Article 7 (commencing with Section 94850), if the educational programs are not exempt under Section 94790." /d., 94780 (emphasis added). 54 Section 94780 does not support defendants' position. First, it is clear that non-W ASC regionally accredited institutions are "subject to this chapter" as that term is used in the statute. See id.,
94739(a) (defining "private postsecondary education institutions" as "any person doing business
6 7 8 9 10
11
12 13 14 15 16 17 18 19 20 21 22 23 24 25
in California that offers to provide or provides, for a tuition, fee, or other charge, any instruction, training. or education" under certain specified circumstances); id., 94739(b) (listing institutions
26
27 28
53 54
Defs.' Reply at 5.
This section was added by A.B. 71, 4.
40
1 that "are not considered to be private postsecondary educational institutions under this chapter").
2 :)
2 As defendants concede, the section bars any institution that is subject to regulation under ~!?e
~?.-:
3 Reform Act from offering educational services unless it is "'first approved by the Council' and
t..)
(11
4 meets the requirements of various Titles of the Reform Act (including Title 6 commencing with
5 94800, which encompasses the Sections 94814, 94816, and 94832 of the Education Code at issue
in this case). " 55 Nothing in 94780, moreover, suggests that non-WASC regionally accredited
7 institutions are exempt from this requirement or that they may offer educational services in 8 California without complying with the requirements of Article 6. See id., 94780(b). 9 In short, under the plain language of the Reform Act, institutions like DeVry that are
10 accredited by a non- WASC regional accrediting agency need not undergo the comprehensive 11 12 13 14 15 16 review process the Bureau undertakes for W ASC-accredited institutions, but must comply with the "General Standards For All Postsecondary Institutions Approved Under this Chapter" set forth in Article 6.
ii.
Purpose And Legislative History
The purpose and history of Senate Bill 967, which added 94905 to the Reform Act in 2003, provide further support for this conclusion. See 2003 Cal. Legis. Serv. ch. 340 (S.B. 967)
17 (West). According to the report of the May 5, 2003 hearing before the Senate Committee on 18 Business and Professions, the impetus for the bill was a November 2002 review of the Bureau's 19 operations conducted by the Joint Legislative Sunset Review Committee ("JLSRC") and 20 21 Department of Consumer Affairs. See Cal. Bill Analysis, S.B. 967 Senate Committee on Business and Professions (May 5, 2003). During that review, "[a] number of deficiencies and
22 problems with the current regulation and administration of the Reform Act were presented to the 23 24 25 26 27 28
55
JLSRC, and found in two audits that had been performed on the Bureau." /d. Specifically, the review revealed that the Bureau had a significant backlog in its approval of institutions, educational courses and instructors. See id. S.B. 967 was sponsored by the Accredited Out-of-State Colleges and Universities in
Defs.' Reply at 5. 41
1 California ("AOCUC"). !d. The AOCUC argued that "the bill would streamline the regulatory 2 process of the Bureau for regionally accredited degree granting institutions by relieving the Bur~u
~2:
3 from having to review those institutions or programs, while maintaining the Bureau's compfte
( I')
regulatory authority over these same institutions for all consumer protection related provisions in
5 the Reform Act." /d. (emphasis added); see id. ("The bill is intended, as a two-year pilot project, 6 to remove degree granting private postsecondary colleges and universities from the institutional, 7 program, and instructor approval requirements of the Reform Act administered by the Bureau 8 but maintain the applicability of all the other regulatory and oversight provisions of the Reform
9 Act - notably its provisions regarding fees, information reporting, participation in the Student
10 Tuition Recovery Fund, student protections, and enforcement" (emphasis added)). 11 12 13 14 15 16 17 Reports of subsequent hearings on the bill similarly show that, while the Legislature wanted to increase the Bureau's efficiency by allowing non-WASC regionally accredited institutions to undergo a relaxed approval process, it did not intend to exempt them from the student protection provisions of the Reform Act. See, e.g., Cal. Bill Analysis, S.B. 967 Assembly Committee on Business and Professions (July 1, 2003) ("Some claims have been made that this bill creates a competitive disadvantage for non-regionally accredited schools still subject to BBPVE regulation. . . . The purpose of this bill is not to level the playing field but instead to
18 .increase efficiencies and eliminate redundancies. Even with this bill, WASC schools will still 19 theoretically have an advantage because this bill only calls for a partial deregulation"); Cal. Bill
20 Analysis, S.B. 967 Assembly Committee on Higher Education (July 8, 2003) ("SB 967 is 21 22 23 24 25 26 27 sponsored by the Accredited-Out-of-State Colleges and Universities in California (AOCUC). According to the sponsor, this bill would streamline the regulatory process at the BPPVE for regionally accredited degree granting institutions by relieving the BPPVE from having to review accredited degree granting institutions or programs, while maintaining the BPPVE's complete regulatory authority over these same institutions for all consumer related activities"); Cal. Bill Analysis, S.B. 967 Senate Floor, Third Reading (Aug. 18, 2003) ("This bill is sponsored by the Accredited Out-of-State Colleges and Universities in California (AOCUC). This bill is intended,
28 as a two-year pilot project, to remove degree granting private postsecondary colleges and 42
1 universities from the institutional, program, and instructor approval requirements of the Reform
b
2 Act administered by the Bureau. This bill maintains the applicability of all the other regulat2Jy 3 and oversight provisions of the Reform Act, notably its provisions regarding fees, informapon
,..)
:?:
reporting, and participation in the Student Tuition Recovery Fund, student protections, and
I
l.f')
5 enforcement"). There is no suggestion in any of these reports that in enacting S.B. 967, the 6 Legislature sought to provide a wholesale exemption for non-WASC regionally accredited
'
7 institutions from the student protection provisions of Article 6.
8
9 10 11 12 13
iii.
Conclusion
Both the text and legislative history of the Reform Act support Daghlian 's contention that, notwithstanding DeVry's status as a non-WASC regionally accredited institution, it must provide students with
writte~
notification regarding the transferability of credits, supply prospective
students with a brochure or catalogue disclosing all material facts reasonably likely to affect their decision to emoll, and refrain from engaging in false and misleading advertising. See CAL.
14 Eouc. CODE 94814, 94816, 94832. Nonetheless, defendants urge the court to adopt the 15 contrary position of the Operations Monitor and the Bureau. 16 It is well-settled under California law that "'[i]n determining the proper interpretation of
17 a statute and the validity of an administrative regulation, the administrative agency's construction 18 is entitled to great weight, and if there appears to be a reasonable basis for it, a court will not
19 substitute its judgment for that of the administrative body.'" Family Planning Assocs. Med. 20 21
Group v. Belshe, 62'Cal.App.4th 999, 1004 (1998) (quoting Campbell Industries v. State Bd. of Equalization, 167 Cal.App.3d 863, 868 (1985) (internal citations and footnote omitted)) .
22 California courts have cautioned, however, that " '[t]he ultimate interpretation of a statute is ... 23 an exercise of judic~al power and it is the responsibility of the courts to declare its true meaning
I
24 even if it requires rejection of an earlier erroneous administrative interpretation."' Id. at 1004 25 26 27 28 (quoting Wheeler
~
Bd. of Administration, 25 Cal.3d 600, 605 (1979), and Physicians &
Surgeons Laboratories, Inc. v. Dep 't. of Health Services, 6 Cal.App.4th 968, 986 (1992)) .
Here, "the c~ear language and purpose of the statute" counsel rejection of the interpretation offered by the Operations Monitor and Bureau. The court notes in this regard that, while periodic
43
1 reports by the Operations Monitor and the Bureau are mandated by statute, the reports do not
C:r
2 constitute regulations or official agency findings, and do not have the force of law. See ClL. 3 Gov'T. CODE 11340.5(a). Accordingly, they are not entitled to the kind of deference norm~jly
(I)
4 accorded administrative interpretations. Compare Family Planning Associates, 62 Cal.App.4th 5 at 1004 (an "administrative agency's construction is entitled to great weight" when a court is 6 determining the validity of an administrative regulation); Campbell, 167 Cal.App.3d at 868 7 (stating that "an administrative ruling comes before the court with a presumption of correctness
8 and regularity, which places the burden of demonstrating invalidity upon the assailant. . . . The 9 ultimate resolution, however, of whether the Board has correctly interpreted its own regulations 10 11 rests with the courts" (citations and internal quotations omitted and emphasis added)); see also
lnt'l Business Machines v. State Bd. ofEqualization, 26 Cal.3d 923, 930-31 (1980) ("The Board
That
12 has embodied its interpretation of section 6006.3, in an administrative regulation. 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

56
regulation, a contemporary administrative construction of a statute by the agency charged with its enforcement and interpretation, 'is entitled to great weight unless it is clearly erroneous or unauthorized'" (citations and footnotes omitted; emphasis added)) . In sum, based on the text and legislative history of the Reform Act, the court concludes that DeVry is subject to the student protection provisions of Education Code 94814, 94816, 94832. Defendants' motion to dismiss Daghlian's first cause of action is therefore denied.
c.
Second Cause Of Action For Violation Of The Consumer Legal Remedies Act
Daghlian's second cause of action asserts a claim for violation of 1770(a)(5) of the Consumer Legal Remedies Act (the "CLRA "). Daghlian contends that he and other members of the putative class are consumers within the meaning of the CLRA, because they purchased goods and services intended for sale by defendants. 56 Daghlian alleges that "[b]y advertising to prospective students that the school's credits are easily transfer[r]able to other schools, and [by] failing to adequately disclose information required by the Education Code, defendants misrepresented their services as having characteristics, benefits, or qualities which they do not
First Amended Complaint, , 31. 44
1 have, all of which are prohibited acts under 1770(a)(5) of the [CLRA]. " 57 Daghlian contends
2 that as a proximate result of the misrepresentations, he and other class members suffered mone~
3 4 damage in the form of tuition payments and attendance costs.
58
i:J
Daghlian seeks an order enjoi~~g

r,-.._
;;t
further violations of the CLRA, as well as other appropriate relief, under Civil Code 1780(a)
5 and 1782(d).59 6 7
8
Defendants assert that the CLRA claim must be dismissed as untimely. 60 They argue that a 1770(a)(5) claim' must "be commenced not more than three years from the date of the commission of such method, act, or practice." CAL. CIV. CODE 1783. Because Daghlian' s CLRA claim challenges advertising that allegedly induced him to enroJI with DeVry in April
10 2001, and because Daghlian did not file this action until December 2005, defendants assert that 11 the CLRA claim is time-barred. 61 In his opposition, Daghlian concedes that "his Consumer Legal
12 Remedies Act claim may be time-barred and . . . withdraws th[e] cause of action."62 Because 13 Daghlian has
withdr~wn
the CLRA claim, the court dismisses it with prejudice.
14
15 16 17 18 19 20 21
D.
Third And Fourth Causes Of Action For Violations Of California Business
And Professions Code 17500, Et Seq. And 17200, Et Seq.
Daghlian' s third and fourth causes of action allege that defendants engaged in false advertising in violation of California Business and Professions Code 17500, et seq., and in unlawful, unfair, and deceptive business practices in violation of California Business and Professions Code 17200, et seq. California Business and Professions Code 17500 et seq. prohibit the dissemination of
22
23 24
51
58
/d.' , 32.
/d. 1
,,
33, 34.
59
25 26 27 28
/d. , 35.
60
Defs. 1 Mot. at 8.
62
Pl. 's Opp. at 1 n. 2.
45
1 false or misleading statements in connection with advertising. 2 17500. 63
CAL. Bus. & PROF. CQDE c. "Section 17500 has been broadly construed to proscribe 'not only advertising w~!fh
~~
( f)
3 is false, but also advertising which[,] although true, is either actually misleading or which h~ a 4 capacity, likelihood or tendency to deceive or confuse the public.'" Colgan v. Leathennan Tool
5 Group, Inc., 135 Cal.App.4th 663, 679 (2006) (quoting Kasky v. Nike, Inc., 27 Cal. 4th 939, 951
6 (2002) (internal quotation marks omitted)). A court may award injunctive relief and restitution 7 for false advertising that violates 17500. See id., 17535. 8 9 Under California Business and Professions Code 17200 et seq., any person or entity that has engaged, is engaging, or threatens to engage "in unfair competition may be enjoined in any
10 court of competent jurisdiction." /d., 17201, 17203. "Unfair competition" includes "any 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 The fuJI text of section 17500 reads: "It is unlawful for any person, firm, corporation or association, or any employee thereof with intent directly or indirectly to dispose of real or personal property or to perform services, professional or otherwise, or anything of any nature whatsoever or to induce the public to enter into any obligation relating thereto, to make or disseminate or cause to be made or disseminated before the public in this state, or to make or disseminate or cause to be made or disseminated from this state before the public in any state, in any newspaper or other publication, or any advertising device, or by public outcry or proclamation, or in any other manner or means whatever, including over the Internet, any statement, concerning that real or personal property or those services, professional or otherwise, or concerning any circumstance or matter of fact connected with the proposed performance or disposition thereof, which is untrue or misleading, and which is known, or which by the exercise of reasonable care should be known, to be untrue or misleading, or for any person, firm, or corporation to so make or disseminate or cause to be so made or disseminated any such statement as part of a plan or scheme with the intent not to sell that personal property or those services, professional or otherwise, so advertised at the price stated therein, or as so advertised. Any violation of the provisions of this section is a misdemeanor punishable by imprisonment in the county jail not exceeding six months, or by a fine not exceeding two thousand five hundred dollars ($2,500), or by both that imprisonment and fine." CAL. Bus. & PROF. CODE 17500. 46
63
unlawful, unfair or fraudulent business act or practice and unfair deceptive, untrue or misleading advertising." /d., 17200. The Supreme Court has construed the term broadly. See Cel-Tech
Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163, 180 (1999)
("[Section 17200] defines 'unfair competition to include any unlawful, unfair or fraudulent business act or practice .... Its coverage is sweeping, embracing anything that can properly be
1 called a business practice and that at the same time is forbidden by law. . . . By proscribing any
0
2 unlawful business practice, section 17200 borrows violations of other laws and treats then!las
:;:
3 unlawful practices that the unfair competition law makes independently actionable .... However, 1 ....)
v~
4 5 6 7
8
the law does more than just borrow. The statutory language referring to any unlawful, unfair or fraudulent practice . . . makes clear that a practice may be deemed unfair even if not specifically proscribed by some other law. Because Business and Professions Code section 17200 is written in the disjunctive, it establishes three varieties of unfair competition - acts or practices which are unlawful, or unfair, or fraudulent" (internal quotations omitted)); see also Paulus v. Bob Lynch
9 Ford, Inc., 139 Cal.App.4th 659, 676-77 (2006) ("The purpose of the UCL 'is to protect both 10 consumers and competitors by promoting fair competition in commercial markets for goods and 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 services. [Citation.]' Thus, the scope of the UCL (Bus. & Prof.Code, 17200 et seq.) is 'broad.' It 'covers a wide range of conduct"' (citations and footnote omitted)). A violation of the false advertising law, 17500 et seq., constitutes a violation of the unfair competition law,
17200 et seq. Pfizer Inc. v. Superior Court,_ Cal.Rptr.3d _ , 2006 WL 1892581, *1
(Cal.App. July 11, 2006) (citing Kasky, 27 Cal.4th at 949-50)). On November 2, 2004, California voters passed Proposition 64; it took effect the following day, in accordance with Article II, Section 10 of the California Constitution. Lyons v. Chinese
Hosp. Ass'n., 136 Cal.App.4th 1331, 1336 n. 2 (2006); see also R&BAuto Ctr., Inc. v. Farmers Group, Inc., 140 Cal.App.4th 327, 44 Cal.Rptr.3d 426, 453 (2006). Proposition 64 amended
the California Business and Professions Code to bar persons from suing as "private attorneys general" or on behalf of others absent a showing that they themselves had suffered injury as a result of the allegedly unfair business practice. See CAL. Bus. & PROF. CODE 17535 ("Any person may pursue representative claims or relief on behalf of others only if the claimant meets the standing requirements of this section . .. "); id., 17204 ("Actions for any relief pursuant to this chapter shall be prosecuted exclusively in a court of competent jurisdiction by the Attorney General or any district attorney . . . or upon the complaint of any board, officer, person, corporation or association or by any person who has suffered injury in fact and has lost money or
28 property as a result of such unfair competition" (emphasis added)). See also Paulus, 139 47
1 Cal.App.4th at 677 n. 13 ("California's electorate narrowed the scope of the UCL in 2004 by 2 passing Proposition 64 .... Proposition 64's provisions included- by amendment to BusiJ~ss
...... .
~
....
3 and Professions Code section 17204 - the elimination of the right of a person 'acting for ;!!te
~ 'i
interests of itself, its members or the general public' to bring a UCL suit, changing the language
5 of the statute to read that a person could bring suit only if the person 'has suffered injury in fact 6 and has lost money or property as a result of such unfair competition.' (Ballot Pamp. , Gen. Elec. 7 (Nov. 2, 2004) text of Prop . 64, 3, p. 109)"); Harris v. Investor's Business Daily, Inc., 138
8 Cal.App .4th 28, 33 (2006) (California Business and Professions Code 17203 "now requires that 9 relief may be sought only by persons who have themselves suffered injury"); Feitelberg v. Credit 10 Suisse First Boston, ILC, 134 Cal.App.4th 997, 1010 (2005) (Proposition 64 amendments "limit 11 private representative actions to persons who . . . meet the standing requirements set forth in
12 section 17204, which include injury in fact") . 13 Additionally, 17200 plaintiffs must now satisfy the requirements for class actions under
14 California law. See CAL. Bus. & PROF. CODE 17535 ("Any person may pursue representative 15 claims or relief on behalf of others only if the claimant .. . complies with Section 382 of the 16 Code of Civil Procedure," which governs class actions); id. , 17203 (same). See also Harris, 17 18 138 Cal.App.4th at 33 (a representative claim for unfair competition "requires class certification under the Code of Civil Procedure section 382"); Schwartz v. Visa Int'l Serv. Ass'n, 132
19 Cai.App.4th 1452, 1458 (2005) ("[T]he UCL now authorizes a person to pursue a representative 20 action only if he or she meets the class certification requirements of section 382 of the Code of 21 22 23 Civil Procedure") . Defendants argue that Daghlian's 17500 and 17200 claims must be dismissed because he has not established that he has standing to prosecute the claims as required by Proposition 64. 64
24 Defendants emphasize that "nowhere in the FAC does [Daghlian] allege that he actually attempted 25 26 27 28
64
to transfer to another school that refused to accept his DeVry units, thus forcing him to repeat
Defs.' Mot. at 10.

48
1 courses or incur additional tuition expenses. "65 In the absence of such an allegation, defendants
CJ
assert, Daghlian has failed to show that he suffered the type of "injury in fact"
66
necessar~~o
~j
V'l
~
3 maintain the third and fourth causes of action.

4 5 6
Daghlian counters that he has adequately pled injury in fact. 67 He argues that he suffered injury when he "spent tens of thousands of dollars in tuition expecting that his degree would be a foundation for further education" and "did not receive what he had bargained for. "68 He
7 contends that regardless of his future actions, he has standing to maintain the 17500 and 17200
8 claims. 69
9
The first amended complaint alleges that Daghlian attended DeVry from April 2002 to
10 October 2005. 70 Daghlian asserts that prior to enrolling at DeVry, he met with a DeVry recruiter,
11
12
who told him that DeVry "offered academic credits that would be transferable to a wide variety of other academic institutions. " 71 He alleges that he did not receive documents disclosing that his DeVry credits would likely not transfer to other colJeges.72 Although Daghlian does not allege that he attempted to transfer the credits to another
13
14
15 educational institution, or that he was forced to begin his education anew at another institution, 16 he does assert that he enrolled at DeVry and incurred $40,000 in debt "[i]n reliance on" 73
17 defendants' misrepresentations and omissions about the transferability of credits. This sufticiently
18
19 20 21 22
65
66
Id. at 10-11.
/d. at 11.
67
PI. 's Opp. at 22.
68/d.
23
24
7
25 26 27
First Amended Complaint, , 4.
71/d.
28 49
1 alleges that Daghlian personally suffered injury as a result of defendants' allegedly false and/or
0
2 misleading advertising and unfair business practices. See Smith v. Wells Fargo Bank, N.A., !~5
-~
Y-~
3 Cal.App.4th 1463, 1480 n. 13 (2005) (stating that after Proposition 64, "any person who s 4 suffered injury in fact and has lost money or property as a result of such unfair competition" can
v~
5 bring a UCL cause of action). The fact that Daghlian may have received some value from his
6 $40,000 in tuition payments does not mean that he suffered no injury. See, e.g., Pfizer Inc. , 2006 7 WL 1892581 at *9 (assuming, in a post-Proposition 64 case, that the class plaintiff had standing 8 to sue under 17500 and 17200 because he alleged that he purchased Listerine in reliance on 9 Pfizer's purportedly false and misleading label; "[T]o have suffered an injury in fact as a result 10 of the alleged misrepresentation, a plaintiff would have had to read Ptizer's label 'as effective as 11 floss against plaque and gingivitis' or some similar statement and relied thereon in buying
12 Listerine. A consumer who was unaware of, or who did not rely upon, Pfizer's claims comparing 13 Listerine to floss did not suffer any 'injury in fact' as a result of the alleged fraudulent business
14 practice or false advertising"); see also Laster v. T-Mobile USA, Inc., 407 F.Supp.2d 1181, 1194 15 (S..D. Cal. 2005) ("[A]fter Proposition 64, a person seeking to represent claims on behalf of 16 others must show that (1) she has suffered actual injury in fact, and (2) such injury occurred as 17 a result of the defendant's alleged unfair competition or false advertising. . . . With respect to 18 the first prong - injury in fact - Plaintiffs claim they entered into a bundled transaction with
19 Defendants whereby they purchased both a phone and cellular service, and in doing so, were 20 provided with a phone that was falsely advertised as 'free' or substantially discounted, when in 21 fact, they were required to pay the sales tax on the full retail value. Plaintiffs, in essence, contend
22 putative class members were injured by Defendants' 'bait-and-switch' practices; that is, 23 consumers were lured in with advertisements for free or deeply discounted phones, yet once in 24 the store, they were charged sales tax based on the full retail value of the phone .... Such 25 allegations sufficiently allege an injury in fact"). As in Pfizer, where the Listerine user had
26 standing to sue despite the fact that he obtained some, albeit not the advertised, benefit from using 27 28 the product, Daghlian has standing to sue despite the fact that he may have received some, albeit not the advertised, benefit from taking cJasses at DeVry. Therefore, Proposition 64 does not bar
50
1 Daghlian's third and fourth causes of action.
2
3
m.
CONCLUSION
z
~ u
v;
0 i1J ._.,.
For the reasons stated, defendants' motion is granted in part and denied in part. The court
5 dismisses plaintiff's second cause of action for violation of the CLRA with prejudice. It denies 6 defendants' motion in all other respects.
7
8
9
DATED: July 18, 2006
10
11
12 13 14 15 16 17 18 19 20 21
22
23
24
25
26
27
28
51
From:
To: CC:
Date: Subject:

9/ 13/2010 3:39:24 PM
Rob MacArthur Alternative Research Setvices, Inc.

203-244-5174
This material has been prepared by Alternative Research Setvices Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Setvices Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The finn does not make a market or hold positions in the securities mentioned herein, nor does the finn maintain any investment banking relationships in such securities.
ALTERNATIVE RESEARCH SERVICES, INC.

Robe1 MacArthur nnacarthur@altresearch.com 203-244-5 174 w 203-2 15-3843 c August 20, 20 l 0 i
Apollo Group (APOL) -- $40.59

Sell Short:
Market Cap. Shares Out. Short Interest Days short Avg. Daily Vol. St. eps est. 2010cy St. eps est. 20 l 1cy Px/book
$5 .9 bil 147 mil 9.63 mil 2.24 4.3 mil $5.39 $5.77
4.4x
44% Repayment Rate - Connection to TCI Playbook ~s:~;TDA 3.66x Student Suit Reveals Loans Paid back by Co. are Source: Bloomberg Inflating Repayment Rate Number Source: All loans for dropped students are paid off by the company; students are put into collections through the company's internal collection company, "CCC" COCO Reports Rise in CDR's
Repayment Rate Fallout
1.35x
Last Friday, the Department of Education published repayment rates on Title IV loans. The numbers for the for-profit space were sufficiently low to shock the markets. Most of the for-profit education companies dropped on the news that repayment rates were below the 35% threshold. APOL, on the other hand, reported a 44% Repayment Rate. That number is, without exception, in our mind, extremely misleading. While we cannot calculate what we think that number should be given currently available data, at the very least, we think there should be a conelation between repayment rate and graduation/ completion rates. The higher the completion tate, the greater the chances of repayment. We think through APOL's default aversion program, the company has manipulated its cohort default rate to an abnormally low level by paying off loans for dropped students and then putting them into collections for money they are not entitled to keep and booking revenue in the process. A 44% repayment rate doesn't wash with APOL's (very) low-teens graduation rates (see below, - IO(M >). While there is some conflict over the validity of APOL's graduation/ completion rates, due to the number of non-first time students and older students in the mix, investors can't ignore the so% gap between repayment rates of 44% and the graduation/ completion rate numbers. 1 The repayment rate data reports 133,802 borrowers in the numerator and 347,157 borrowers in the denominator, which is 38% of its students/ ex-students in repayment
Devry has a graduation rate -30% and a repayment rate of approximately 35% and a CDR of 9% in 2007 . COCO has a low 20's repayment rates and hi gh teens 2-year cohort default rate and a 3-year coho1 default rates well north i of30%.
1
Robert MacArth ur m1acarth ur@a ltresearch.com
203-244-5174 w 203-215-3843 c August 20, 2010
(44% is doUars). IPEDS completion/graduation rates and CDRs are based on the number of students/borrowers. In FY07, APOL had 9,941 (the numerator) botTowers in default out of 106,702 borrowers in repayment (the denominator), yielding a 9.3% CDR. 2 Why is there such a disparity between the 38% repayment figure on one hand, and the 9.3<Yo CDR for APOL in FY07? The repayment rate reported by the DOE includes students in deferment and forbearance, which isn't in the CDR calculation. 5 Could there actually be 241,000 more students in repayment (347k-106k) than investors are led to believe? Further, at 241,000 x $1,000 per loans being paid, AIR would be $241M. Reported AIR is $261M. Coincidence? We think not. The new repayment rate metric inc1udes the total amount ofloans repaid divided by the original outstanding balance of ALL Federal loans entering repayment in the prior 4 fiscal years. APOL has already indicated to investors that preliminary 2008 cohort default rates to be released in mid-September 2010 will be ovet 10% vs. high s ingle digits in the prior years. We think the 2008 CDRs in 3 weeks will surprise investors and come in 15%-20%. The CDR manipulation and the A/ R is effectively a teeter-totter. If APOL has been paying off loans on behalf of students to keep their cohort default rate down, at some point, it is no longer an economically viable altemative, especially in a weak economy, where putting students into collections y ields lower returns. The recent rise in bad debt expense, 5.4% of revenue vs. 3.4% in the previous quarter, signals noncollection. Therefore, the company is becoming handcuffed in its ability to maintain an artificially low default rate. Last quarter net A/R grew twice as fast as revenue. As of May 31" 2010, Gross A/R was $409M less $184M allowance for doubtful accounts vs. $269M in May 2009 less $99M allowance. We could actually see accounts receivable decline and have that be a negative to the company, not a positive as is typically the case. It would indicate a lower risk tolerance and lower rate of paying down student loans. We spoke to a fotmer UOP emollment cou nselor about this practice. According to source, when a student <hops out they are put into "CCC." This is the company's internal collections agency. Source indicated that when students <hop, "CCC" sends the money back to the lender and puts the student s into coUection-including for the Pell amounts that were disbursed. Source believes this to be illegal. How much of this the school is entitled to, we can't say. Source indicated that all students, Pell Runners or otherwise, that drop end up in CCC. Intemally, the emollment and academic counselors are prevented from talking to CCC. Given om belief that APOL's drop-out rate is north of 50%, we believe that repayment rates are close to or equal to the graduation/ completion rates of 10%, not the 44% repayment being reported. Also included in ED's repayment rate measurement and not in the CDR measurement are consolidation loans issued in place of the original federalloans. " On its Monday morning pre-market conference call te: ED's tepayment rate data, STRA's management vociferously contested the inclusion of consolidation loans in the tepayment tate measure. STRA's management contends that since the original/undedying fedel'a] loans
http://wdcrobcolp0 l .ed.gov/CFAPPS/COHORT /cohortdata detail.cfm?Record 1D=4963&record= l &datarates.rec ordcount=J 3 See GIE Rule published 7/26/10, at page 21 of I 65 (text doc) or at column 3 of page 43619 in Federal Register publication: " Other bOJTOwers who are meeting Lheir legal obligations but are not actively repaying their loans, such as those in defe rment or forbearance, are not considered lobe in repayment." 4 See G/E Rile published 7/26/10, at page 34 of 165 (text doc) or at column 2 o fpage 43622 in Federal Register publication: "LPF (loans paid in full) would be loans to the program's students that have been paid in full. However, the LPF would not include any loans paid through a consolidation loan until the consolidation loan is paid in full. "
2
2
Robert MacArthur m1acarthur@altresearch.com 203-244-5174 w 203-215-3843 c August 20,2010
are first discharged before a new, consolidat ion loan for the temammg outstanding amount owed on the original loans is issued to the borrower, consolidation loans should not be considered in the repayment rate calculation. Under the CDR calculation, a default on a consolidation loan is not counted against the school fot which the borrower took out the original fedetal loans. We think it entirely reasonable to believe that default and debt management services utilized by companies in the space foist consolidation on borrowers, in order to keep CDRs misleadingly low. Why APOL's Repayment Rates are Overstated- Select Quotes6 (Russ v. UOP) "Although each student withdrew from UOP within weeks of emolling, they attended long enough to incm some amount of tuition related debt that UOP was entitled to debit fiom the students' federalloans. Although UOP was in possession of each student's federal loan money, rather than debiting the amount owed for tuition, UOP, without the knowledge or consent of the students, and without standing to do so, cancelled the loans, returned the federal loan monies to the lenders and immediately theteafter sought to collect the outstanding amount directly fiom the students." "The manner by which UOP returned federal loan monies for educational services rendeted is neither mandated nor permitted by applicable federal rules. Indeed, the HEA requires the opposite-a borrower is entitled to the applicable percentage of loan funds earned prior to a student's withdrawal 34 CFR 668.22(e)(2)." "By returning a student's loan money to the lender, UOP effectively pays offthat student's loan, eliminating the student's contractual obligation with thei1 lender. Rather than eradicating the debt on their books, however, UOP then seeks to collect dllectly fi:om the student the amount owed for tuition that it should have satisfied with federal loan money." "In addition to the fact that UOP had no right to interfere with a contract between a student and a third par-ty lender, UOP also does not have the right to seek a payment directly fiom a student who has chosen, with UOP's ass.istance, to pay fm his/her education by using federal loans. Doing so deprives students of the benefits of the terms on which they bonowed money (i.e. low interest and a six month grace period in which to star-t paying) and saddles them with an immediate debt and payment terms which were never acceded to by the student by contract or otherwise. Unsuspecting students are routinely bombarded with calls, letter and e-mails fiom UOP to collect tuition along with thleats that refusal to pay willresult in referral to collection agencies and negative repm-ts on their credit." The TCI Playbook- Excerpts fi'Om IG t-epot-t (italics added)
On May 19th, 2008 the OIG published an audit ofTechnical Career Institutes, Inc. TCI paid the lenders $440,487 to pay off the FFEL loans received by SOl students (~ 10% of all students) who withdrew during their first semester at TCI. TCI received a total of $20,541,317 in Title IV funding, which included $10,572,764 in Pell Grants and $8,881,954 in FFEL. The IG review disclosed that (1) TCI improperly paid $440,487 to FFEL lenders to pay
offits students' loans and prevent their default;

FINDING NO. 1 - TCI Improperly Paid Lenders to Reduce Its Cohort Default Rates.
5
Angela Russ v. University of Phoenix, case number 9:2009-CV-00904, Central District Califomia.
3
Robert MacArthur m1acarth ur@a ltresearch.com 203-244-5 174 w 203-215-3843 c August 20, 2010
TCI paid the lenders $440,487 to pay off the FFEL loans received by SO 1 students who withdrew during their first semester at TCI.6 For 5 of the 1S students in our random sample of withdrawn students. 7 TCI then attempted to collect the loan amounts from its students by entering into repayment plans scheduled to begin 150 days after the end of the students' last semester at TCI. None of the five students in om sample made payments within 150 days. TCI mru:ked the students' accounts as delinquent and sent the debts to an outside collection agency. According to TCI officials, TCI implemented its defaultpreventionpolicybecause it had problems with it$ cohort default rates in prior years, and it wanted to reduce its cohort default rates to maintain its Title IV eligibility. For fiscal years (FYs) 1992 through 1995, TCI's cohort default rates exceeded 25 percent. Based on these rates, TCI would have lost its eligibility to participate in the FFEL and Direct Loan programs if it had not prevailed in its appeals. TCI instituted its default prevention policy in November 1994. 8 As a result of TCI's payments on its students' loans, TCI's students were denied access to the FFEL loan funds to which they were entitled. This could have harmed the students by damaging thei r credit (when their outstanding balances were referTed to outside collection agencies) and by denying the students access to the terms of FFEL Program loans, including grace periods, low-cost repayment plans, deferments, forbearances, cancellations, and other benefits. TCI may have retained its eligibility for Title IV programs improperly. TCI compounded the denial when it employed collect ion agencies to collect charges from students that had pteviously been sat isfied with FFEL funds. TCI's terms of repayment were not as generous as those for repayment of a FFEL loan. As the most substantive example, under TCI's terms of repayment, a borrower was considered to be in default if he or she did not begin making payments within 150 days after he or she ended attendance. It takes about 600 days for a borrower to default on a FFEL loan after the student ends attendance. 9 All of the students in our sample defaulted on their obligations under TCI's loan terms; it is much less likely that they would have defaulted under the tenns for FFEL ptogram loans. TCI incorrectly calculated the return of Title Jv. We reviewed files for SO withdrawn students and found that TCI incorrectly determined the withdrawal date used in the retmn of Title IV calculations. We found that, for 15 of SO randomly sampled students (50 percent), due to incorrect withdrawal dates. Hendow Qui Tam Docmnent Requests Defaults Info. ' 0
We identified a total of 1,502 students who withdrew from TCI during the period under review. Our original sample for the return of Title 1V funds included 30 withdrawn students: 13 students who had FFEL loans and/or other Title IV funding, and 17 students who did not have FFEL loans but had other Title IV funding. 8 For FY 1995, TCl 's original cohort default rate was 33.4 percent, but after an appeal it was revised to 24.7 percent. 9 For most borrowers, default occurs after 6 months in a grace period, then 60 days during which the lender schedules the first payment, then 270 days of delinquency on the loan by the bonower, and after that, an average of about 90 days for the default claim to be fi led and paid (34 C.F.R. 682.200(b), 682.209(a)(2) and (3), and 682.406(a)). 1 Case 2:03-cv-0457-GEB-DAD Filed 4/28/2009 Document 271
7
4
Robert MacArthur m1acarthur@altresearch.com 203-244-5174 w 203-215-3843 c August 20,2010
Interestingly, a relevant quote in the thousands of pages of Hendow filings, "Relators seek a designee who can testify on behalf of UOP about the "Defaults: The default rates of UOP students, default rate tracking, measurement of defaults, any steps UOP takes (including but not limited to purchasing student loans and Default Aversion Programs) to limit defaults [emphasis added] or steps short of default such as delinquency." (Clearly, the Relators has some cursory knowledge of an internal scheme to lower the company's default rate). Page 6 UOP refused to comply, saying it would only supply a witness that could speak to the company cohort default rate, and "not the extensive data UOP maintains as to actual default rates." [emphasis added] ''UOP has access to default data that extends well beyond the two year "cohort default" period used for its government reporting, and discovery concerning UOP's knowledge of actual default rates is critical to Relators' ability to calculate one measure of restitutionary damages." "Moreover, the high actual [italics part of document] default tates by UOP students provides further evidence that UOP is running an illegal enrollment mill, whose incentive-based corporate culture ... " COCO EPS Report- CDR's On the Rise
Although we believe that om default management efforts have slowed the rate of increase for the 2009 cohort, current trend information indicates that cumulative defaults have trended substantially higher for the 2009 cohort of students comprued with t he 2008 cohort at the same time last year. lnformation curTently available also indicates that the number of our OPEIDs which could exceed DOE's 25% cohort default rate threshold for the 2009 cohort will be substantially higher than for the 2008 cohort. In the 2008 cohort, nine of our OPEIDs exceeded the 25% threshold. We expect the higher two-year rates for the 2009 cohort to translate into elevated three-year rates for the same cohort. We thus expect a majority of om OPEIDs to exceed the 30% threshold under the three-year measurement for the 2009 cohort. Schools cannot be sanctioned under the three-year measurement methodology until 2014 (the year the 2011 cohort data will be final) on either the 30% ot 40% thresholds, and we will aggressively pursue default mitigation efforts between now and then.
5
Robert MacArthur m1acarthur@a ltresearch.com 203-244-5 174 w 203-21 5-3843 c August 20, 2010
APOL's Consume Information Guide Re: Graduation Rates "
GRADUATION RATES
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Disclaimer This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.
http://wv.rw.phoenix.edu/content/dam/altcloud/doc/about uopx/Universitv-of-Phoenix-Consumer-InformationGuide-2009-20 I O.pdf
11
6
Robert MacArthur m1acarthur@altresearch.com 203-244-5174 w 203-215-3843 c August 20, 2010
From: To:
Robert MacArthur <nnacarthur@altresearch com> Woodward, Jennifer Wittman, Donna 'Serra Joanna'
CC:
Date: Subject:
9/22/201 0 11 :28:20 AM
Industry Overview
Equily I United States 1 Business, Education & Professional Services 22 September 2010
BankofAmerica~
Merrill Lynch
Hearing to focus on student outcomes, debt & revenue
As has been widely anticipated, the Senate HELP (Health, Education, Labor and Pensions) committee will hold its next hearing on for-profit postsecondary education institutions on Thursday, 9/30 at 10am ET, according to an article in Inside Higher Ed. The article notes that the hearing will focus on student outcomes, debt, and for-profits' revenue sources. The head of the committee, Senator Tom Harkin (D-IA), has been leading the charge against for-profits. He had requested significant amounts of data from all of the publicly traded for-profits and 15 private schools, which were due on 8/26 and 9/16. We expect this data to be used in the hearing. To date these hearings have had a highly negative tone towards for-profits. At the last hearing, Senator Harkin said that hearings could continue into November/December.
Sara Gubins Research Analyst MLPF&S sara.gubins@baml.com DavidChu Research Analyst MLPF&S david.j.chu@baml.com David Ridley-Lane Research Analyst MLPF&S david.ridleytane@baml.com
+1 646 855 1961
+1 646 855 2589
+1 646 855 2907
Table 1: BofAML ratings vs. consensus Ticker APOL CECO No. of %breakdown BofAML Rating opinions Buy Neutral Sell Buy 22 59% 41% 0% Neutral 17 47% 41% 12% coco Underperform 15 6% 67% 27% Buy CPLA 18 59% 41% 0% DV Buy 22 59% 41% 0% EDMC Underperform 16 33% 61% 6% ESI Underperform 19 42% 53% 5% Neutral 10 44% 56% 0% LINC LOPE Buy 11 82% 18% 0% LRN Buy 9 67% 33% O"k STRA Buy 17 43% 50% 7% UTI Neutral 11 36% 55% 9%
Source: Bloombe<g
Legislative risk would decline under a Republican led House

Senators Harkin and Durbin (O-IL) have been very vocal about their concerns around for-profits and have called for legislation, though no specific proposals have yet been made. We think the likelihood of legislation passing this year is low, and mid-term elections will be an important factor in the outcome. In our view, a Republican-controlled House would lower the risk of particularly negative legislation going through. Some have become hopeful that positive legislation for the sector around gainful employment might be possible if Republicans take the House - this strikes us as less likely if the Democrats retain control of the Senate.
Not counting on a delay in gainful employment (GE)

With 80k+ comments coming in on GE including opposition to GE from at least 48 House Democrats according to The Hill, stocks have rallied on the hopes that GE could be delayed past the 11/1 deadline. A delay is possible, but we believe the Department of Education's (DOE) goal is still to publish final regulation by 11/1, including GE. The DOE must review all of the comments and include responses to major themes raised in the final regulation. Our published estimates - now the low on the Street in most cases -assume GE goes through largely as proposed & schools begin to adapt rapidly. Please see our recent note for highlights of our expectations and assumptions: Education: lowering estimates and ratings. APOL is top pick.
DC-related risk remains key overhang; Apollo is top pick

We continue to recommend a select group of postsecondary education stocks that have strong businesses and value propositions for students & investors. Apollo, our top pick, should fare well on gainful employment. We li ke its increased focus on quality and note that consensus already incorporates flat earnings in FY 11. The next company-specific catalyst for APOL will come on 10/13 when it reports 4Q (August) earnings. We also continue to recommend Grand Canyon, DeVry, Capella, and Strayer.
Merrill lynch 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 of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 7 to 9. Analyst Certification on Page 5. Price Objective Basis/Risk on page 3. link to Definitions on page 5. 1091~s1
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Table 2: Education Valuation Metrics PO Basis CYPE 12E

NA 111 NA 17.3 7.9 4.2 11.4 14.0 12.0 8.5 5.8 14.8 10.5 10.3
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NR $62 NR $83 $21 $5 $51 $8.50 $23 $54 $14 $195 $19 NA 23% NA 17% 0% -21% 14% -25% 9% -18% 9% 23% -1% $489 $6,194 $771 $1 ,107 $1 ,332 $619 $2,915 $2,666 $950 $2,277 $334 $2,047 $408
10E 11E 12E 10E 11E 12E 10E

20.3 16.5 14.1 9.5 9.7 9.0 8.2 6.5 5.7 19.1 16.3 14.7 7.2 7.6 7.9 3.9 4.8 5.3 10.6 10.4 10.0 6.8 12.2 18.6 16.6 13.0 11 .0 5.9 6.8 10.4 5.2 5.3 5.3 16.0 13.5 12.0 14.0 12.1 10.7 11.0 10.4 10.4 9.0 4.2 3.6 9.5 3.1 1.9 5.6 4.1 8.0 3.5 2.3 8.5 5.5 5.3 7.2 4.3 2.8 7.8 3.2 2.3 5.3 5.8 6.1 4.1 2.4 7.4 4.8 4.9 6.3 4.0 2.5 6.9 3.4 2.5 5.0 7.6 5.1 6.0 2.3 6.6 4.4 4.8 2.5 12 1.1 2.6 0.6 0.3 14 1.0 2.3 1.4 0.5 3.2 0.9 1.5
11E
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Avg. Short Int. For. PIE as %of SO

34 17 12 29 19 21 24 13 23 18 17 28 25 21 11% 8% 17% 14% 12% 29% 4% 5% 8% 6% 22% 29% 6%
Net Cash/Sh. Current

$4.53 $4.76 $3.39 $11 .30 $3.86 -St18 $4.47 -$7.43 $0.32 $3.77 -$0.32 $10.28 $2.39
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POSTSECONDARY American Public Ed. APE I NR NR $30.40 Apollo Group APOL B-1-9 Buy $50.37 Bridgepoint BPI NR NR $16.28 Capella $70.79 CPLA C-1-9 Buy $21 .08 Career Education CECO C-2-9 Neutral Corinthian Colleges COCO C-3-9 Underperform $6.31 DeVry DV B-1-7 Buy $44.79 Education Mgmt. EDMC C-3-9 Underperform $11 .28 Grand Canyon LOPE C-1-9 Buy $21.08 ITT ESI C-3-9 Underperform $65.67 $12.87 Lincoln LINC C-2-9 Neutral $158.45 Strayer STRA B-1-7 Buy $19.26 Universal Tech. lnsl. UTI C-2-9 Neutral Average
pre-K-12 K12, Inc.
LRN C-1-9
Buy
$28.58 $1,139.78
$30
5%
$820
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Source: CECO excl. tmnsitional schools. COCO rcnects continuing operations. LINC excludes three closed schools. APOL has an August FY end. COCO and DV have a June FY end. UTI has Sept. FY end. Source: BolA Merrill Lynch Global Research Estimates, Rrsteall, Company Reports. APE I & BPI estimates based on consensus. 0-R-0: Volatmty: A- Low, B- Medium, and C- High. Investment ratings reflect the analyst's assessment of a stock's: (~absolute total return potential and {ii) attractiveness for investment relative to other stocks within b C overage Clustet: 1 - Buy (total return of at least 10% and are the most a~ractive stocks in the coverage cluster - less than or equal to 70% of cluster); 2 . Neutral (expected to remain flat or increase in value and are less a~raotive than Buy rated stocks - less than or equal to 30% or coverage cluster), 3. Underperforrn (least attractive stocks in a coverage cluster . greater than or equal to 20% of clusterj. lncome ratings: indicatorn or potential cash dividends, are: 7 same/higher {dividend considered to be seoureJ: 8 sameJ!ower (dividend not considered to be secure); and 9 pays no cash dividend.
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22 Sep tember 20 10

Apollo Group (APOL)
Our $62 target is based on 11x CY12E EPS, a significant discount to Apollo's average forward multiple of 16x. We apply a discounted multiple given broader regulatory risk and two key company specific overhangs - an informal SEC inquiry into revenue recognition and its transition to a higher degree/higher quality mix which will limit growth in FY11 as it rolls out its orientation program. Risks are: 1) SEC informal inquiry around revenue recognition practices. 2) Uncertainty in future growth as APOL shifts towards higher level programs. 3) Greater competition and limited growth in APOL's core working adult market. 4) Headline and regulatory risk. 5) Legal risks. 6) Concerns about the federal and private student lending markets, though this issue has largely subsided.
Capella Education (CPLA)

Our $83 price objective is based on 17x CY12E EPS, below its 28x historical forward multiple. While this represents a premium to its peer group, we believe a premium multiple is warranted given the company's pure online model, less countercyclical nature, margin expansion potential and attractive position from a regulatory perspective. Risks are: 1) Gainful employment risk 2) Funding risk: changes in corporate tuition reimbursement programs are a risk. 3) Increasing competition in the online education market as market growth slows. 4) Popularity of programs. 5) Increasing mix of bachelors degree students could dilute revenue per student and lower graduation rates. 6) Capella operates in a highly regulated sector and is currently awaiting the outcome of a Federal Student Aid review of its financial aid.
Career Education (CECO)

Our $21 PO is based on 8x our 2012 EPS estimate and is a discount to peers given the continued regulatory overhang around the Dept. of Education gainful employment proposal. Risks to our price objective are: 1) execution risk, 2) higher than anticipated costs and decreased cash flow associated with internal financing of students, and 3) headline, regulatory, and legislative risks.
Corinthian Colleges Inc (COCO )

Our $5 PO is based on 4x CY12E, a significant discount to COCO's 3-year historical forward multiple of 17x. Despite historically low valuations, we believe it will be difficult for the stock to work until more clarity is gained on company specific issues (see below) and on the broader regulatory overhang. Risks are: 1.) one of its regionally accredited schools potentially losing accreditation, 2.) cohort default rates continuing to rise or starting to fall, 3.) execution risk around operational changes, 4.) higher/lower than anticipated costs and decreased/increased cash flow associated with internal financing of students, and 5.) broader regulatory and legislative risks.
DeVry Inc (DV)

Our $51 PO is based on 11x CY12E EPS of $4.47, below its 20x average 3-year forward multiple, given the broader regulatory overhang facing the sector. We remain positive on its balance of focus on quality, long-term growth potential, diversification and attractive valuation in our view. However, we believe upside could be limited near-term given the broader regulatory overhang facing the sector.
3
CR

22 Sep tember 20 10
Risks are 1.) potential negative impact of any regulatory or legislative changes, 2.) faster than expected decline in enrollment trends, 3.) pressure on DV's countercyclical segments as the economy improves, 4.) declining job placement rates, 5.) integration risk of recent acquisitions, 6.) increasing competition.
Education Manage ment Corporation (EDMC)

Our $8.50 target is based on EDMC achieving 7x CY12E EV/EBITDA. We remain impressed by its operations and growth prospects from online and new campus openings. However, we think it will be hard for the stock to deliver upside until there is more clarity around the impact of GE given its exposure and as a result of the broader heighted legislative risk for the sector. Risks are: 1) higher/lower-than-anticipated costs and decreased/increased cash flow associated with internal financing of students, 2) disruptions in federal loan availability, 3) relatively high tuition levels, 4) slowing market growth and increasing competition in the on-line education market, 5) continued popularity of programs, 6) headline and regulatory risk, including the recently-disclosed qui tam action.
Grand Canyon Education (LOPE)

Our $23 PO is based on 12x CY12E EPS, a discount to forecast growth given the broader regulatory and legislative overhang as well as the DOE program review. We continue to believe LOPE is a high-growth high-quality story and that it is well positioned vs peers on key regulatory risks given low tuition & low default rates. Risks are: 1) execution risk, 2) slowing market growth and increasing competition, 3) popularity of programs, 4) heavy reliance on federal financial aid, 5) regulatory risk, including an Office of Inspector General investigation, a DOE program review and a false claims lawsuit, and 6) the broader legislative overhang.
ITT Educational Services (ESI )

Our $54 PO is based on ITT achieving 9x CY12E, a deep discount to its 14x 3year historical forward multiple. The multiple accounts for slowing demand trends and gainful employment risks, which will likely limit a return to more robust historical valuation multiples near term . Risks are 1) gainful employment risks: could result in tuition cuts or elimination of programs, 2) higher/lower than anticipated costs and decreased cash flow associated with internal financing of students, 3) any disruptions in federal loan availability, 4) increasing competition and relatively high tuition levels vs peers, 5) limited online presence in a market in which online is the fastest growing segment and 6) ITT operates in a heavily regulated sector.
K12 (LRN)
Our $30 PO represents 25x CY1 1 EPS of $1.18, a discount to our 30% five-year EPS CAGR. While our target multiple for K12 is not low in the absolute, we believe the earnings growth rate justifies a high multiple of current earnings. Risks are: 1) execution risk, 2) operating in a niche market, with increasing competition, 3) operating in a heavily regulated and political sector which requires approval to operate in any state and often growth caps, 4) funding risk as K12 has minimal control over government-regulated funding per pupil, and 5) concentrated revenues in several key states.
4
CR

22 Sep tember 20 10
Lincoln Educational Services Corp (LINC)

Our $14 price objective is based on 6x 2012E EPS. Our price objective represents a significant discount to Lincoln's 15x historical forward 3 year multiple. We believe a discount is warranted given potential for slowing enrollment growth in shorter-term vocational programs as the economy improves, the broader regulatory overhang, and execution risk around its new initiatives. Risks to the price objective are weaker-than-forecast auto enrollments, a slowdown in demand for health science programs, slowing enrollment growth in an improving economy, broader regulatory and DC concerns, and execution risk.

We believe Strayer should continue to warrant a premium multiple to the peer group given its growth prospects, superior profitability and strong track record. We also believe its is well positioned on gainful employment from a debt service to income perspective, despite low repayment rates. Our $195 price objective is based on a multiple of 15x our 2012 EPS estimate of $13.22. Risks are: 1) changes to the industry business model from gainful employment, 2) execution as the company scales and enters new markets and rolls out a new global online operations center, 3) increased competition, 4) increased regulatory scrutiny, and 5) longer-term DC risks.
Universal Technical Institute (UTI)

Our $19 price objective is based on 11x our CY12 EPS estimate of $1 .77. While we are not as positive on the longer-term story which remains heavily focused on automotive and lacks program diversification in our view, we see less risk at these valuation levels. Specifically, we believe UTI has minimal exposure to gainful employment risks. Risks are: company's concentrated automotive/transportation curriculum, execution risk around curriculum overhaul and new campus expansion, and regulatolry risks.
Link to Definitions
Industrials
Click here for definitions of commonly used terms.
I, Sara Gubins, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.
US-Business, Education & Professional Services Coverage Cluster Investment rating Company
Apollo Group Capella Education Corporate Executive Board DeVry Inc Ecolab Inc Grand Canyon Education
BofAML ticker
APOL CPLA EXBD DV ECL LOPE
Bloomberg symbol
APOLUS CPLAUS EXBDUS DVUS ECLUS LOPE US
Analyst
Sara Gubins Sara Gubins David Ridley-Lane Sara Gubins David Ridley-Lane Sara Gubins
BUY
5
CR

22 September 2010
US-Business, Education & Professional Services Coverage Cluster Investment rating Company K12 Manpower Resources Connection Strayer Education Inc. TrueBiue
Career Education CB Rtchard Ellis Group Inc Jones Lang LaSalle Inc Lincoln Educational Services Corp Universal Technicallnstitute
BofAML ticker LRN MAN RECN STRA TBI

CECO CBG JLL LING UTI
Bloomberg symbol LRN US MANUS RECNUS STRA US TBIUS

CECOUS CBGUS JLLUS LING US UTI US
Analyst Sara Gubins Sara Gubins Sara Gubms Sara Gubins Sara Gubms
Sara Gubins Sara Gubtns Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins
NEUTRAL
UNDERPERFORM
Corinthian Colleges Inc Education Management Corporation ITI Educational Services Robert Half International
coco
EOMC ESI RHI
coco us
EOMCUS ESIUS RHI US
6
CR
22 Sep tember 20 10
Investment Rating Distribution: Education & Training Services Group (as of 01 Jul2010) Coverage Universe Count Percent lnv. Banking Relationships Count Percent 60.00",{, Buy 10 55.56% Buy 6 Neutral 6 33.33% Neutral 5 83.33% Sell 2 11.1 1 % Sell 2 100.00% Investment Rating Distribution: Global Group (as of 01 Jul2010) Coverage Universe Count Percent lnv. Banking Relationships Percent Count Buy 1922 54.14% Buy 1042 59.85% 24.62% 874 Neutral Neutral 496 62.78% 21.24% Sell 754 Sell 362 51.86% * Com panies in respect of which MLPF&S or an affiliate has received compensation for investm banking services within the past 12 months. For purposes of this distribution, a stock ent rated Underperformis included as a Sell. FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RA T/NGS, indicators of potential price fluctuation, are: A- Low, B- Medium and C- High. INVESTMENT RATINGS reflect the analyst's assessment of a stock's: (Q absolute total return potential and (iQ attractiveness for investment relative to other stocks within its Coverage Cluster(defined below). There are three investment ratings: 1 -Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a stock and the firm's guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst's view of the potential price appreciation (depreciation). Investment rating Buy
~~
Total return expectation (within 12-month period of date of initial rating) 2: 10"/o
~~
Ratings dispersion guidelines for coverage cluster* :5 70",{,

s~
Underperform N/A ~ 20",{, Ratings disperstons may vary fromtime to time where BofAML Research beheves it better reflects the investm prospects of stocks in a Coverage Cluster. ent
INCOME RATINGS. indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8- same/lower (dividend not considered to be secure) and 9- pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock's coverage cluster is included in the most recent BofAML Comment referencing the stock.
Price charts for the securities referenced in this research report are available at http://pricecharts.ml.com, or caii1-888-ML-CHART to have them mailed.
MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, Grand Canyon, ITT, K12, Lincoln, Strayer, Universal Tech. MLPF&S or an affiliate was a manager of a public offering of securities of this company within the last 12 months: Education Mgmt The company is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: Apollo Group, Career Education. Corinthian Coli, DeVry, Education Mgmt, Grand Canyon, lincoln. MLPF&S or an affiliate has received compensation from the company for non-investment banking services or products within the past 12 months: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, ITI, K12, Lincoln, Strayer, Universal Tech. The company is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, ITI, K12, lincoln, Strayer, Universal Tech. MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months: Apollo Group, Career Education, Corinthian Coli, DeVry, Education Mgmt, Grand Canyon, lincoln. MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company or an affiliate of the company within the next three months: Apollo Group, Career Education, Corinthian Coli, DeVry, Education Mgmt, Grand Canyon, ITT, Universal Tech. MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the company on a principal basis: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, Grand Canyon, ITT, K12, lincoln, Strayer, Universal Tech. The company is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: Apollo Group, Career Education, Corinthian Coli, DeVry, Education Mgmt, ITT, Strayer. The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Bank of America Corporation, including profits derived from investment banking revenues. Merrill lynch is affiliated with an NYSE Designated Market Maker (DMM) that specializes in one or more securities issued by the subject companies. This affiliated NYSE DMM makes a market in, and may maintain a long or short position in or be on the opposite side of orders executed on the Floor of the NYSE in connection with one or more of the securities issued by these companies: Corinthian Coli, K12
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From: Rob MacArthur <rmacarthur@altresearch com> To: Rob MacArthur CC: Date: 11/23/2009 11 :28: 14 AM
Subject:
This research belongs to a competitor of mine. I alluded to the 3rd year calculation change in Philadelphia speech. It would be nice if the Department actually release defaults in the third year.
y T :
Washington , DC November 23, 2009
For-Profit Education: Regulatory Outlook Part II

New cohort default numbers could be a negative for the group (especially certain companies such as COCO, LINC and Kaplan), simply because they don't screen well given our analysis of the new 3-yr cohort default rates (CDRs). We believe cohort default data could be moderately significant for two reasons: (1) it would be the first time the Department of Education (DOE) has released such numbers; and (2) the numbers are coming from the DOE, which furthers the bear case that the more the DOE knows, the worse things will get. We see the real trade in the group will be in the draft rules we expect from the DOE next week, NOT in the final rules. If the rules come in less onerous than expected, that will set the floor in expectations. If the rules are onerous, it turns into a 'it can't get much worse from here' thesis. Of the two coming data points, 3-year CDRs and a preliminary rule from the DOE, the CDR numbers could come first and then the DOE rule. EXJSTING RULES. Existing rules pose a near-term threat to Title IV funds and enrollment. Cohort Default Rates Cpe. 2). The new method of calculating cohort default rates (CDRs) established last year by Congress (effective 2012) could make several institutions vulnerable to sanction by the DOE for the first time (see Figures 6-8). Our analysis of moving from the current 2-yr CDR window to the new 3-yr CDR window shows that 25% of LINC's, 47% of COCO's, 50% of APOL's, and 60% of Kaplan's institutions could come under some form of DOE sanction, including the possible loss of Title IV eligibility. In addition, the DOE may try to give schools a benchmark of where they stand by releasing provisional 3-year CDR data as early as this week (in advance of the DOE's Fall Conference in Nashville- December 2-4, 2009).
90/10 Rule Cpe. 8). The % ofrevenues derived from federal student aid is expected
)arrel Price 202-629-0003 jprice@heightanalytics.com Andrew Parmentier 202-629-0002 aparmentier@heightanalytics.com
to trend up in 2010 and in order to avoid losing Title IV eligibility, we expect vulnerable schools (see Figure 11) to rely on mitigation strategies that could impact enrollment growth and bring increased congressional scrutiny.
Recent Research
Audits & Proeyam Reviews fpe. 10). The DOE is awarding contracts to improve its ability to review financial statements from for-profits and the DOE's Inspector General is pursuing examples of fraud exposed in the August 2009 GAO rep01t on for-profit schools.
October 26, 2009, "For-Profit Ed: Negotiated Rulemaking Committee May Examine Advertising" October 22, 2009, "For-Profit Ed:
NEW RULES (front-end). Risk will be driven by investor sentiment around the release of Support Expressell on For-Profit CFPA Amendment; Vote Today" the draft rule and the fina l set of regulations issued 1Q-2Q10. Coneress (pe, 11), Near-term organic congressional action is unlikely and we think a catalyst/news event will be needed to make for-profit legislation a sufficiently imp01tant political priority. In the absence of better alternatives, there is growing pressure to accept another 90/10 Rule "fix" in the education reform bill (SAFRA). Neeotjated Rulemakine (pe. 11), We do not have good visibility heading into the draft rule next week, but based on what we saw during NegReg Session One, gainful employment (see page 13) and incentive compensation (see page 15) represent the greatest threats to the for-profit business model. A brief analysis of all 14 NegReg topics can be found on page 16. NEW RULES (back-end). Rather than singling out the for-profit industry for direct regulation, Congress appears more comfottable addressing some of the after effects (especially indebtedness) that come from high cost loans and current economic conditions. Coneyess (PI: 17). Congress will consider several proposals to regulate private student loans in an etlort to help students who receive a poor ROI and are stuck with debt loads they can't repay (e.g. CFPA/Treasuty oversight, discharging in bankruptcy, private debt "swap," etc).
Height Analytics, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.heightanalytics.com
October 16, 2009, "For-Profit Ed: Amendment Proposes CFPA Oversight of For-Profit Loans" October 15, 2009, "For-Profit Ed: Hearing Recap- Congress Looks to DOE for Robust Rulemaking" September 24, 2009, "Education Finance: Congress to Examine Changes to Bankruptcy Law
y T :
EXISTING RULES
Cohort Default Rates - Macro Factors & 3-yr Calcu1ation Cou1d Pressure Enrol1ment Summary: Last year, Congress authorized a new cohort default rate (CDR) calculation that will
increase the default rates evaluated by the DOE. The Higher Education Opportunity Act (HEOA) of 2008 increased the CDR window from 2-yrs to 3-yrs. The legislation also changed the CDR thresholds used to determine Title IV eligibility (see Figure 1).
Figure 1. 2-yr & 3-yr CDR Comparison

2-YearCDR
Current law
Release Dates
Draft FY09 -2/2011 Final FY09 -9/2011
Penalties
CDR> 25% =provisional status CDR >25% for 3-years =loss of Title IV eligibility CDR >40"-1> =loss ofTitle IV eligibility
I FXQ9 j I FY!9J
FY09 1
3-YearCDR
HEOA changes effective 2012
l FY09 -j I FY10 -j. FY11 j

FY09
Draft FY09-2/2012 Final FY09 -g/2012
J
The denominator is the number of borrowers who enter repayment within a cohort period
CDR> 30% =develop default prevention plan CDR> 30% for 3-years =loss of Title IV eligibility CDR >40% =loss of Title IV eligibility
._l_......,J
-
The numerator is the number of borrowers from the denominator's cohort who default within a given year
Sources: Department of Education, Height Analytics LLC
To partially offset the new 3-year calculation, HEOA 2008 also increased the threshold default rate from 25% to 30%. If a school exceeds the 30% CDR in any given year, it must provide the DOE with a plan to reduce their CDR. If a school remains over 30% for three consecutive years, it may be deemed ineligible for Title IV programs. Separately, if a school exceeds 40% CDR in any given year, it is deemed ineligible for Title IV programs. The DOE calculates CDRs and issues sanctions based on unique DOE ID#'s that are issued to "main campuses" (some schools have several, others have only one).
~The
new 3-yr CDR could pressure enrollment growth. Schools with high CDRs will have to change their enrollment strategies to recruit a student body with a lower risk of default. We expect that ending open enrollment and moving up-market will have a negative impact on enrollment growth. In addition, the new 3-yr window will limit options commonly relied on by schools to manipulate their CDR data (see page 5). Regulators are focused on student outcomes; new CDRs could bring unwanted scrutiny. Given that Congress is intently focused on ensuring a good RO l for students, we think lawmakers will have a very negative opinion of these new CDR estimates (see page 5). During the October 14, 2009, hearing on for-profits, lawmakers were divided about whether higher default rates should be blamed on the ownership structure or whether they more accurately reflected the demographics and default risk of the student body (see Figure 2).

975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.height analytics.com
y T :
~gu re2 . CDRsbyTyp e o_ ln ti t__i_ n__________________~ ~__f __s__ ut o_

12.0% 10.0%
8.6% 9.7%
11.0%
a: :; 4:!
0
"' n;
8.0% 6.0%
"' t::
Q
8 4.0%
2.0% 0.0% 2003 Cohort 2004 Cohort 2005 Cohort Public 2006 Cohort For-Profit 2007 Cohort
.s:
Private Non-Profit
Congressional scrutiny could increase, however, when new lifetime default data starts circulating around Capitol Hill (see Figure 3). DOE's budgetary lifetime default rate (based on the projected o/o of dollars entering default) shows lifetime defaults at 2-yr for-profit institutions >40% (these lifetime default rates will now be provided to Congress each December).
1 gure 3 Sta nd ard 2 -yr CDRs & Burge t L' fe f Ime De f;au ltRa t es d 1
Cohort Yr 2003 Cohort Yr 2004 CohortYr 2005 Cohort Yr2006 Cohort Yr 2007 Oefualt Rate Defualt Rate Defualt Rate Defualt.Rate Defualt Rate
Traditlona/2-Year Window CDR (based on BORROWERS) '
Private Non-Prof it Public For-Profit Public and Private Non Profit (2-yr.) For-Profit (2 yr.)
2.8% 4.3% 7.3%
3.0"/o 4.7% 8.6%
2.4% 4.3% 8.2%
2.5% 4.7% 9.7%
3.7% 5.9% 11.0%
Budget lifetime Defualt Rate (based on DOLLARS) 2
25.8% 39.9%
26.5% 38.6%
26.8% 38.0%
26.7% 40.8%
N/A N/A
Sources: Department of Education, He1gllt Analyt1cs LLC
Traditional 2-yr window CDR - Under current law, the DOE evaluates each institutions' CDR by the number of FFELP and DLP borrow ers who enter repayment during a particular federal fiscal year and then default during that same year or the next fiscal year (a 2-yr window). 2 Budget lifetime default rate- Projected % in .!12.ll.aG oftl1e FFELP and DLP loans originated in a particular tisca l year and that may default during a projected 20-year life of the loan period.
New 3-yr CDR calculation will significa ntly increase default rates. Using FY04 data, the DOE projected the impact of moving from a traditional 2-y r CDR to a 3-yr and 4-y r window (see Figure 4). The DOE estimate shows that moving to a 3-yr window increases CDRs at for-profi t institutions by 94.2% and moving to a 4-yr window increases CDRs at for-profits by 170.9%.

975 F Street NW. Suite 520 - Washington, DC 20004 - 202.629.0000 - www.heightanalytics.com
y T :
. Jgure4. DOEEst1mates f<or 2-yr, 3 -yr, & 4-yr CDR W"ndows (using FY2004 data) I
Cohort Yr 2004 Default Rate
Overall 2-YearCDR 3-YearCDR 4-YearCDR
Private Non-Profit Public For-Profit

2- Year Schools
3.0"..6 4.7% 8.6%

2-YearCDR
4.7% 7.2% 16.7%

3-YearCDR
6.5% 9.5% 23.3%

4-YearCDR
Private Non-Profit Public For-Profit 4- Year Schools Private Non-Profit
7.4% 8.1% 9.9%

2-YearCDR
12.2% 12.9% 19.5%

3-YearCDR
16.2% 16.6% 27.2%

4-YearCDR
2.8% 4.5% 6.2% Public 3.5% 5.3% 7.1% For-Profit 7.3% 13.7% 19.2% .. Sources: Government Accountability Office (GAO), He1ght Ana/yt1cs LLC
This FY04 data suggests that the rate of increase in defaults slows overtime (94.2% increase from years 2 to 3, but an increase of only 39.5% from years 3 to 4). Additional cumulative default rate data found in the DOE's Office of Federal Student Aid (FSA) FY09 Annual Report (released November 16, 2009) seems to confirm the notion that the most pronounced increase in default rates is in the first several years of repayment Figure 5 shows the percentage increase in default rates slow as you move from the 2nd year of repayment to the 6th year.
" 1 gure 5% .::1 m Dfau ts bIY Length e 0
Enters Repayment
2()()() 2001 2002 2003 2004 2005 2006 1.4 1.5 1.5 1.2 1 1.1 1.2 1.1
fR epay ment (Cumul ative Li fetime DefauJts1 )

YrSto Yr6 0.9 1 1 0.9
Yr2to Yr3
Yr3to Yr4
Yr4to
'((5
1.8 2.1 1.9 1.8
Sources: DOE's Office of Federal Student A1d, He1ght Anu/ytiCs LLC

1
Cumulative lifetime default rates track loans not borrowers like the traditional CDR calculation (or the budgetary lifetime default rate, shown in Figure 3, which is based on dollars). Therefore, cumulative lifetime default rates are typically much lower than CDRs used to sanction schools by the DOE.
Although this seems to confirm that default rates slow over-time, the rate is still increasing. Outlook; Based on current FY07 CDR data, none of the for-profit institutions we examine are over the regulatory threshold of 25% CDR, however, our estimates for a 3-year CDR window (increasing each institution's FY07 CDR by 94.2%) shows that 25% of LINe's, 47% of COCO's, 50% of APOL's, and 60% of Kaplan's institutions could come under some form of DOE sanction (see Figures 6 & 7). Although the DOE sanctions schools by the institution, Figu re B shows the % of borrowers who attend vulnerable institutions. These institutions represent 32.2% of LINe's borrowers, 49.7% of COCO's borrowers, 16.9% of APOL's borrowers, and 37.2% of Kaplan's borrowers. This analysis provides a good indication of how important vulnerable institutions are to revenues and how easy/difficult it will be for companies to reduce averages by transferring high CDR programs to institutions with lower CDRs.
Height Analytlcs, LLC
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Impact of Changing to a Cohort Default Rate (CDR) with a 3-Year Window

7 Data)
ure 7. Breakdown oflnstitutions & Their 3-yr CDRs
20
3yr CDR
j t0 +--------------------- ------------1-------------------------'- -----------1
~ $ -~--~--------------------O L_je-_~ I [ 1_~._____-.,. .c.-JIWI ~=ui

APEI APOL BPI CECO COCO CPLA DV ESI LINC LOPE STRA UTI WPO
I-(1) (l) (3)
().9.9%
10-19.9% e20.29.9% 3().39.9% 40-49.9%
(2)
(2)
(2)
(17)
(38)
(1)
(8)
(29)
(20)
(20)
Companies and the #of DOE Recognized Institutions
8. % of Borrowers at Institutions Over 30% and 40% Thresholds

.:Z0.29. 9'J6 CDR
30-39.996 CDR
Sources: Department of Education Height Analytics LLC

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Enro11me nt Threat- Default Ra tes Trend i ng Up & CDRs More Difficult to Manipulate Summary: Historically companies have been able to manipulate their CDRs with relative ease to avoid DOE sanctions. However, the longer 3-yr window will make it more difficult for these default rates to be altered. Furthermore, job loss (likely through lQlO), and the subsequent lag in the unemployment rate, can only serve to compound growing default rates.
Risk: In the past, schools have been able to push defaults beyond the 2-year window by helping students secure forbearance and deferments so that defaults would not be included in the official CDR calculation. It will be increasingly difficult for schools to manipulate their CDRs tmder the new calculation because schools will have to "max out" delays to push defaults beyond the 3-year window. In addition, Figure 8 shows that, given the large number of students affected, it could be very difficult for some schools to move a sufficient munber of programs with high CDRs to other institutions to reduce their overall average. Further, we expectCDRs to increase in coming years due to a combination of factors including: macro economic/unemployment outlook, aftereffects of a wave of loan consolidations, increased student borrowing, and decreased availability of forbearances.
Fi ~re
9. U.S. Unem 1oyment Rate

...... Unemployment Rate
12% E
11%
10%
9%
6%
4%
3%
2%
0 0 0 0 "' "' "' ..... "' 0"' 0"' "' "' 00 0 0 00 0 0 0 0 "::? ~ ~ ~ ...... ~ ~ ~ "::? "::? < < 0 s < < ~ a s "' ... .... .... "' ...
N
0 0
..
0 0
... ... ... ...

0 0
< % a ....
0 0
0 0
"::?
"'
0 0
00
< < "' ...
0 0
00
0 0
00
"::? ......
~
0 0
00
0 0 0 "' 0"' "' 0 0
< < .....
"'
"::? ...... 0
N
0 0
"'
....
Source: Bureau of Labor and Statistics
As shown in Figure 9, the recent upward trend in unemployment didn't start until 2008. Therefore, associated defaults are only partially accounted for in the 2-yr window of the FY07 CDRs shown in Figure 10.

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~gu re
25.00% 20.00%
15.00%
10. Historical CDRs

2 2.40%
- -H-:-20_.%' " - - - _ _ . . . , . , . - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~60 ~----------------------
10.00% 4.50% 5.00% 0.00%
--
---6~ 70%
1987 1988 1989 19 90 19911992 19 93 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Cohort Default Rate
Sources: Department ofEducation, Height Ana/ytics LLC
In his November 19, 2009 report titled, "Economic & Market Outlook: Good Enough, Considering," our Chief Strategist Steve East wrote that despite looking for nonfarm payrolls to turn positive in the first half of 2010 (likely around the end of 1Q10), he still thinks it will be a long time before the unemployment rate reaches a politically acceptable level. East notes that assuming current population growth trends and assuming a stable labor force participation rate, employment growth of 115,000 per month would merely keep the unemployment rate stable at 10.2%. Continued unemployment will likely pressure student loan default rates as we push further into FY08, FY09 & FY10 CDR data. Even if the DOE doesn't release the 3-yr CDR data in the coming weeks, the companies shown to be vulnerable in our analysis will have to work aggressively to reduce their default rates; thus pressuring enrollment. Also, draft FY08 CDR numbers (released in February 2010) are expected to show a significant uptick in default rates and several schools that we follow could face DOE sanction. COCO's 1Q10 earnings call (October 29, 2009) provided some evidence of the potential increase in next year's FY08 CDR data. Despite most of COCO's institutions showing FY07 CDRs in the mid- to upper-teens, the company signaled that internal estimates for FY08 showed 10-12 of their institutions crossing the 25% regulatory threshold.
Outlook: Given high default rates among dropouts, increasing completion rates is a good way for schools to improve their CDRs. In addition to working with current students, schools will likely increase pre-enrollment screening to boost graduation, job placement, and loan repayment rates. We expect that ending open enrollment and moving up-market will have a negative impact on enrollment growth (schools will be less inclined to attract "starts" who are at risk of dropping out just to inflate their enrollment numbers).
Schools may appeal sanctions based on mitigating circumstances (e.g. servicing a disproportionately low-income student body), however, it remains unclear if appeals will be a legitimate option for any of the for-profit schools we follow.

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90/10 Rule- Expected Upward Trend in 2010 Could Have Unappea ling Consequences
.s.wnm.arx.;. In order to receive Title IV funds, ~10% of revenues at for-profit schools must come from
private funding sources (non-federal student aid monies). Economic conditions and other factors have lead 90/10 ratios to trend upward, putting some schools in jeopardy of crossing the allowed threshold (see Figure 11). Under current law, if a school violates the 90/10 Rule for two consecutive years, it may be deemed ineligible to received Title IV funds.
R.Wi;. During a recent investor conference, APOL Co-Chief Executive Officer Chas Edelstein
highlighted the unintended consequences of the 90/10 Rule when he stated that if APOL comes in jeopardy of crossing the 90% threshold, "[the company] would definitely consider raising prices." The 90/10 Rule "fixes" described below should provide some relief for the most vulnerable schools. On the other hand, if Congress decides to regulate private student loans (see page 17), access to private sources of funding decrease and we would expect students to rely more on federal student aid; increasing the 90/10 risk for some schools.
Outlook: Last fall Congress passed a 90/10 Rule "fix" that excluded some federal loans from the
calculation and lawmakers are now considering a second "fix" that Rep. Robert Andrews (D-NJ) added to the House version ofSAFRA (the legislative outlook of this 2nd "fix" is discussed on page 11). Both "fixes" would provide some relief for the schools. However, 90/10 ratios are expected to trend up in 2010 and we think vulnerable schools (see Figure 11) will have to consider mitigation strategies including: raising tuition, promoting private loans, lending internally to students, partnering with employers and the armed services, andjor moving up-market to reduce reliance on Title IV funding. Most of these options could be expected to pressure enrollment and/or increase congressional scrutiny.

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Figure 11. 90/ 10 Per ce ntages by Ins titutio n

Company College/University Title IV Revenues Dat e. of Report Notes/Trends The company reports that most of its institutions range from UNC Uncoln Education 69.7-89% 69.7-89%(except for Briar wood College which has a ratio of 12/31/08 45.5%). The ratios are not broken out by institution. The company estimates that the 2008 HEOA 00/10 Rule fix wi ll drop their Title IV generated revenues to 81.3%. The 6/30/09 ratios are not broken out by institution. 12/31/08 The company estimates that the 2008 HEOA 00/10 Rule fix could drop Title IV revenues 50 -300 bps. Company expects it APOL DV BPI CECO DV LOPE DV DV CPLA University of Phoenix Ross University University of the Rockies Career Education Apollo College Grand Canyon University Western Career College DeVry University (undergraduate) Capella University 86.0% 81.0% 80.8% 80.0% 79.0% 78.6% wil l continue to trend toward 90%in 2010and says it will 8/31/09 employ measures to avoid violating the rule. Company says that YOY increase (-5-10%) due to increased 6/30/09 Title IV loan limits. 8/11/09 The company reports thatthis ratio is up from 67.2% YOY. The 9/30/09 ratios are not broken out by institution. Company says that YOY increase ("'5-10'/o) due to increased 6/30/09 Title IV loan limits. 12/31/08 Company says that YOY increase ("'5-10'/o) due to increased 6/30/09 Title IV loan limits. Company says that YOY increase ("'5-10%) due to increased 6/30/09 Title IV loan limits. 12/31/08 Only a 1% increase YOY. The company expects an upward trend in its 00/10 ratio due to increased ntle IV limits/borrowing and the economic ESI UTI STRA ITITech Universal Technical Institute Strayer University 62-75% 70-74% 72.0'/o 12/31/08 downturn. 9/30/08 The ratios are not broken out by institution. The company reports that its 00/10 ratio is unchanged at 72% 12/31/08 from 2007 numbers. Company says that YOY increase ("'5-10'/o) due to increased
coco
BPI
Corinthian Colleges Ashford University
88.9% 86.8%
77.0'/o
75.0% 75.0'/o
DV Chamberlin College of Nursing 62.0'/o 6/30/09 Title IV loan limits. APOL Western International University 57.0'/o 8/31/09 APE I American Public University System 14.0% 12/31/08 TI1e ratios are not broken out by institution. * Note: The 00/10 Rule fix contained in HEOA 2008 is not represented in these numbers. These ratios could decrease once the DOE issues fina l rules for the calculation and companies apply the fix to their calcu lations.
Sources: Company Reports, He1ght Analyttcs LLC
Height Analy tics, LLC

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Audits & Program Reviews - DOE is Improving Its Financial Analysis Capabilities
Summa~:
The DOE is finalizing a contract award for a financial analysis consultant to help improve its ability to evaluate financial statements from for-profit institutions (solicitation #: EDOFSA-09-R0046). The DOE's RFP, issued July 9, 2009, outlined a contract with five major areas of focus: (1) identify financial and other performance strengths, wealrnesses related to trends of reviewed companies; (2) identify potential accounting irregularities or fraud in the financial statements of the audited companies; (3) identify if any of the companies are in distress or approaching insolvency; (4) identify risks to these companies and provide a means to forecast financial distress and insolvency; and, (5) training for DOE staff. stated goal of the contract is to help the DOE "ensure that these [for-profit education] companies are able to continue to provide contracted services to students and remain current with financial obligations in a highly competitive environment that is under pressure to meet shareholder demands." During NegReg Session One, the DOE commented that one of the primary objectives of the new rules will be to provide its enforcement arm with more capacity to audit bad actors. In addition, during the October 14, 2009, House Education and Labor hearing on for-profits, the DOE Office of Inspector General promised to follow-up on the examples of fraud cited in the August 2009 GAO report
~The
Outlook: Given congressional interest, high-profile media reports, and growing pressure to maintain enrollment figures, it is reasonable to assume that DOE audits and program reviews will continue and possibly pick-up in frequency over the next 12 months.

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NEW RULES (Front-end)
.s.wnm.arx.;. We have witnessed that regulators generally approach options to regulate the for-profit
sector differently based on whether the measure is preventative with up-front implications for the business model or if the proposal is reactionary and just treats the symptoms.
Risk: There is a wide variety of preventative rules that regulators could ultimately adopt, ranging
from disclosures aimed at preventing ill-informed enrollment decisions by students, to more robust restrictions on Title IV funding, marketing spend, incentive compensation, lending practices, and even tuition costs.
Outlook: Historically, the for-profit industry has been sheltered from onerous front-end regulation, at least in part, due to fears that restrictions would reduce access to higher education. However, support is growing in Congress and the DOE to develop a new front-end regulatory structure that ensures a better ROI for students and taxpayers. Regulators are focused on establishing new methods of evaluating ROI for students and taxpayers. See below for an analysis of potential front-end regulation from Congress and the DOE's NegReg.
Congress- For-Profit Action Unlikely Before 2Q10, 90/10 Rule "Fix" Gaining Support
Summary: The education committees have little bandwidth for anything other than healthcare this fall and, based on our conversations with Washington sources, direct regulation of the for-profit sector prior to the release of the NegReg's final rule does not appear likely.
~Even
heading into 2 H10, we think preventative congressional action will have to be driven by some external catalyst/news event (in our opinion, there is a greater likelihood that Congress will take a back-end approach to address indebtedness and private loans - see page 17).
QpJ:look; As mentioned above, Congress is increasingly focused on ensuring ROI (e.g. completion, job placement, indebtedness, post-graduation wages), but key offices remain undecided on how to improve the oversight of outcomes. There is widespread criticism that the 90/10 Rule is no longer a good measure of school quality, but there is also a noticeable lack of alternatives. Therefore, despite initial opposition, the Senate is under increasing pressure to accept a 90/10 Rule "fix" in the final version ofSAFRA in order minimize tuition hikes and other undesirable outcomes.
DOE's Negotiated Rulemaking - Draft Rule Will Kick-Start Negotiations
Summarv: The DOE's NegReg process will result in new regulations for the space. However, many of the 14 topics (see Figure 12) are apt to result in disclosure-based rules that may marginally increase the cost of compliance, but won't fundamentally change the business model or impair enrollment growth. That said, investors should not discount the threat because: the DOE wants to develop an outcome-based regulatory structure; the DOE recognizes that its rules are outdated; and, based on our experience in Washington, recent congressional interest may pressure the DOE to issue a fair but tough rule to help stave-off legislative action (witness the Fed's recent rule on overdraft fees after years of inaction, at least in part, due to the threat of legislation from congressional banking committees). See Figure 17 for a brief analysis of all14 NegReg topics.

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F' 1gure 12 Neg1Reg T OplCS

Negotiated Rulemaking Committee Topics
1. Satisfactory academic progress 2. Incentive compensation 3. Gainful employment in a recognized occupation 4. Verification of infonnation included on a Free Application fm Federal Student Aid (FAFSA) 5. State authorization as a component of institutional eligibility 6. Misrepresentation of information provided to students and lprospective ~"tudents 7. Definition of a credit hour 8. Ability to benefit 9. Agreements between institutions of higher education 10. Retaking coursework 11. Institutions required to take attendance for purposes of the Rerum of Title IV Funds requirements 12. Term-based module programs 13. Definition of a high school diploma for purposes of establishing eligibility to receive Federal student aid 14. Timeliness and method of disbursement of Title IV funds
Sources: Department ofEducatiOn, Hetght Analyttcs LLC
Risk: The NegReg analysis below highlights the two topics we think present the greatest potential risk to the for-profit sector: gainful employment and incentive compensation.
Outlook: We are not far enough into the NegReg process to make a high conviction call whether the regulations present a genuine threat to margins and enrollment. Our thesis continues to develop based on the tmderstanding that the DOE strikes first by issuing a draft rule next week that will be consistent with its priorities (former negotiators have made it clear that the DOE will not be impartial during this process). However, Kaplan's Elaine Neely (the industry's lone representation) showed during NegReg Session One that the minority can take a lead role in these proceedings and we expect her to be a sizeable force for moderation.
F' 1gure 13 T' rme o fN egJRegan dC ongressronalAcf ron rme

Date
Event
Description
Consultant to improve DOE's evaluation of for-profit financial statements (EDOFSA-09-R-0046) Despite initia l opposition, the Senate is under increasing pressure to accept a 90/10 Rule "fix" in the final version of SAFRA The DOE hopes to release a draft rul e 1-week prior to Session Two of the NegReg. Drafl rule could be released section-by-section Negotiators debate and suggest changes to the DOE's draft rul e The DOE hopes to release an updated rule 1-week prior to Session Three of the NegReg Negotiators debate and try to reach unanimous consent on each or the 14 topics Negotiators must reach unanimous agreement or DOE can develop its own regulatory language- published in Federal Register Federal Register announcement will solicit public comments DOE considers publ ic comments and develops final rul e published in Federal Register The Master Calendar prohibits implementing these rules before july 1, 2011
DOE 1-"inancial Analysis 4Q09 -lQlO (approx.) Contract Award Introduction of Senate 4Q09 (approx.) Education Reform Bill Week of Release of Draft NegReg Rule November 30, 2009 December 7 11, 2009 NeaRea Session Two Week of Release of Updated Draft january 18, 2009 NegRegRule january 25-29, 2010 NegReg Session Three 1Q10 (approx.) Proposed Rule
1Q10 - 2Q10 (approx. Public Comment Period November 1, 2010 Final Rule (or earlier) July 1, 2011 (or later) Final Rttle Effective Date
Source: Department of Educatton, Hetght Ana/yttcs LLC
TimelinejProcess. The DOE will release draft regulations (probably piecemeal) as soon as the week of November 30. Negotiators will then amend this rule during the December 7-11 and january 25-29 NegReg sessions. If the NegReg Committee fails to reach unanimous consent on the 14 topics, the DOE is authorized to rewrite anyfall of the rules (in practice they will likely accept any approved topics as-is). Although the process gives a structural advantage to the minority, the for-profits are incentivized to broker a deal wherever possible to avoid giving a blank check back to the DOE. Dissent could also come from consumer advocate and former-California Deputy Attorney General Margaret Reiter. Past NegReg negotiators have commented to us that attorneys are notoriously
12
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problematic in efforts to reach consensus. Based on what we witnessed during NegReg Session One and the controversial nature of these topics, it is difficult for us to see how the Committee will reach unanimous consent on several of the topics.
Gainful Employmen t- Top Priority for the DOE, but Logistical Nightmare
Summary: Under current statute, all for-profit programs and vocational offerings at not for-profit institutions must demonstrate that they provide training towards "gainful employment in a recognized occupation" in order to maintain their Title IV eligibility (see Figure 14). While schools have had to associate their programs with a Department of Labor database of "recognized occupations," the DOE has never defined "gainful employment"
Figure 14. Institutional Eligibility for Federal Student Aid

Public or Private Nonprofit Institution of Higher Education Privat e For-Profit Institution of Higher Education Postsecondary Vocational Public or Private Nonprofit Institution
Program offered: must Rrovide training for gainful emRIOlment in a Program offered: recognized occuRation, and must meet the criteria of at least one category below. ( 1) Associate, bachelor's, graduate, or professional degree, or (2) At least a two-year program that is acceptable for full credittoward a bachelor's degree, or
{3) At least a one-year training
{1) Provides at least a 15-week (instructional time) undergraduate program of 600 clock hours, 16 semester or trimester hours, or 24 quarter hours. May admit students without an associate degree or equivalent. {2) Provides at least a lD-week (instructional time) program of 300 clock hours, 8 semester or trimester hours, or 12 quarter hours. Must be a graduate/professional program, or must admit only students with an associate degree or equivalent.
{3) Provides at least a lD-week (instructional time) undergraduate
program that leads to a degree or certificate (or other recognized educational credential) and prepares students for gainful employment in a recognized occupation.
program of 3Cl0-599 clock hours. Must admit at least some students who do not have an associate degree or equivalent, and must meet specific qualitative standards. Note: These programs are eligible only for FFEL and Direct Loan participation. "Two-Year Rule" (applicable to proprietary and postsecondary vocational institutions)- Legally authorized to give (and continuously has been giving) the same postsecondary instruction for at least two consecutive years. 90/10 Rule (applicable to proprietary institutions)- Derives no more than
900/o of its revenues from FSA funds. Note: Cohort Default Rates (CDR), Satisfactory Academic Progress (SAP), and other DOE thresholds can affect a school 's ability to participate in FSA programs, but the above criteria determine the eligibility of an institution .
Sources: DOE's 2009-2010 Federal Student Aid Handbook, Height Analytics LLC
.R.Wi;, The DOE's NegReg Issue Paper on gainful employment (released prior to NegReg Session One),
proposed tying Title IV eligibility to a federal definition of gainful employment that included criteria such as: tuition, fee charges, indebtedness, and expected earnings. Such a federal definition of gainful employment could pose a significant threat to enrollment at schools regardless of ownership structwe (current statute would apply the definition to for-profits and other vocational programs). The DOE may also propose moving to the latest Department of Labor database to evaluate
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"recognized occupation," but we do not think such a systems upgrade will have a material impact on reporting standards. Outlook: There is genuine interest at the DOE to tie Title IV eligibility to a federal definition of gainful employment, but given the implementation challenges, we think the easiest path forward for the DOE could be requiring gainful employment discloswes to help prospective students develop "reasonable outcome assumptions." Challenges to implementing a federal standard for gainful employment include: maintaining a system agile enough to account for economic downturns; ability to track post-graduation wages; flexibility to evaluate the wide variety of programs offerings; sensitivity to student privacy issues.
FigureR~~f:~s:~~=t::::s in)Congress & the DOE

...._________,""-Source: HeiBh t Ana/ytics LLC
taxpayers
Outcomes
Gainful Employment ____;...____---
The slide below will be used to explain the NegReg process during the DOE's Fall Conference in Nashville (December 2-4, 2009). The DOE is not expected to go in-depth about the definition of gainful employment, but we have been told that the DOE added the emphasis shown below because they consider gainful employment one of the most important topics before the NegReg Committee (see Figu re 16).
Figure 16. Slide to be Used During DOE's Fall Conference (Session #29, Slide #8)
l}~i
~eg
Reg Includes Consumer P1otection

.:ng~g~J
ln.:cmi\ c ~oompcrNttion 1>:ud b~ irhntmim" to perwrt or <:ntilics
m \tudl.lltt rc1.'t\lrtmg M trdtnt>-\iPil n~o'lh tti .. -,.
Gainful employment in a recognized occupation

<;tate nutbortL:allon as ;r ~umpom:nt of nl>lttutumal dtgibihty ()elirlcllont)f ~rcdu hour -lo d~tenmriC J>ngrom di!!tbtlit~
p~rti.:ularlyin the OO>IIextnfu"anlin~ !'ell (or:m" \"en!i~31lO!l
'"'ttr;...
o( lllt(lnuati<m tnclu\lcd o)ll ;nrdcn! aldapphcllll('lb
I hgh ,dwol JipJ,,rmt-k-liniuon a_, ;1 conJili<'n >f re.:dving F<'<l<'r:tl

:>ntlcnt Aod
Source: DOE O ffice of Federal St udent Aid
We think there are two primary hurdles that the DOE will have to overcome if they are to offer a federal definition of gainful employment in the draft rule set to be released next week: 1) the DOE will have to manage to create a system to evaluate gainful employment in the three weeks since NegReg Session One; and, 2) the DOE will have to be able to adequately separate definitions of gainful employment for vocational and degree-based programs at for-profits (as shown in Figure 14, the statute would apply the definition to all for-profit programs).
975 F Street NW. Suite 520 - Washington, DC 20004 - 202.629.0000 - www.height analytics.com
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Finally. if the DOE proposes a federal definition of gainful employment in the draft rule, we think a unified front of opposition could emerge among the schools because the standard would be applied to their vocational programs as well. Therefore, we would expect negotiators to push back and try to move the DOE's proposal toward the middle.
Incentive Compensation- Rules on Lead Generation Could Pressure Enrollment
Summar : In 2002, the DOE carved 12 safe harbors out of its general prohibition on incentive compensation for recruiting, enrollments, or other admissions activities. The NegReg Committee is now debating whether these safe harbors opened the door for abuse and whether some, or all, should be scaled back/eliminated.
In particular, two safe harbors protect incentive compensation for 3rd party non-recruiting activities (e.g. marketing and advertising) and internet recruiting (defined as people who, "provide information about the institution to prospective students, refer prospective students to the institution, or permit prospective students to apply for admission on-line." According to the DOE, incentive compensation payments to 3d party lead aggregators are not restricted under current law.
Risk: The risk is that DOE will eliminatejscale back safe harbors in a manner that restricts schools'
ability to generate leads and recruit on-line (both important for continued enrollment growth). Scaling back the safe harbors that allow incentive compensation for Internet-based recruiting and 3d party non-recruiting cou ld increase the cost of enrolling each student. Changing the safe harbor for Internet recruiting could harm one of the least expensive forms of recruiting. Scaling back or eliminating these safe harbors could also have a negative impact on partnerships with lead aggregators; driving up costs-per-lead (CPL) and, ultimately, per-enrollment These changes could become especially problematic if schools are forced to increase reliance on marketing spend to offset declines in organic starts due to reputation damage.
Outlook: While not for-profits and public institutions also rely on lead generation and voiced some
concerns about restricting all types of pay-per-click advertising, the DOE is clearly interested in updating the safe harbors to reflect the technological advances since 2002. Our sources suggest that internet recruiting practices may face increased restrictions, but that traditional schools will help protect several kinds of web-based advertising. Ultimately, the impact on internet recruiting and lead generation from the elimination/scale-back of safe harbors will be determined by two factors: (1) if the DOE scales back the safe harbors in a manner that threatens lead generation; and, (2) if public and not for-profit schools join the for-profit industry in opposing restrictions on web-based pay-per-click advertising during the NegReg sessions. We do not think the DOE is interested in eliminating all of the incentive compensation safe harbors, but there remains some risk that the NegReg could recommend changes that would make it increasingly difficu lt for schools to offset churn and maintain recent enrollment growth.
See below f ora brief analysis ofa/114 NegReg topics.

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ew - D ra ft RuI e Pr ev1ew 1gure 17 Neg1 eg Rev1 R

Issue
1. Definition of a High School Diploma 2. Abilit y-to-Benefit (ATB) Tests 3. Misrepresentation of Information to Students and Prospective Students
Analysis
Expect some greater oversight to help DOE reduce access to diploma mills. The controversial issue is whether the DOE orthe schools will have to shoulder the burden of authenticating high schools. Ironically, these regs may force schools to increase reliance on ability-to-benefit tests. DOE will increase oversight of how test publishers administer the ATB tests (more frequent re certification requirements). but fears that the DOE would replace the ATB with a more onerous entrance exam appear unfounded. DOE is primarily focused on improving its auditing capabilities to help prevent false claims during recruitment. The DOE is not interested in capping marketing spend. The consumer and student advocates, however, argued that the DOE should require affirmative disclosures (e.g. cost, indebtedness, lifetime default rates, job placement, credit transfers, post-graduation wages, etc.) to help prospective students make "reasonable outcome assumptions." This idea came up again during the gainful employment discussion. Regulation of internet recruiting and lead generation could pressure enrollments. See above. States that do not provide oversight/authorization for proprietary schools increase the opportunity for fraud, but the panel was cautious about mandating state action without state representatives on the panel. There is genuine interest at the DOE to tie Title IV eligibility to a federal definition of gainful employment, but given the implementation challenges, we think the easiest path forward for the DOE could be requiring gainful employment disclosures to help prospective students develop " reasonable outcome assumptions." See above.
4. Incentive Comp. 5. State Authorization
6. Gai nful Employment
7. Definition of a Credit Hour
DOE is considering defining a credit hour for the purposes of distributing Title IV funds because it is concerned that the growing variety of products (e.g. on -line, non-tradiional, accelerated, etc.) has made it difficult to determine what Title IV funds are truly going towards. However, proposals to establish DOE benchmarks for accreditors was met with stiff resistance because accreditors are increasingly relying on outputs/learning outcomes rather than just inputs (i.e. time in a seat).
8. Agreements between Although oversight of these consortium agreements will require further discussion, there is Institutions general consensus that schools receiving Title IV funding should have to provide at least a portion 9. Verification of Information on Financial Aid Apps of the program if it is going to confer a degree bearing its name. Consistent with a broader Obama Administration objective, the DOE may propose simplifying the FAFSA process and synchronization with IRS data.
10. Satisfactory Academic Debate focused on the bizarre ru le that, at some schools, Title IV funds can only be used to retake Progress classes students have failed (you cannot use Title IV funds to retake a class in an effort to improve your grade). The DOE may use this issue to advance a broader administration goal of developing a new completion metric such as "semester-to-semester continuous enrollment" due to a recognition that traditional graduation rates don't account for non-traditional students (part-time, 11. RetakingCoursework transfers, or continuing education) and may not be appropriate for disadvantaged subpopulations. Most of the debate focused on how the DOE might harmonize standards between clock- hour and credit-hour programs. The DOE may establish a maximum length of absence before a student must retake coursework. 12. Return o f Title IV Funds: Term-Based Programs 13. Return ofTitl e IV Funds: Taking Attendance DOE has identified abuse where schools structure very short "module" courses in the beginning of the semester to increase the number of courses "completed" before a student withdraws. The DOE is expected to issue new rules to preserve the spirit and intent of Title IV return policies. Attendance requirements are left to states and accreditors so there is great inconsistency in return policies. Therefore, DOE is considering a federal attendance standard that would level playing
field. It was noteworthy to us that, despite recent investor concerns, attendance policies for on line programs were not a focus of the panel. 14. Disbursements of Title DOE may establish new Title IV distribution requirements to make sure that schools aren't withholding the funds from their students (forcing many students to take private loans in the IV Funds interim). Schools countered that such practices aren't malicious, but are aimed to avoid unnecessary administrative and repayment burdens during high churn periods early in the semester.
Sources: Department of Educattoll, Hmg!Jt AnalytLC LLC S

Height Analy tlcs, LLC
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NEW RULES (Back-end)

Rather than singling out the for-profit industry for direct regulation, there is more support from lawmakers to address some of the after effects (especially indebtedness) that come from high cost loans and current economic conditions. For example, during the otherwise balanced October 14, 2009, House Education and Labor Committee hearing on for-profit schools, Chairman George Miller (D-CA) launched into a harsh criticism of institutional loans: comparing for-profit lending to the subprime liar loan crisis; citing 2Q09 earnings calls during which companies showed their willingness to have losses >50% on institutional loans; and, recommending a watch list for schools with questionable lending practices. In addition, on November 17, 2009, the Government Accountability Office (GAO) sent a report to Congress examining the private student loan market and showed that for-profit students rely on private loans more than their private not for-profits and public institutions counterparts (42.%, 24.3%, and 8.7% respectively).
Congress- Support Growing to Provide Student Debt Relief

Summary: Congress is taking particular aim at private student loans and internal lending practices at for-profit schools. Lawmakers ar e considering bills that would: 1) make it easier to discharge private student loans in bankruptcy; 2) allow certain private student loans to be "swapped" for unsubsidized Stafford loans; and, 3) increasing oversight either through the CFPA or a new jointTreasury /Education ombudsman. Risk: Discharging private student loans could increase 90/10 risk. During a September 23, 2009, House Judiciary Committee hearing, Subcommittee Chairman Steve Cohen (D-TN) announced plans to introduce legislation that would make it easier for students to be released from private student loan debt during bankruptcy. Education and Labor Committee Chairman George Miller has announced support for the measure and Republicans signaled they could be open to a compromise that would lower the "undue hardship" standard that students must show in order to discharge loans. The biggest threat from such legislation, in our opinion, would come from further retreat in the private loan market. Less private loans could reduce the revenue for-profit institutions derive from non-Title IV funding sources, thus increasing the risk that institutions violate the 90/10 Rule. Dischargeability would also likely change the risk profile/ratings for private student loan portfolios. Debt swap could improve recovery rates for lenders and schools. On July 30, 2009, Sen. Sherrod Brown (D-OH) introduced a bill called the "Private Student Loan Debt Swap Act of 2009" (S.1541) that would allow certain students with private student loans to refinance into lower rate unsubsidized Stafford loans (the bill would focus eligibility retroactively to avoid schools andjor lenders gaming the system). If the legislation is evaluated or "scored" by the Congressional Budget Office (CBO) in time (supporters are hopeful that the bill will be scored cost-neutral because of Stafford interest payments), Sen. Brown will try to add the proposal to the Senate education reform bill (SAFRA) that is currently before the Senate. The unintended consequence of such legislation would be 100% repayment on swapped loans for lenders and schools (only loans in good-standing would be eligible). Several plans would expand private loan oversight in the financial regulatory reform package. During the House Financial Services Committee's consideration of the financial regulatory reform package, Rep. Maxine Waters (D-CA) tried to give the Consumer Financial Protection Agency (CFPA)
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explicit authority over internal loans made directly by for-profit schools to their students. Due to an intense lobbying effort, the measwe was narrowly defeated 35 to 33. On November 5, 2009, Sen. Brown was joined by Sens. Mikulski (D-MD), Franken (D-MN), and Bennet (D-CO), in introducing, 'The Private Education Loan Ombudsman Act" (S. 2733). The bill would establish an office in the Treasury Department to resolve complaints, compile data, and make recommendations about private student loans to the DOE, Treasury, and Congress. Sen. Brown will likely try to add this proposal to the CFPA once the Senate turns its sites on financial regulatory reform later this year. Since the Banking Committee is just starting its consideration of the CFPA, it's too early to place high conviction on this proposal, but given that the ombudsman would have no rule malting or enforcement authority, we would consider its adoption relatively benign.

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The legislative and regulatory agendas are subject to change at the discretion of leadership. Unprecedented economic conditions could instigate unanticipated and/or sweeping shifts in policy. Predicting the futur e is a hazardous endeavor and economic I market forecasting is an imprecise science. Actual outcomes may differ substantially from our forecasts. The predictions and opinions expressed herein are subject to change at any time. ANALYST CERT1FICATION I, jarrel Price, certifY that (i) the recommendations and opinions expressed in this research report accurately reflect the research analyst's personal views about any and all of the subject securities or issuers discussed herein and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in the research report I, Andrew Parmentier, certifY that (i) the recommendations and opinions expressed in this research report accurately reflect the research analyst's personal views about any and all of the subject securities or issuers discussed herein and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in the research report. DISCLAIMER This report is intended for the private use of Height Analytics' clients and prospective clients. Reproduction or editing by any means, in whole or in part, or any other unauthorized use, disclosure or redistribution of the contents without the express written pennission of Height Analytics is strictly prohibited. The information contained in this report has been obtained from sources which Height Analytics believes to be reliable; however, Height Analytics does not guarantee the accuracy, completeness or timeliness of any information or analysis contained in the report Opinions in this report constitute the personal judgment of the analysts and are subject to change without notice. The information in the report is not an offer to purchase or sell any security. Users assume the entire cost and risk of any investment decisions they choose to make. Height Analytics shall not be liable for any loss or damages resulting from the use of the information contained in the report, or for errors of transmission of information, or for any third party claims of any nature. Nothing herein shall constitute a waiver or limitation of any person's rights under relevant federal or state securities laws.

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From:
To:
Finley Steve Vierling Chris Hale. Milton Kistler Keith Kolotos, John Kerrigan, Brian 10/29/2009 11 :25:26 AM "The Subprime Student Loan Racket" article
CC: Date:
Subject:
A Stephen Burd article from Washington Monthly http://www. washingtonmonthly.com/features/2009/09ll.burd.html
The Sub prime Student Loan Racket With help from Washington, the for-profit college industry is loading up millions of low-income students with debt they'll never pay off
At the age of forty-three, Martine Leveque decided it was time to start over. For several years, she had worked in the movie business, writing subtitles in Italian and French for English-language films, but her employer moved overseas. She then tried her hand at sales, but each time the economy dipped sales tumbled, along with her income, and as a single mother with a teenage son, she wanted a job that offered more security. She decided to pursue a career in nursing, a high-demand field where she could also do some good. While researching her options online, Leveque stumbled on the Web site for Everest College, part of the Corinthian Colleges chain, which pictured students in lab coats and scrubs probing a replica of a human heart and a string of glowing testimonials from graduates. "Now I know exactly where I am going. And now I'm making very good money," enthused a former student named Anjali B. The school, near Leveque's home in AJhambra, California, offered a Licensed Vocational Nursi ng program that would take her just one year to complete. When Leveque contacted the admissions office, she was told she would receive hands-on training from experienced nurses in state-of-the-art labs with the most modem equipment-including a recently purchased $30,000 mannequin that could simulate the birthing process. She also says recruiters told her that she would be able to do rotations at the University of California, Los Angeles Medical Center, one of the nation 's best hospitals. Leveque was intrigued, though she was initially put off by the $29,000 tuition. But the school's recruiters assured her there was nothing to be concerned about: Everest had an exceptional track record of helping students find employment-they claimed the typical Everest College LVN graduates landed a job paying between $28 and $35 an hour straight out of school. And the school would arrange a financial aid package to cover her costs.
In the end, Leveque decided to enroll. The day she came in to fill out her paperwork, she says, the recruiters rushed her
through the process and discouraged her from taking the forms home to look over. They told her that she would be taking out private loans in addition to federal loans that are traditionally used to pay educational expenses, but did not explain what the terms of those loans would be. "They just kept telling me that ' we're with you,' and that they would try to get me the maximum amount of federal loans allowed," she says. Only later did she learn that those private loans-which made up two-thirds of her "financial aid" package--carried double-digit interest rates and other onerous terms. To make matters worse, the program did not come close to delivering on the promises that had been made. The instructors had little recent medical experience. Instead of really teaching, she says, they usually just read textbooks aloud in class and sometimes offered students the answers on tests ahead of time. On the rare occasions when Leveque and her class were given time in the lab, she found that the equipment was broken down and shoddy-except for the expensive new mannequin, which no one knew how to use. Instead ofthe promised rotations at UCLA Medical Center, her clinical training consisted of helping pass out pills at a nursing home. (A spokeswoman for Corinthian Colleges denied many ofLeveque's allegations, insisting that the company does not condone cheating, that all L VN instructors at Everest College have "at least the minimum qualifications" set by the California Board ofVocational Nursing, and that UCLA Medical Center "is not and has never been" one of the school's official clinical training sites.) Since graduating in 2008, Leveque has been unable to find a nursing job, perhaps because she never teamed how to perform basic tasks such as giving shots. Instead, she works as an occasional home health care aid earning at the most $1,200 a month-not enough to pay her rent on the cramped apartment she shares with her sister and son or keep gas in her car, much less pay off her student loans. As a result, her loan balance has ballooned to $40,000, and she has no idea how she will ever pay it off ''My credit is ruined," Leveque says. "I made one mistake, and I will be paying for it for the rest ofmy life." Leveque's story is far from unique. Each year, more than two million Americans enroll in for-profit colleges, also known as proprietary schools, and their popularity has only grown since the financial crisis. While traditional four-year colleges are struggling with dwindling student bodies and budget gaps, proprietary schools are reporting record enrollments as the newly unemployed try to retool their skills so they can wade back into the job market. Some of the largest for-profit chains say their numbers have doubled over the last year. The students who are flocking to these schools are mostly poor and working class, and they rely heavily on student loans to cover tuition. According to a College Board analysis ofDepartrnent ofEducation data, 60 percent of bachelor's degree recipients at for-profit colleges graduate with $30,000 or more in student loans-one and a halftimes the percentage of those at traditional private colleges and three times more than those at four-year public colleges and universities. Similarly, those who earn two-year degrees from proprietary schools rack up nearly three times as much debt as those at community colleges, which serve a similar student population. Proprietary school students are also much more likely to take on private student loans, which, unlike their federal counterparts, are not guaranteed by the federal government, offer scant consumer protections, and tend to charge astronomical interest-in some cases as high as 20 percent. These figures are all the more troubling in light of these schools' spotty record of graduating students; the median graduation rate for proprietary schools is only 38 percent-by far the lowest rate in the higher education sector. What's more, even those students who make it through often can't find jobs. The reason for this is simple: while some proprietary schools offer a good education, many more are subpar at best. Thus large numbers of students leave with little to show for their effort other than a heap of debt. Not surprisingly, students at proprietary schools are far more likely to default on their loans than those at other colleges. The appalling treatment of disadvantaged students at the hands of proprietary schools ought to be a national scandal, especiaJJy at a time when America desperately needs more college graduates to stay competitive. But the problem has
barely registered in Washington. That's partly because the proprietary school lobby has enough clout among lawmakers on both sides of the aisle to keep the issue quiet. But Congress and the Obama administration have also had their hands full advancing other higher education reforms-in particular, legislation to kick private lenders out of the federally subsidized student loan program. This will create tens of billions of dollars in cost savings that will go toward larger Pell grants for low-income students. But that measure, vital as it is, affects only lending within the federal student loan program. It leaves untouched the private loans that are increasingly being foisted on students like Leveque and the loosely regulated schools that are profiting as a result. he for-profit higher education sector is no stranger to scandal. In the 1980s and early '90s, it came to light that hundreds of fly-by-night schools had been set up solely to reap profits from the federal student loan programs, in part by preying on poor people and minorities. The most unscrupulous of them enrolled people straight off the welfare lines, and got them to sign up for the maximum amount offederal student loans available-sometimes without their knowledge or consent. The rampant abuses caught the attention of the news media, sent shockwaves through Capitol Hill, and led to a yearlong, high-profile Senate investigation led by Senator Sam Nunn, the Georgia Democrat. The standing-room-only hearings had all the trappings of scandal, with trade school officials pleading the Fifth and a school owner, who had been convicted of defrauding the government, brought to the witness table in handcuffs and leg irons. Key lawmakers considered kicking all trade schools out of the federal student aid programs-a virtual death sentence given the institutions' heavy reliance on these funds. But Congress ultimately stepped back from the brink and instead strengthened the Department ofEducation's authority to weed out problem institutions. Under the new rules, for-profit colleges had to get at least 15 percent of their tuition money from sources other than federal loans and financial aid. Also, if more than a quarter of a school's students consistently defaulted on their loans within two years of graduating or dropping out, the school could be barred from participating in federal financial aid programs. The idea was to get rid of those schools that were set up solely to feed on federal funds and didn't provide the meaningful training students needed to get jobs and pay off their debt. As a result, during the 1990s more than 1,500 proprietary schools were either kicked out of the government's financial aid programs altogether or witl1drew voluntarily. In an effort to rein in abusive recruiting tactics, in 1992 Congress also barred schools from compensating recruiters based on the number of students they brought in. These changes shook up the industry. The old generation of trade schools gradually died off and were replaced by a new breed of for-profit colleges-mostly huge, publicly traded corporations. The largest, the Apollo Group, owns the University of Phoenix, which serves more than 400,000 students at some ninety campuses and 150 learning centers worldwide. Others include the Career Education Corporation, which serves 90,000 students at seventy-five campuses around the world, and Corinthian Colleges, which serves 69,000 students at more than 100 colleges in the United States and Canada. Not only did these companies promise that their schools would be more responsive to the needs of students and employers than the previous generation, they also said they would be more accountable to the public because, as publicly traded companies, they were heavily regulated. "We've seen a fire across the prairie, and that fire has had a purifying effect," Orner Waddles, then the president of the Career College Association, told the Chronicle ofHigher Education in 1997. "As our sector has weathered the storms of recent years, a stronger group of schools is emerging to carry, at a high level of credibility, the mantle oftraining and career development."
In reality, the new breed of schools had quite a bit in common with their predecessors; in some cases, they even operated out of the same buildings and employed the same personnel. What's more, rather than making them more accountable, the fact that they were publicly traded created a powerful incentive for them to game the system. After all, to keep their stock prices up and investors happy, the schools had to show that they were constantly expanding, which
meant there was intense pressure to get students in the door and signed up for classes and financial aid. With so much at stake, these schools quickly found ways to skirt the new rules. To get around the caps on student loan default rates, for instance, many of them began hiring agencies to help former students get forbearances or offering lines of credit so alums could make their student-loan payments-but only during the initial two-year window, when defaults were counted against the school by the Department of Education. After that, students were left to wrestle with the debt on their own. As for the rule requiring schools to get at least 15 percent of tuition from nongovernment sources, it had some unintended consequences. Rather than, say, enrolling people who could afford to pay some tuition out of pocket, many schools started pushing students to take out private student loans. Previously, this kind ofloan had gone exclusively to graduate and professional students pursuing careers in high-paying fields like law and medicine. The financially needy students who attend for-profit institutions couldn't qualify for them because of their less-than-stellar credit records, their lousy graduation rates, and their spotty record of finding work in their field. But this began to change around 2000. At the time, college tuition was skyrocketing-a trend that has only accelerated-and federal grants and loans weren't keeping pace. To ftll the gap, financial aid officers started cutting deals with lenders to bring in private loan money. In the case of proprietary colleges, most of the large publicly traded chains forged arrangements with Sallie Mae, the nation's largest student loan company. (Once a quasi-government agency like Fannie Mae, it became entirely private in 2004.) In exchange for pots of private student loan funds that they could dole out at will-meaning without regard for students' ability to repay the debt-the schools gave Sallie Mae the right to be the exclusive provider of federal student loans on their campuses. Lenders vie fiercely for this privilege because federal loans are guaranteed by the government, meaning the Treasury pays back nearly all the money if the borrower defaults. Thus lenders get to pocket generous fees and interest and bear almost no risk. Sallie Mae clearly understood that these private loans were going mostly to sub prime borrowers who might not be able to pay them back; in 2007, Senate investigators uncovered internal company documents showing that executives expected a staggering 70 percent of its private student loans at one for-profit school to end in default Investigators concluded that Sallie Mae viewed these loans as a "marketing expense"-a token sum to be paid in exchange for the chance to gorge on federal funds. From the schools' perspective, it didn't much matter whether students would be able to pay off their debt any more than it mattered if they stuck with the program or graduated with the skills they needed. As long as students were enrolled long enough to be considered a "start," meaning that they attended classes for a week or two, the schools got to keep some of the money, and they got to include students in their official enrollment tally, which gave Wall Street the impression they were expanding. Having a cache of private loan funds to dole out also allowed the schools to clinch the deal right away-no need to grind through a stack of forms or wait for a third party to approve the loan application. Thus recruiters could lock students in before they experienced buyer's remorse. At best, the George W. Bush administration and the Republican-led Congress turned a blind eye to these schemes. At worst, they made it easier for the schools to carry them out. In his first term, Bush packed the Department of Education with allies of the proprietary colleges. Before becoming the assistant secretary for post-secondary education, for example, Sally Stroup worked as a lobbyist for the University of Phoenix. Under her leadership, the agency took the teeth out of regulations that were designed to rein in abuses of the 1990s, including the incentive-compensation ban for recruiters. Not surprisingly, many schools began resorting to hard-sell tactics to bring students in. In 2004, the Department of Education found that corporate bosses at the University ofPhoenix routinely pressured and intimidated their recruiters to put "asses in the classes." At some of the campuses, enrollment counselors who didn't meet their targets were sent to the "Red Room," a glassed-in space where they worked the phones under intense management supervision. What's more, in recent years dozens of former students have filed suits alleging they were misled about classes and programs proprietary
schools offered, as well as about their prospects for graduating and getting jobs in their fields of study. While the seriousness of the abuses vary, in some cases they amount to outright fraud, with recruiters pressuring students to sign up for classes that don't actually exist or to enroll in programs where the instructors lack even basic expertise in the field. The push to get students in the door also created more pressure to steer people into private loans. The frenzy only intensified after Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005. This made it almost impossible for those who took out private student loans to discharge them in bankruptcy and, not surprisingly, turned the private student loan market into a much more appealing target for lenders. sa result of these changes, private loan borrowing has skyrocketed. In the last decade alone, it has grown an astounding 674 percent at colleges overall, when adjusted for inflation. The growth has been most dramatic at for-profit colleges, where the percentage of students taking out private loans jumped from 16 percent to 43 percent between 2004 and 2008, according to Department of Education data. The spike in private loan borrowing is dismal news for students. Unlike traditional student loans, which have low, fixed interest rates, private educational loans generally have uncapped variable rates that can climb as high as 20 percent-on par with the most predatory credit cards. Private loans also come with much less flexible repayment options. BotTowers can't defer payments if they suffer economic hardship, for instance, and the size of their payment is not tied to income, as it sometimes is in the federal program. Private loans also lack basic consumer protections available to federal loan borrowers. With a traditional federal student loan, for example, if a borrower dies or becomes permanently disabled, the debt is forgiven, meaning they or their kin are no longer responsible for paying it off. The same goes if the school unexpectedly shuts down before a student graduates. But none of this is true of private loans. AJso, because it is so difficult to discharge private student loans in bankruptcy, when students take them out to attend schools that provide no meaningful training or skills they can find themselves trapped in a spiral of debt that they have little prospect of escaping. Theresa Sweet, a thirty-three-year-old California resident, took out about $100,000 in private loans between 2003 and 2006 to study photography at the Brooks Institute in Santa Barbara, which is owned by the Career Education Corporation. At the time, she says the Brooks recruiters-who have frequently been accused of misleading students-told her that graduates of their photography program typically made at least $60,000 straight out of school. In fact, since graduating three years ago she has been unable to find paid work in her field, and, while she has managed to get forbearances on her student loans, the interest has continued to stack up. She now owes more than $200,000. Looking back, Sweet admits that she was naive in ttusting the recruiters. But she can't help but wonder how she ever qualified for the loans in the first place, especially given that when she applied she was unemployed. "If it were me, I never would have loaned me the money," she says. "Who in their right mind would lend $100,000 in unsecured debt to an art major?" Like Sweet, graduates of proprietary coll eges often struggle to find jobs in their fields. This is because, in many cases, they don't get the skills they need to compete. After all, it's far easier and less expensive for schools to boost enrollment numbers through aggressive advertising and recruitment than to expend the resources to build quality schools. Corinthian and Career Education, which own the schools Leveque and Sweet attended, have faced the most damning allegations when it comes to educational quality and steering students into shady private loans. Other chains have better reputations on these fronts, among them the University ofPhoenix and DeVry University. But even they have a spotty record of graduating students. or awhil e it looked like the meltdown on Wall Street, and the ensuing credit crunch, would put an end to predatory lending at for-profit schools. In 2008 Sallie Mae quit offering sub prime private loans to students at for-profit colleges because the astronomical default rates had helped throw its stock price into a nosedive. But the proprietary college industry has found a way around this roadblock, namely making private loans directly to students, much the way used-
car lots loan money to buyers rather than going through a third party. For example, in a recent earnings call with investors and analysts, Corinthian said that it plans to dole out roughly $130 million in "institutional loans" this year, while Career Education and ITT Educational Services Inc., another for-profit chain, have reported that they expect to lend a combined total of$125 million. These loans could prove to be even more toxic than the private ones offered by Sallie Mae. This is because some schools are packaging them as ordinary consumer credit, which has even fewer built-in safeguards than private student loans, especially when it comes to disclosure requirements. This makes it easier for schools to mislead borrowers about the terms of the debt they are taking on. In one class-action lawsuit filed earlier this year, former students of Coloradobased Westwood Colleges allege they were duped into borrowing institutional loans at a staggering 18 percent interest. According to the complaint, the college's corporate bosses advise their admissions officers to sign students up for these loans without revealing how costly they are going to be. Thus borrowers don't learn about the steep interest until after they leave school and receive their first loan bill. Worse, the lawsuit alleges that some students have been signed up for loans without their permission. lillian L. Estes, a Florida lawyer who represents the plaintiffs in the case, says she has been approached by two dozen former Westwood admissions representatives who admit that they deliberately avoided telling students about the terms of these loans. "They knew they' d never be able to enroll these students if they were up front with them," Estes explains. (In their written response to the lawsuit, Westwood College officials offered a "categorical rejection" of the allegations brought by Estes and her clients.) Significantly, many proprietary schools are pushing institutional loans even when they know students won't be able to pay them off; Career Education and Corinthian Colleges only expect to recover roughly half ofthe money they distribute through their institutional lending programs, according to communications with shareholders. Why would they lend knowing they won't get the money back? Because any loss is more than offset by federal loans and financial aid dollars, which, despite the surge in private educational lending, still fund the bulk of tuition at proprietary schools. Say a student gets a $60,000 federal financial aid package and supplements it with a $20,000 institutional loan. The school comes out $40,000 ahead even if the borrower ultimately defaults. Plus, getting students in the door pumps up enrollment numbers, which makes for happy shareholders. Meanwhile, as the credit crunch eases, traditional lenders may well go back to making private loans to proprietary school students, especially given the changes afoot in the industry. President Obama aims to get rid of the program that allows lending companies to collect lucrative fees and interest for serving as the middleman on federal student loans and instead have the government offer the loans directly. Once forced out of the federal student Joan program, traditional lenders will have a powerful incentive to seek profits by wading deeper into the private student loan market, and forprofit schools, with their exponential growth, could once again be an appealing target. The good news is that the Obama administration seems more inclined than its predecessor to stand up against the abuses of proprietary schools. In May, the Department of Education revealed that it was considering reversing changes the Bush administration made to weaken the incentive-compensation ban. It is also thinking about adding teeth to the rules requiting proprietary colleges to show that graduates are finding "gainful employment" in their field and cracking down on schools that willfully mislead prospective students. "Our overall goal at the Department of Education in post-secondary education is to make sure that students ... have the information they need to make good choices," Robert Shireman, the deputy undersecretary of education, told financial analysts and investors during a conference call earlier this year. These proposals are a good start, but more steps will be needed. For starters, the Department ofEducation should publish the data that it already collects on the number of students at each school who default over the lifetime of their loans. At the moment, it only releases the number who default during the first two years after leaving college, which is of limited value, not only because this is such a short time span, but also because the rates can be easily manipulated by
schools. Just publishing lifetime default rates would give prospective students a clearer picture of the risks of enrolling in a particular school. But the impact would be far greater if Congress used this data, along with graduation rates, to weed out abusive institutions; ideally, any school that failed to meet a certain threshold should be kicked out of the federal financial aid programs. At the same time, Congress should require companies that offer private student loans to give the same kinds offlexible repayment options and consumer protections as are available through the federal student loan program, including allowing borrowers to repay their loans as a percentage of their income. Lawmakers also need to revisit changes Congress made to the bankruptcy code in 2005, which make it exceeding difficult for financially distressed borrowers, including those with private student loans, to discharge their debt in bankruptcy. These changes would go a long way toward helping people like Martine Leveque escape their mountains of debt and ensuring that future students don't wind up in the same situation. It would also guarantee that taxpayers don't go on bankrolling giant companies that profit by exploiting those who are struggling to build better lives.
From:
To:
Finley Steve Vierling Chris Hale. Milton Kistler Keith Kolotos, John Kerrigan, Brian 10/29/2009 11 :25:26 AM "The Subprime Student Loan Racket" article
CC: Date:
Subject:
A Stephen Burd article from Washington Monthly http://www. washingtonmonthly.com/features/2009/09ll.burd.html
The Sub prime Student Loan Racket With help from Washington, the for-profit college industry is loading up millions of low-income students with debt they'll never pay off
At the age of forty-three, Martine Leveque decided it was time to start over. For several years, she had worked in the movie business, writing subtitles in Italian and French for English-language films, but her employer moved overseas. She then tried her hand at sales, but each time the economy dipped sales tumbled, along with her income, and as a single mother with a teenage son, she wanted a job that offered more security. She decided to pursue a career in nursing, a high-demand field where she could also do some good. While researching her options online, Leveque stumbled on the Web site for Everest College, part of the Corinthian Colleges chain, which pictured students in lab coats and scrubs probing a replica of a human heart and a string of glowing testimonials from graduates. "Now I know exactly where I am going. And now I'm making very good money," enthused a former student named Anjali B. The school, near Leveque's home in AJhambra, California, offered a Licensed Vocational Nursi ng program that would take her just one year to complete. When Leveque contacted the admissions office, she was told she would receive hands-on training from experienced nurses in state-of-the-art labs with the most modem equipment-including a recently purchased $30,000 mannequin that could simulate the birthing process. She also says recruiters told her that she would be able to do rotations at the University of California, Los Angeles Medical Center, one of the nation 's best hospitals. Leveque was intrigued, though she was initially put off by the $29,000 tuition. But the school's recruiters assured her there was nothing to be concerned about: Everest had an exceptional track record of helping students find employment-they claimed the typical Everest College LVN graduates landed a job paying between $28 and $35 an hour straight out of school. And the school would arrange a financial aid package to cover her costs.
In the end, Leveque decided to enroll. The day she came in to fill out her paperwork, she says, the recruiters rushed her
through the process and discouraged her from taking the forms home to look over. They told her that she would be taking out private loans in addition to federal loans that are traditionally used to pay educational expenses, but did not explain what the terms of those loans would be. "They just kept telling me that ' we're with you,' and that they would try to get me the maximum amount of federal loans allowed," she says. Only later did she learn that those private loans-which made up two-thirds of her "financial aid" package--carried double-digit interest rates and other onerous terms. To make matters worse, the program did not come close to delivering on the promises that had been made. The instructors had little recent medical experience. Instead of really teaching, she says, they usually just read textbooks aloud in class and sometimes offered students the answers on tests ahead of time. On the rare occasions when Leveque and her class were given time in the lab, she found that the equipment was broken down and shoddy-except for the expensive new mannequin, which no one knew how to use. Instead ofthe promised rotations at UCLA Medical Center, her clinical training consisted of helping pass out pills at a nursing home. (A spokeswoman for Corinthian Colleges denied many ofLeveque's allegations, insisting that the company does not condone cheating, that all L VN instructors at Everest College have "at least the minimum qualifications" set by the California Board ofVocational Nursing, and that UCLA Medical Center "is not and has never been" one of the school's official clinical training sites.) Since graduating in 2008, Leveque has been unable to find a nursing job, perhaps because she never teamed how to perform basic tasks such as giving shots. Instead, she works as an occasional home health care aid earning at the most $1,200 a month-not enough to pay her rent on the cramped apartment she shares with her sister and son or keep gas in her car, much less pay off her student loans. As a result, her loan balance has ballooned to $40,000, and she has no idea how she will ever pay it off ''My credit is ruined," Leveque says. "I made one mistake, and I will be paying for it for the rest ofmy life." Leveque's story is far from unique. Each year, more than two million Americans enroll in for-profit colleges, also known as proprietary schools, and their popularity has only grown since the financial crisis. While traditional four-year colleges are struggling with dwindling student bodies and budget gaps, proprietary schools are reporting record enrollments as the newly unemployed try to retool their skills so they can wade back into the job market. Some of the largest for-profit chains say their numbers have doubled over the last year. The students who are flocking to these schools are mostly poor and working class, and they rely heavily on student loans to cover tuition. According to a College Board analysis ofDepartrnent ofEducation data, 60 percent of bachelor's degree recipients at for-profit colleges graduate with $30,000 or more in student loans-one and a halftimes the percentage of those at traditional private colleges and three times more than those at four-year public colleges and universities. Similarly, those who earn two-year degrees from proprietary schools rack up nearly three times as much debt as those at community colleges, which serve a similar student population. Proprietary school students are also much more likely to take on private student loans, which, unlike their federal counterparts, are not guaranteed by the federal government, offer scant consumer protections, and tend to charge astronomical interest-in some cases as high as 20 percent. These figures are all the more troubling in light of these schools' spotty record of graduating students; the median graduation rate for proprietary schools is only 38 percent-by far the lowest rate in the higher education sector. What's more, even those students who make it through often can't find jobs. The reason for this is simple: while some proprietary schools offer a good education, many more are subpar at best. Thus large numbers of students leave with little to show for their effort other than a heap of debt. Not surprisingly, students at proprietary schools are far more likely to default on their loans than those at other colleges. The appalling treatment of disadvantaged students at the hands of proprietary schools ought to be a national scandal, especiaJJy at a time when America desperately needs more college graduates to stay competitive. But the problem has
barely registered in Washington. That's partly because the proprietary school lobby has enough clout among lawmakers on both sides of the aisle to keep the issue quiet. But Congress and the Obama administration have also had their hands full advancing other higher education reforms-in particular, legislation to kick private lenders out of the federally subsidized student loan program. This will create tens of billions of dollars in cost savings that will go toward larger Pell grants for low-income students. But that measure, vital as it is, affects only lending within the federal student loan program. It leaves untouched the private loans that are increasingly being foisted on students like Leveque and the loosely regulated schools that are profiting as a result. he for-profit higher education sector is no stranger to scandal. In the 1980s and early '90s, it came to light that hundreds of fly-by-night schools had been set up solely to reap profits from the federal student loan programs, in part by preying on poor people and minorities. The most unscrupulous of them enrolled people straight off the welfare lines, and got them to sign up for the maximum amount offederal student loans available-sometimes without their knowledge or consent. The rampant abuses caught the attention of the news media, sent shockwaves through Capitol Hill, and led to a yearlong, high-profile Senate investigation led by Senator Sam Nunn, the Georgia Democrat. The standing-room-only hearings had all the trappings of scandal, with trade school officials pleading the Fifth and a school owner, who had been convicted of defrauding the government, brought to the witness table in handcuffs and leg irons. Key lawmakers considered kicking all trade schools out of the federal student aid programs-a virtual death sentence given the institutions' heavy reliance on these funds. But Congress ultimately stepped back from the brink and instead strengthened the Department ofEducation's authority to weed out problem institutions. Under the new rules, for-profit colleges had to get at least 15 percent of their tuition money from sources other than federal loans and financial aid. Also, if more than a quarter of a school's students consistently defaulted on their loans within two years of graduating or dropping out, the school could be barred from participating in federal financial aid programs. The idea was to get rid of those schools that were set up solely to feed on federal funds and didn't provide the meaningful training students needed to get jobs and pay off their debt. As a result, during the 1990s more than 1,500 proprietary schools were either kicked out of the government's financial aid programs altogether or witl1drew voluntarily. In an effort to rein in abusive recruiting tactics, in 1992 Congress also barred schools from compensating recruiters based on the number of students they brought in. These changes shook up the industry. The old generation of trade schools gradually died off and were replaced by a new breed of for-profit colleges-mostly huge, publicly traded corporations. The largest, the Apollo Group, owns the University of Phoenix, which serves more than 400,000 students at some ninety campuses and 150 learning centers worldwide. Others include the Career Education Corporation, which serves 90,000 students at seventy-five campuses around the world, and Corinthian Colleges, which serves 69,000 students at more than 100 colleges in the United States and Canada. Not only did these companies promise that their schools would be more responsive to the needs of students and employers than the previous generation, they also said they would be more accountable to the public because, as publicly traded companies, they were heavily regulated. "We've seen a fire across the prairie, and that fire has had a purifying effect," Orner Waddles, then the president of the Career College Association, told the Chronicle ofHigher Education in 1997. "As our sector has weathered the storms of recent years, a stronger group of schools is emerging to carry, at a high level of credibility, the mantle oftraining and career development."
In reality, the new breed of schools had quite a bit in common with their predecessors; in some cases, they even operated out of the same buildings and employed the same personnel. What's more, rather than making them more accountable, the fact that they were publicly traded created a powerful incentive for them to game the system. After all, to keep their stock prices up and investors happy, the schools had to show that they were constantly expanding, which
meant there was intense pressure to get students in the door and signed up for classes and financial aid. With so much at stake, these schools quickly found ways to skirt the new rules. To get around the caps on student loan default rates, for instance, many of them began hiring agencies to help former students get forbearances or offering lines of credit so alums could make their student-loan payments-but only during the initial two-year window, when defaults were counted against the school by the Department of Education. After that, students were left to wrestle with the debt on their own. As for the rule requiring schools to get at least 15 percent of tuition from nongovernment sources, it had some unintended consequences. Rather than, say, enrolling people who could afford to pay some tuition out of pocket, many schools started pushing students to take out private student loans. Previously, this kind ofloan had gone exclusively to graduate and professional students pursuing careers in high-paying fields like law and medicine. The financially needy students who attend for-profit institutions couldn't qualify for them because of their less-than-stellar credit records, their lousy graduation rates, and their spotty record of finding work in their field. But this began to change around 2000. At the time, college tuition was skyrocketing-a trend that has only accelerated-and federal grants and loans weren't keeping pace. To ftll the gap, financial aid officers started cutting deals with lenders to bring in private loan money. In the case of proprietary colleges, most of the large publicly traded chains forged arrangements with Sallie Mae, the nation's largest student loan company. (Once a quasi-government agency like Fannie Mae, it became entirely private in 2004.) In exchange for pots of private student loan funds that they could dole out at will-meaning without regard for students' ability to repay the debt-the schools gave Sallie Mae the right to be the exclusive provider of federal student loans on their campuses. Lenders vie fiercely for this privilege because federal loans are guaranteed by the government, meaning the Treasury pays back nearly all the money if the borrower defaults. Thus lenders get to pocket generous fees and interest and bear almost no risk. Sallie Mae clearly understood that these private loans were going mostly to sub prime borrowers who might not be able to pay them back; in 2007, Senate investigators uncovered internal company documents showing that executives expected a staggering 70 percent of its private student loans at one for-profit school to end in default Investigators concluded that Sallie Mae viewed these loans as a "marketing expense"-a token sum to be paid in exchange for the chance to gorge on federal funds. From the schools' perspective, it didn't much matter whether students would be able to pay off their debt any more than it mattered if they stuck with the program or graduated with the skills they needed. As long as students were enrolled long enough to be considered a "start," meaning that they attended classes for a week or two, the schools got to keep some of the money, and they got to include students in their official enrollment tally, which gave Wall Street the impression they were expanding. Having a cache of private loan funds to dole out also allowed the schools to clinch the deal right away-no need to grind through a stack of forms or wait for a third party to approve the loan application. Thus recruiters could lock students in before they experienced buyer's remorse. At best, the George W. Bush administration and the Republican-led Congress turned a blind eye to these schemes. At worst, they made it easier for the schools to carry them out. In his first term, Bush packed the Department of Education with allies of the proprietary colleges. Before becoming the assistant secretary for post-secondary education, for example, Sally Stroup worked as a lobbyist for the University of Phoenix. Under her leadership, the agency took the teeth out of regulations that were designed to rein in abuses of the 1990s, including the incentive-compensation ban for recruiters. Not surprisingly, many schools began resorting to hard-sell tactics to bring students in. In 2004, the Department of Education found that corporate bosses at the University ofPhoenix routinely pressured and intimidated their recruiters to put "asses in the classes." At some of the campuses, enrollment counselors who didn't meet their targets were sent to the "Red Room," a glassed-in space where they worked the phones under intense management supervision. What's more, in recent years dozens of former students have filed suits alleging they were misled about classes and programs proprietary
schools offered, as well as about their prospects for graduating and getting jobs in their fields of study. While the seriousness of the abuses vary, in some cases they amount to outright fraud, with recruiters pressuring students to sign up for classes that don't actually exist or to enroll in programs where the instructors lack even basic expertise in the field. The push to get students in the door also created more pressure to steer people into private loans. The frenzy only intensified after Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005. This made it almost impossible for those who took out private student loans to discharge them in bankruptcy and, not surprisingly, turned the private student loan market into a much more appealing target for lenders. sa result of these changes, private loan borrowing has skyrocketed. In the last decade alone, it has grown an astounding 674 percent at colleges overall, when adjusted for inflation. The growth has been most dramatic at for-profit colleges, where the percentage of students taking out private loans jumped from 16 percent to 43 percent between 2004 and 2008, according to Department of Education data. The spike in private loan borrowing is dismal news for students. Unlike traditional student loans, which have low, fixed interest rates, private educational loans generally have uncapped variable rates that can climb as high as 20 percent-on par with the most predatory credit cards. Private loans also come with much less flexible repayment options. BotTowers can't defer payments if they suffer economic hardship, for instance, and the size of their payment is not tied to income, as it sometimes is in the federal program. Private loans also lack basic consumer protections available to federal loan borrowers. With a traditional federal student loan, for example, if a borrower dies or becomes permanently disabled, the debt is forgiven, meaning they or their kin are no longer responsible for paying it off. The same goes if the school unexpectedly shuts down before a student graduates. But none of this is true of private loans. AJso, because it is so difficult to discharge private student loans in bankruptcy, when students take them out to attend schools that provide no meaningful training or skills they can find themselves trapped in a spiral of debt that they have little prospect of escaping. Theresa Sweet, a thirty-three-year-old California resident, took out about $100,000 in private loans between 2003 and 2006 to study photography at the Brooks Institute in Santa Barbara, which is owned by the Career Education Corporation. At the time, she says the Brooks recruiters-who have frequently been accused of misleading students-told her that graduates of their photography program typically made at least $60,000 straight out of school. In fact, since graduating three years ago she has been unable to find paid work in her field, and, while she has managed to get forbearances on her student loans, the interest has continued to stack up. She now owes more than $200,000. Looking back, Sweet admits that she was naive in ttusting the recruiters. But she can't help but wonder how she ever qualified for the loans in the first place, especially given that when she applied she was unemployed. "If it were me, I never would have loaned me the money," she says. "Who in their right mind would lend $100,000 in unsecured debt to an art major?" Like Sweet, graduates of proprietary coll eges often struggle to find jobs in their fields. This is because, in many cases, they don't get the skills they need to compete. After all, it's far easier and less expensive for schools to boost enrollment numbers through aggressive advertising and recruitment than to expend the resources to build quality schools. Corinthian and Career Education, which own the schools Leveque and Sweet attended, have faced the most damning allegations when it comes to educational quality and steering students into shady private loans. Other chains have better reputations on these fronts, among them the University ofPhoenix and DeVry University. But even they have a spotty record of graduating students. or awhil e it looked like the meltdown on Wall Street, and the ensuing credit crunch, would put an end to predatory lending at for-profit schools. In 2008 Sallie Mae quit offering sub prime private loans to students at for-profit colleges because the astronomical default rates had helped throw its stock price into a nosedive. But the proprietary college industry has found a way around this roadblock, namely making private loans directly to students, much the way used-
car lots loan money to buyers rather than going through a third party. For example, in a recent earnings call with investors and analysts, Corinthian said that it plans to dole out roughly $130 million in "institutional loans" this year, while Career Education and ITT Educational Services Inc., another for-profit chain, have reported that they expect to lend a combined total of$125 million. These loans could prove to be even more toxic than the private ones offered by Sallie Mae. This is because some schools are packaging them as ordinary consumer credit, which has even fewer built-in safeguards than private student loans, especially when it comes to disclosure requirements. This makes it easier for schools to mislead borrowers about the terms of the debt they are taking on. In one class-action lawsuit filed earlier this year, former students of Coloradobased Westwood Colleges allege they were duped into borrowing institutional loans at a staggering 18 percent interest. According to the complaint, the college's corporate bosses advise their admissions officers to sign students up for these loans without revealing how costly they are going to be. Thus borrowers don't learn about the steep interest until after they leave school and receive their first loan bill. Worse, the lawsuit alleges that some students have been signed up for loans without their permission. lillian L. Estes, a Florida lawyer who represents the plaintiffs in the case, says she has been approached by two dozen former Westwood admissions representatives who admit that they deliberately avoided telling students about the terms of these loans. "They knew they' d never be able to enroll these students if they were up front with them," Estes explains. (In their written response to the lawsuit, Westwood College officials offered a "categorical rejection" of the allegations brought by Estes and her clients.) Significantly, many proprietary schools are pushing institutional loans even when they know students won't be able to pay them off; Career Education and Corinthian Colleges only expect to recover roughly half ofthe money they distribute through their institutional lending programs, according to communications with shareholders. Why would they lend knowing they won't get the money back? Because any loss is more than offset by federal loans and financial aid dollars, which, despite the surge in private educational lending, still fund the bulk of tuition at proprietary schools. Say a student gets a $60,000 federal financial aid package and supplements it with a $20,000 institutional loan. The school comes out $40,000 ahead even if the borrower ultimately defaults. Plus, getting students in the door pumps up enrollment numbers, which makes for happy shareholders. Meanwhile, as the credit crunch eases, traditional lenders may well go back to making private loans to proprietary school students, especially given the changes afoot in the industry. President Obama aims to get rid of the program that allows lending companies to collect lucrative fees and interest for serving as the middleman on federal student loans and instead have the government offer the loans directly. Once forced out of the federal student Joan program, traditional lenders will have a powerful incentive to seek profits by wading deeper into the private student loan market, and forprofit schools, with their exponential growth, could once again be an appealing target. The good news is that the Obama administration seems more inclined than its predecessor to stand up against the abuses of proprietary schools. In May, the Department of Education revealed that it was considering reversing changes the Bush administration made to weaken the incentive-compensation ban. It is also thinking about adding teeth to the rules requiting proprietary colleges to show that graduates are finding "gainful employment" in their field and cracking down on schools that willfully mislead prospective students. "Our overall goal at the Department of Education in post-secondary education is to make sure that students ... have the information they need to make good choices," Robert Shireman, the deputy undersecretary of education, told financial analysts and investors during a conference call earlier this year. These proposals are a good start, but more steps will be needed. For starters, the Department ofEducation should publish the data that it already collects on the number of students at each school who default over the lifetime of their loans. At the moment, it only releases the number who default during the first two years after leaving college, which is of limited value, not only because this is such a short time span, but also because the rates can be easily manipulated by
schools. Just publishing lifetime default rates would give prospective students a clearer picture of the risks of enrolling in a particular school. But the impact would be far greater if Congress used this data, along with graduation rates, to weed out abusive institutions; ideally, any school that failed to meet a certain threshold should be kicked out of the federal financial aid programs. At the same time, Congress should require companies that offer private student loans to give the same kinds offlexible repayment options and consumer protections as are available through the federal student loan program, including allowing borrowers to repay their loans as a percentage of their income. Lawmakers also need to revisit changes Congress made to the bankruptcy code in 2005, which make it exceeding difficult for financially distressed borrowers, including those with private student loans, to discharge their debt in bankruptcy. These changes would go a long way toward helping people like Martine Leveque escape their mountains of debt and ensuring that future students don't wind up in the same situation. It would also guarantee that taxpayers don't go on bankrolling giant companies that profit by exploiting those who are struggling to build better lives.
From: Rob MacArthur <rmacarthur@altresearch com>

To:
Rob MacArthur 9/22/2009 12:08:26 PM 46488941 .pdf
CC:
Date: Subject:
Business Services Research

September 22, 2009
Education Services
GAO Report Related to Proprietary Schools Relatively Benign
Amy W. Junker ajunker@rwbaird.com 414.765.3790 Gordan Lasic glasic@rwbaird.com 414.298.6049 Blair Minarik bmlnarik@rwbaird.com 414.298.5224
Action
Near-term thesis unchanged. Education stocks rallied yesterday following the release of a highly anticipated GAO report which turned out to be relatively benign, in our opinion, as many of the report's findings were either already known or widely expected . Our thesis on the group is unchanged. We continue to believe that meaningfu l multiple expansion in unlikely given expectations for decelerating trends head ing into 2010.
Summary
Relief rally post release due to relatively benign GAO report. Higher education stocks saw strength yesterday after recommendations from a Government Accountability Office (GAO) report focused on oversight within proprietary schools turned out to be relatively benign, in our opinion. - The highly anticipated report, entitled "Proprietary Schools: Stronger Department of Education Oversight Needed to Help Ensure Only Eligible Students Receive Federal Student Aid," was requested by Rep. Ruben Hinojosa (D-TX, Chairman of the House Subcommittee on Higher Education). Key findings and recommendations. The report recommends stronger monitoring of federal aid eligibility requirements within for-profits given the sector's relatively higher cohort default rates. Importantly, many of the report's findings were either already known or widely expected , in our view. Additionally, recommendations had a limited focus, including: - Improving monitoring of basic skills tests and target schools for further review. - Revising regulations to strengthen controls over basic skills tests. - Providing information and guidance on valid high school diplomas for use in gaining access to federal aid . No widespread problems among for-profits, according to report. While the GAO reported some violations among for-profits (including one publicly traded school) such as test tempering and helping students obtain invalid high school diplomas, its "findings do not represent nor imply widespread problems" at proprietary schools. - Focus on ability-to-benefit provision. The report found non-compliance related to ability-to-benefit (ATB, passing basic math and English skills) testing procedures at some for-profits. o Possible changes to this provision could potentially impact schools like Corinthian which include a meaningful percentage of ATB students (24% of F2009 enrollment) . o Conversely, companies like Capella and Strayer have little ATB exposure as their incoming students have college cred it. Thus the findings and recommendations hold little implication. o However, as this is already a topic of interest in the negotiated rulemaking process, we do not expect additional action from the DOE in the near term.
Please refer to Appendix- Important Disclosures and Analyst Certification.
Education Services
September 22, 2009
Details
GAO Report Focused on High School Proficiency The GAO report focused on improved oversight to ensure that students enrolling in proprietary schools meet the proper eligibility requirements, specifically high school proficiency. While the GAO concluded that its "findings do not represent nor imply widespread problems" at proprietary schools, it did report some violations among for-profits (including one publicly traded school) such as helping students obtain invalid high school diplomas. Specifically, the GAO identified cases in which proprietary schools helped students obtain high school diplomas from diploma mills in order to obtain access to federal student loans.
Additionally, the report found non-compliance related to ability-to-benefit (ATB, passing basic math and English skills) testing procedures at some for-profits. In order to be eligible for Title IV funding, incoming students must have a high school diploma or GED, or they must pass ability-to-benefit (ATB) tests. The intent of the test is to measure whether students have the basic skills needed to benefit from higher education, thus allowing student who pass the tests to finish their high school diploma and work toward their associates degree concurrently. Test administrators are responsible for administering ATB tests at schools in accordance with test publisher rules. Upon the GAO's recommendations for increased oversight in monitoring student eligibility (given instances of violations) , the DOE commented that it is considering the management of the ATB testing process as a topic to include in the new round of negotiated rulemaking. As such, we do not expect the GAO report to spur additional regulatory action from the DOE related to this topic.
Cohort Default Rates The report analyzed cohort default rates (CDR) among proprietary institutions over a 2-, 3-, and 4-year period, attributing the relatively higher rates to a variety of factors including borrowers' family income and level of parental education. It is widely known that cohort default rates are higher among proprietary institutions given their student make-up, as they often attract a relatively higher mix of first-time college students given their open enrollment policy. However, there has been interest in the the level of increase in CDR following the extension of the calculation period to 3 years from 2 years for the F2009 (released in F2012). According to the GAO report CDR among for-profits nearly doubled when expanding the calculation from a 2-year rate to a 3-year rate (based on F2004 CDR data). If this hold true when the calculation period is expanded in F2009, some schools with relatively higher 2-year rates will be in danger of tripping DOE guidelines, despite the increased thresholds.
Robert W. Baird & Co.
Education Services
September 22, 2009
Cohort Default Rates by Type of Institution (2- to 4-Year CDR of F2004 data) 23.3%
16.7%
8.6%
9.5%
7.2%
2-year rate
3-year rate
4-year rate
Public
Private non-profit
Proprietary
Source: Department of Education and the Government Accountability Office

Cohort Default Rates Among Four-year Schools (2- to 4-Year CDR of F2004 data)
19.2%
13.7%
7.3% 5.3% 4.5% 3.5% 2.8%
7.1 % 6.2%
2-year rate Public
3-year rate Private non-profit
4-year rate Proprietary
Source: Department of Education and the Government Accountability Office
Education Services
September 22, 2009
Cohort Default Rates Among Two-Year Schools (2- to 4-Year CDR of F2004 data)
23.3%
16.7%
8.6%
9.5%
7.2%
2-year rate Public
3-year rate Private non-profit
4-year rate Proprietary
Source: Department of Education and the Government Accountability Office F2007 Cohort Default Rates by School
F2007 >10% Over l ast Three years 36 14 23 17
coco
LINC ESI CECO DV* APOL UTI STRA CPLA
6.9%-22.3% 7.1%-21 .9% 9.3%-15.2% 0.3%-12.3% 0.2%-10.2% 9.3% 6.2%-6.8% 6.0% 2.5%
Source: Department of Education and company reports * DeVry University 9.0%
Recent Changes to CDR Calculation

The Higher Education Act (HEA) reauthorization (signed into law 9/08) changed the way the Department of Education (DOE) calculates college default rates (defined as the percentage of student-loan borrowers who default on their student loan repayments within a certain time period). It expands the calculation period of default rates to 3 years from 2 years, which is likely to increase the cohort default rate at many institutions. The HEA also increased the threshold for penalties associated with this starting in F2012. Currently schools lose access to Title IV funding if they cross 40% for one year and 25% for three consecutive years. In 2012 the rate would increase to 30% for three consecutive years.
Education Services
September 22, 2009
Appendix- Important Disclosures and Analyst Certification

1 Robert W. Baird & Co. maintains a trading market in the securities of APEI, APOL, CECO, COCO, CPLA, DV. ESI , LINC and STRA. 2 Robert W. Baird & Co. and/or its affiliates managed or co-managed a public offering of securities of Lincoln Educational Services Corp in the past 12 months. 3 Robert W. Baird & Co. and/or its affiliates have received investment banking compensation from Lincoln Educational Services Corp in the past 12 months. 10 Robert W. Baird & Co. and/or its affiliates have been compensated by ITT Educational Services, Inc. and Strayer Education, Inc. for non-investment banking-securities related services in the past 12 months.
Robert W. Baird & Co. and/or its affiliates expect to receive or intend to seek investment banking related compensation from the company or companies mentioned in this report within the next three months.lnvestment Ratings: Outperform (0) - Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Neutral (N)- Expected to perform in line with the broader U.S. equity market over the next 12 months. Underperform (U) - Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis on safety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue and earnings. A - Average Risk - Growth situations for investors seeking capital appreciation with an emphasis on safety. Company characteristics may include: moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and earnings. H- Higher Risk- Higher-growth situations appropriate for investors seeking capital appreciation with the acceptance of risk. Company characteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and price volatility. S - Speculative Risk - High-growth situations appropriate only for investors willing to accept a high degree of volatility and risk. Company characteristics may include: unpredictable earnings, small capitalization, aggressive growth strategies, rapidly changing market dynamics, high leverage, extreme price volatility and unknown competitive challenges. Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a time horizon of 12 months but there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined by a subjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may be used to determine the value of a security including, but not limited to, discounted cash flow, earnings multiples, peer group comparisons, and sum of the parts. Overall market risk, interest rate risk, and general economic risks impact all securities. Specific information regarding the price target and recommendation is provided in the text of our most recent research report. Distribution of Investment Ratings. As of August 31, 2009, Baird U.S. Equity Research covered 591 companies, with 41% rated Outperform/Buy, 57% rated Neutral/Hold and 2% rated Underperform/Sell. Within these rating categories, 8% of Outperform/Buy-rated, and 6% of Neutral/Hold-rated companies have compensated Baird for investment banking services in the past 12 months and/or Baird managed or co-managed a public offering of securities for these companies in the past 12 months. Analyst Compensation. Analyst compensation is based on: 1) The correlation between the analyst's recommendations and stock price performance; 2) Ratings and direct feedback from our investing clients, our sales force and from independent rating services; and 3) The analyst's productivity, including the quality of the analyst's research and the analyst's contribution to the growth and development of our overall research effort. This compensation criteria and actual compensation is reviewed and approved on an annual basis by Baird's Research Oversight Committee. Analyst compensation is derived from all revenue sources of the firm, including revenues from investment banking. Baird does not compensate research analysts based on specific investment banking transactions. A complete listing of all companies covered by Baird U.S. Equity Research and applicable research disclosures can be accessed at http://www.rwbaird.com/research-insights/research/coverage/research-disclosure.aspx. You can also call 1-800-792-2473 or write: Robert W. Baird & Co., Equity Research, 24th Floor, 777 E. Wisconsin Avenue, Milwaukee, WI 53202.
5
Education Services
September 22, 2009
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From: Rob MacArthur <rmacarthur@altresearch com> To: Rob MacArthur CC: Date: 1115/2009 12:36:00 PM Subject: 4687703 3.pdf
Company Update
BUY
Equity I United States I Education & Training Se1V1ces 04 November 2009

Continued focus on quality
We hosted a meeting with Strayer's CEO Rob Silberman. We continue to be impressed by Strayer's consistent focus on quality of education. Takeaways are: 1.) Strayer does not expect to be significantly impacted by potential changes out of current negotiated rulemaking sessions, 2.) graduation rates for students with some college experience are high, 3.) Strayer draws down Title IV federal financial aid funds one class at a time; -70% of students receive Title IV.
Kevin C. Doherty Research Analyst MLPF&S kevin.doherty@bamtcom Sara Gubins Research Analyst MLPF&S sara.gub1ns@baml.com David Chu Research Analyst MLPF&S dav1d.j.chu@baml.com +1 646 855 5607
+1 646 855 1961
+1 646 855 2589
Dept. of Ed. negreg outcomes not expected to have impact

Strayer does not expect any regulatory changes resulting from the current Dept. of Ed. negotiated-rulemaking sessions to have a material impact on its operations. Enrollment advisors salaries are adjusted 1x/yr based on length of service and grade, with no incentive comp. He does not believe Strayer would be subject to potential changes to 'gainful employment' (in part because students are already employed & it wouldn't make sense), but this may be a subject of debate.
Stock Data Price Price Objective Date Established Investment Opinion Volabhly RISk 52-Week Range Mrkt Val/ Shares Out (mn} BofAML Ticker I Exchange Bloomberg I Reuters ROE (2009E} Total Obi to Cap (Sep-2009A} Est. 5-Yr EPS I DPS Growth
High levels of student success

Strayer's graduation rate was in the high 70's% for grad students & students with >2 years of college credit (6-yr grad rate for 2002 cohort). Students entering with <45 college credits graduated at a 32% rate, overall institution rate was 53%.
US$19921 US$23600 30-Jul-2009 B-1-7 MEDIUM USS143.53-239 99 US$2,725/13 7 STRA/NAS STRA US I STRA 0 57 4%
0%
24.5%/4.2%
Lower drops helping revenue per student

As discussed in 3Q, the increase in rev/student this year (+5.7% in 3Q) has been helped by a lower number of students dropping out Yet this benefit should flatten out over time. Management noted 20% enrollment growth is needed for flat margins in 2010 in part due to the number of new schools (lower margins vs mature schools) & the online center, which will lose an equivalent amount as in '09. The second online center provides redundancy & makes it easier to serve West Coast students. Over time, leverage should come from selling & promotional and G&A costs vs. instructional services.
Estimates (Dec) (US$) EPS GAAPEPS EPS Change (YoY) Consensus EPS (Bloomberg) Oivldend Rate Valuation (Dec) PIE GAAPPIE Dividend Y1eld EV /EBITOA' Free Cash Flow Yield'
For ftAIdolililons of iQmt~hod"' measures, soc pago 4.
2007A 4.47 4.47 23.8% 1.31
2008A 5.67 5.67 26.8% 3.63
2009[ 7.59 7.59 33.9% 7.58 2.00
2010[ 950 9.50 252% 9.52 250
2011[ 1160 1160 221% 1159 306
2007A 44.6x 44.6x 0.7% 25.3x 2.4%
2008A 35.1x 35.1x 1.8% 19.5x 2.5%
2009[ 26.2x 26.2x 1.0% 14.4x 3.7%
2010[ 21.0x 21.0x 1.3% 11.7x 4.8%
2011[ 172x 17 2x 1.5% 9.8x 4.9%
Merrill Lynch 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 of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 5 to 7. Analyst Certification on Page 3. Price Objective Basis/Risk on page 3. 10885035
CR
Bank of America~ Merrill Lynch 04 November 2009
iQproflle St rayer Education Inc .

SM
iQmerhod!JM - Bus Performance

(US$ Millions) Return on Capital Employed Return on Equity Operating Margin Free Cash Flow 2007A 34.3% 36.1% 30.7% 66 200BA 41.7% 44.3% 320"k 68 2009E 54.0% 57 4% 33.7% 101 2010E 60.5% 64.1% 33.3% 130 2011E 51.8% 54.1% 32.7% 135
Com~an:t Descri~tion
iQmerhod"" - Qualit~ of Earnings

(US$ Millions) Cash Realization Ratio Asset Replacemen t Ratio Tax Rate Net Debt-to-Equity Ratio Interest Cover 2007A 1.2x 1.7x 37.6% -50.4% NA 200BA 1.1x 1.9x 38.5% -32.0% NA 2009E 1.3x 2.4x 39.5% -29.3% NA 2010E 1.3x 2.1x 39.5% -35.0",{, NA 2011E 1.1x 1.9x 39.5% -53.8% NA
Strayer Education, Inc., consists of the Strayer University and Strayer University Online brands. The company operates 71 campuses in 15 states and Washington, D.C., and had Fall2009 term enrollment of more than 54,000, including nearly 33,000 purely online students. The company generated revenue of nearly $400mn in 2008 and employs a workforce of approximately 3,000 (roughly 1,600 faculty). Investment Thesis We have a favorable opinion of the company given: (1) the company's organic growth prospects from geographic expansion and continued online penetration, (2) superior profitability from leveraging a highly standardized operating platform, and, (3) strong track record. We believe Strayer has a significant opportunity to expand its footprint nationally over the next several years from its core base campuses in the Eastern U.S.
Income Statement Data (Dec) (US$ Millions) Sales %Change Gross Profit %Change EBITDA %Change Net Interest & Other Income Net Income (Adjusted) %Change 2007A 318 20.6% 209 21.2% 106 22.5% 6 65 24.1% 200BA 396 24.6% 265 26.9% 138 29.7% 5 81 24.4% 2009E 511 28.9% 346 30.4% 186 35.3% 2 105 29.8% 2010E 635 24.4% 433 25.2% 229 23.2% 2 129 23.1% 2011E
772
21.5% 525 21.1% 274 19.5% 4 155 20.1%
Stock Data Average Daily Volume Quarterl:t Earnings Estimates Q1 Q2 Q3 Q4 2008 1.64A 1.50A 0.83A 1.71A 2009 2.07A 2.00A 1.21A 2.31E 133,990
Free Cash Flow Data {Decl (US$ Millions) Net Income fromCont Operations (GAAP) Depreciation & Amortization Change in Working Capital Deferred Taxation Charge Other Adjustments, Net Capital Expenditure Free Cash Flow %Change 2007A 65 9 16 (6) (3) (15) 66 35.6% 2008A 81 11 6 0 (9) (21) 68 3.1% 2009E 105 14 14 (4) 6 (34) 101 48.3% 2010E 129 18 18 (3) 6 (38) 130 29.2% 2011E 155 22 (4) (4) 8 (42) 135 3.4%
Balance Sheet Data (Dec) (US$ Millions) Cash & Equivalents Trade Receivables Other Current Assets Property, Plant & Equipment Other Non-Current Assets Total Assets Short-Term Debt Other Current liabilities Long-Term Debt Other Non-Current Liabilities Totalliabilities Total Equity Total Equity & liabilities
For n.1demi ions of iQmethod"' meas.~res, see page 4.
2007A 95 101 80 58 10 344 0 144 0 11 155 189 344
200BA
56
135
58
66 9 325 0 137 0 12 148 176 325
2009E 55 184 62 86 12 399 0 198 0 12 210 189 399
2010E 75 212 57 106 16 466 0 240 0 12 253 213 466
2011E 194 280 65 126 19 684 0 31 1 0 13 323 360 684
2
CR
04 November 2009

We believe Strayer should continue to warrant a premium multiple to the peer group given its ample growth prospects, superior profitability, and strong track record. Our $236 target is based on a multiple of 24.8x our 2010 EPS estimate of $9.50, or a 1x PEG ratio. Risks are: 1) execution as the company scales and enters new markets and rolls out a new global online operations center 2) increased competition and 3) increased regulatory scrutiny.
I, Kevin C. Doherty, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.
US-Edu, Business Services & Special Sits Coverage Cluster Investment rating
BUY
Company
Capella Education Corinthian Colleges Inc Corporate Executive Board DeVry Inc Ecolab Inc Grand Canyon Education ITI Educational Services K12 Strayer Education Inc.
BofAMl ticker
CPLA
Bloomberg symbol
CPLAUS
Analyst
Sara Gubins Sara Gubins David Ridley-lane Sara Gubins David Ridley-Lane Sara Gubins Sara Gubins Sara Gubins Kevin C. Doherty Sara Gubins Sara Gubins Kevin C. Doherty Kevin C. Doherty Kevin C. Doherty Sara Gubins Sara Gubins Sara Gubins Sara Gubins Kevin C. Doherty Sara Gubins
coco
EXBD DV ECL LOPE ESI LRN STRA APOL CECO CBG FDS JLl LINC MAN RECN RHI UTI MPS
coco us
EXBDUS DVUS ECLUS LOPE US ESIUS LRNUS STRAUS APOLUS CECO US CBG US FDS US JLlUS LINC US MAN US RECNUS RHI US UTI US MPSUS
NEUTRAL
Apollo Group Career Education CB Richard Ellis Group Inc FactSet Research Systems Inc. Jones lang LaSalle Inc Lincoln Educational Services Corp Manpower
UNOERPERFORM
Resources Connection Robert Half International Universal Technicallnstitute

RSTR
MPSGroup
3
CR
04 November 2009
iQmethodSN Measures Definitions Business Performance Numerator

Return On Capital Em ployed Return On Equity Operatmg Margin Earnings Growth Free Cash Flow NOPAT = (EBIT + Interest Income) (1 -Tax Rate) + GoodNill Amortization Net Income Operating Profit Expected 5-Year CAGR From Latest Actual Cash Flow FromOperations- Total Capex Cash Flow From Operations Capex Tax Charge Net Debt = Tolal Debt, Less Cash & Equivalents EBIT
Denominator
Total Assets- Current Liabilities+ ST Debt + Aocumutated GoodNill Amorhzation Shareholders' Equity Sales N/A N/A Net Income Depreciation Pre-Tax Income Total Equity Interest Expense
Quality of Earnings
Cash Realization Ratio Asset Replacemen t Ratio Tax Rate Net Debt-To-Equity Ratio Interest Cover
Valuation Toolkit
Price I Earnings Ratio Price I Book Value Dividend Yield Free Cash Flow Yield Enterprise Value I Sales EV I EBITDA Current Share Price Diluted Earnings Per Share (Basis As Specified) Current Share Price Shareholders' Equity I Current Basic Shares Annualised Declared Cash Dividend Current Share Price Cash Flow From Operations- Total Capex Markel Cap. = Current Share Pnce Current Basic Shares EV = Current Share Price Current Shares + Minority Equity + Net Debt + Sales Other LT Liabilities Enterprise Value Basic EBIT + Depreciation +Amortization
iQmethod"''s the set of BolA Merrill lynch standard measures that setVe to maintain global consistency under three bload headings: Business Perfonna~. Qually of Earrings, and vali da~ons. The key features of iOmethod are: A consistently structured, detalad, arld transparent methodology. Glideines to maximize the effectiveness ofthe comparative valuation proc~ss, and to identify S4me common plfulls. iQtlalaba.te is our real-time global research da4abasc thai is sourced dicctly from 01.1' equity analysts' camilgs models and includes forecasted as wei as historical data for 11comc sta:cmcnts. balance sheets. and cash low stalcmcnts for companies covered by SofA Mcrrillynch. iQprojlle"", iQJirethod"' are servic~ mart<s of Mcrril Lynch & Co., lnc.iQdarobare"is a re{jstetcd service mark of Merrill lynch & Ol., Inc.
4
CR

04 November 2009
STRA Price Chart
30.Jul PO:US$236 US$300 US$270 US$240 US$21 0 US$180
US$150 US$120 US$90 US$60 US$30
usso
1.Jan.07
1.Jan.08
1.Jan.09
STRA - - -
B: Buy, N: Neutral, S: Sell, U: Undefpertonn, PO : Price objective, NA No longervalid

'Prior to May 31, 2008, 1ho IWostmCfll op11K>n system inckldcd Buy, Not.tral and Sell. As of May 31, 2008, 1ho investment op11ion system 11ckldos Buy, Noulrnl and Undorporform. Dark Grey shading in<icalos thai a soctiily rs restricted v.ilh tho opinion wspended.lig~ grey shading inclcales thai a security is underreviewwith the opinion withctawn. The current investment opinion key is cornined at the end oflhe report. Chart is ctirenl as of September 30, 2009 or wch later date as indicated. Bo!Aid. P<itc charts do net reflect analysts' covorngo of tho stock al prior Inns. Hisloncal price charts rclal11g to companies covered as of September 30, 2009 by Iormor Bane of America Socuriios l l C (BAS) analysis arc available lo BAS clonls on tho BAS website.'
Investment Rating Distribution: Education & Training Services Groue (as of 01 See 2009) lnv. Banking Relationships Coverage Universe Count Percent Count Percent Buy 14 77.78% Buy 8 57.14% Neutral 3 16.67% Neutral 1 33.33% Sell 5.56% Sell 100.00% Investment Rating Distribution: Global Groue ~as of 01 See 2009~ Percent Coverage Universe Percent lnv. Banking Relationships Count Count Buy 1528 4719% Buy 740 53.86"/o Neutral 815 25.17% Neutral 436 60.39% Sell Sell 378 895 27.64% 45.99% Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months. For purposes of this distnbution. a stock rated Underperform is included as a Sell. FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A- Low, B- Medium and C- High. INVESTMENT RA TINGSreflect the analyst's assessment of a stock's: (i) absolute total return potential and (iO attractiveness for investment relative to other stocks within its Coverage Cluster(defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a stock and the firm's guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst's view of the potential price appreciation (depreciation). Investment rating Total return exeectation (within 12-month eeriod of date of initial rating) Ratings diseersion guidelines for coverage cluster Buy ~ 10% $ 70% Neutral ~ 0% s 30% Underperform N/A ~ 20% Ratings dispersions may vary from time to time where BofAML Research believes it better reflects the investment prospects of stocks in a Coverage Cluster.
INCOME RATINGS. indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered to be secure) and 9- pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock's coverage cluster is included in the most recent BofAML Comment referencing the stock.
5
CR
Bankof America ~ Merrill Lynch
04 November 2009
The company is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: Strayer. MLPF&S or an affiliate has received compensation from the company for non-investment banking services or products within the past 12 months: Strayer. The company is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: Strayer. MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months: Strayer. MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company or an affiliate of the company within the next three months: Strayer. MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the company on a principal basis: Strayer. The company is or was, within the last 12 months, a secur~ies business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: Strayer. The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall prof~ability of Bank of America Corporation, including profits derived from investment banking revenues.

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6
CR
04 November 2009
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7
CR
From: Robert MacArthur <rmacarthur@altresearch.com>

To:
CC: 'Aitomease Kennedy'

'Adam Taub' 'Andy Matthes' aardridis@sma1maley.a:m Arlington. Angela afinkenhoefer@eng.I.NVo.ca 'Cope. Brian' Llli L6 J 1JPatt.blackbeny.net 'Bany Yeoman' 'Nassirian. Barmak' celzer@ocmilaw.com cdurranoo@rainmedia.net V\littman. Donna ctwomack@mypherox.com Dan Benari Goldsmith, Elizabeth 'Elizabeth Medina' 'Melissa Davis' grovesb@sec.r;pv ggreen@.Npsir.com 'Leslie Hollingsworth' 'Mary Houston' V\loodward. Jennifer 'Majors, Jay (CIV)' JOberg@aol.com 'Jillian Estes' 'Joshua Mcinerney' 'JingGe' Rb)(6) ')l?roadrunner.com 'Joshua Kuntz' Kem. Joe 'Kelly Field' ku!zg@gao.r;py 'Katie Mac' 'Kantrowitz, Mark'
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Date:
Subject:
8/19/2010 8:27:48 AM
ABC News investigation of APOL--Good Morning America to be followed by nightly news and Nlghtline
Rob MacArthur Alternative Research Services, Inc.

203-244-5174
rmacarthur@altresearch. com
This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report w1thout the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change w1thout notice. This material is intended for use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.
ABC News Investigates For-Profit Education: Recruiters at the University of Phoenix ABC News Gets Answers for Student Who Claims She Was Duped by 0Dhne School
Post a Comment By CHRIS CUOMO, GERRY WAGSCHAL and LAUREN PEARLE Aug. 19, 2010 Ads for online schools are all over the Internet, plastered on billboards in subway cars and on television. The University of Phoenix, with nearly 500,000 students, is the biggest for-profit college. But some fonner students said they were duped into paying big bucks and going deeply in debt by slick and misleading recmiters.
Melissa Dalmier, a 30-year-old single mother of three from Noble, Ill ., enrolled in the associate's degree in education program at the University of Phoenix to reach her drean1 of becoming an elementary school teacher. (ABC News) "I don't want anyone else to be sucked in," said Melissa Dalmier, 30, of Noble, Ill. The mother of three bad big dream s to be an elementary school teacher, so when she saw ads for the University ofPhoeDix pop-up on her computer, she e-mailed them for more infom1ation. A few minutes later, Dalnuer said she got a call from one of the school's recruiters, who she said told her that enrolling in the associate's degree in education program at the University of Phoenix wouJd put her on the fast-track to reaching her drean1. "[The recmiter said] they had an agreement with Illinois State Board of Education and that as soon as I finished their program I'd be ready to start working," she recalled. Within 15 minutes, Dalmicr was enrolled. Since she didn't have enough money to pay for tuition, she said the recmiter helped he r get federal student aid. In total, she took out about $8,000 in federall y-guaranteed student loans.
But just a few months after Dalmier started, she said she learned the horrible tmth : the degree program she was enrolled in would not qualify her to become a public school teacher upon graduation in Illinois. "It was an outright lie. A bold faced lie," she said.
Watch more of the undercover investigation tonight on "World News" at 6:30p.m. ET and later on "Nightline" at 11:35 p.m. ET
It's not the first time that the controversial school, which obtains almost 90 percent of its revenues from students paying tuition from federal aid, has come under fire for its recmiting methods. The University of Phoenix was one of 15 for-profit schools whose aggressive recruiting practices were the subject of hearings held by Sen. Tom Harkin, D-lowa. The Govemment Accountability Office sent investigators to for-profit schools across the country and found that all of them were misleading potential students.
In 2004, the University of Phoenix paid nearly $ 10 million to the Department of Education to settle
allegations that it had violated rules about its recruiting practices. The school did not admit any w rongdoing. "I think maybe the whole orchard is contaminated," Harkin said. "TI1ere's a systemic problem with the system itself that needs to be addressed." ABC News wanted to know firsthand whether what Dalmier said happened to her, would happen to us, so we sent one of our producers undercover to meet with a University of Phoenix recruiter. Our producer told the recruiter, who was working out of an office in Houston, Texas, that he aspired to be a teacher and planned to live in either Texas o r New York. The recruiter told him to enroll in the Bachelor's of Science in Education program, and with that degree and some student teaching, he would be set. Producer: I just want to understand clearly. I can go to University of Phoenix, do my bachelor's degree, and 100 percent for sure I can go back to either Texas, or New York and I can sit for those exams and once I finish those exams... l can teach. Recruiter: Then you can become a teacher. Yes. That is true. What's your e-mail address? Despite her assurances, the recruiter's claim was not true. Even with successful completion of the required certification testing, a degree from the University of Phoenix does not guarantee a teaching certificate in either of those states. When we confronted Dr. William Pepicello, president of the University of Phoenix, about the recruiter's false promise, he said it was "indefensible."
"It's wrong. Can we do better? Absolutely. Do we train our people to give that kind of misadvice? Absolutely not. And we can do better, we will do better, you know, we already have some initiatives that we talked about that we're putting in place because at the end of the day, we have to get it right." But this was not the first time that the university's recruiting practices have come under scrutiny. In December 2009, after two former employees came forward and accused the university of violating federal financial aid regulations with its recruiting practices, without admitting wrongdoing the school agreed to pay $67.5 million to resolve the accusations. The two whistleblowers received $19 million in the settlement. When asked if the 2009 settlement was a sign that "we got caught," Pepicello disagreed. "No, I wouldn't say it's proof that we got caught. I mean, it's certainly proof that we weren't doing as well as we could. We could do better," he said. The recruiter also told our undercover producer he could take out as much as $35,000 in federal financial aid to pay for school. She also said that there might even be some money left over after tuition was paid.
Recruiter: I tell students to take out the max and whatever you don't need or you don't use then use
it [for whatever]. But it's easier to take out more than you need and send back the excess versus you didn't take out enough.
Producer: What are the kinds of things though? I mean in terms of like that I could use it for? I mean,
what if I just ... because you're going to have to have money to walk around.
Recruiter: They don't care. Right. They don't. They just tell you use it for educational purposes. Producer: And they don't ...They don't what? Recruiter: No one follows up. No one says, What happened to this money? You received a check for
$562, where did you spend it?
Producer: It's your business.

The university president said that there was no excuse for a recruiter to push someone to borrow to the max. 'It's absolutely indefensible. It is not the way that I intend to run this university," Pepicello said.
For-Profit Universities Contributing to Financial Crisis?

Experts say recruiters who are misleading students may only be the tip of the iceberg. Students who have attended for-profit schools are defaulting on their loans at an alarming rate, which experts say may be contributing to the next big financial crisis. At the University of Phoenix's headquarters, the loan repayment rate was 44 percent, according to data from 2009 provided by the Department of Education; students at their Nellis Air Force location had a repayment rate of 36 percent. At the headquarters of Brown Mackie College, another for-profit
school, the repayment rate was 27 percent. Harris Miller, who heads the for-profit industry's lobby group, told Chris Cuomo that default rates at for profit schools are comparable to other schools which service similar student populations. Recruiters from for-profit schools obtained $24 billion in student loan and grant money for the 2008-2009 school year, according to Government Accountability Office and Senate reports. "These schools are marketing machines masquerading as universities," said Steve Eisman, a renowned hedge fund investor who predicted the last big mortgage crisis. "I thought there would never again be an opportunity to be involved in the short side as an industry as social destructive and morally bankrupt as the sub-prime mortgage industry... Unfortunately, I was wrong." Though for-profits get the lion's share of their tuition from financial aid, the default rates on loans for students who attended for profit schools are alarming. About 50 percent of the students at for-profits drop out, according to Eisman, so schools need to keep adding new students, and have to try to recruit just about anyone-- even those most vulnerable in society, he says. Benson Rawlins was considered homeless last year when he met two recruiters from the University of Phoenix, who gave three seminars at Y-Haven, a shelter for transitional men in Cleveland, Ohio, or in effect, a homeless shelter. Rawlins doesn't have aGED, but said the recruiters had no qualms trying to sell him an expensive associate's degree. "It seems like it is just too much all about money," he said, "Instead of helping someone get an education." The university told ABC News it does not tolerate recruitment at facilities like Y-Haven. "We can assure you that anyone who participated in the recruitment of residents from homeless facilities in Cleveland no longer works for the University," said Alex Clark, a spokesperson for the University of Phoenix. "Any such activity is strictly forbidden by our Code of Business Conduct and Ethics, and employees who violate this policy face disciplinary action up to and including termination." Harris Miller said even though the schools serve an important role by providing higher education to students who wouldn't ordinarily get one, many schools' recruiting practices need to be changed. Miller claimed that universities began to change even before the GAO's report on their misleading practices, including changing how recruiters are compensated (so they do not receive bonuses or prizes for recruiting students), offering "test drive" programs to help people figure out if higher education is for them and focusing more on consumer protection. When asked why for-profit universities don't return money back to those who have been misled by their solicitations, Miller said: "There are other countries in the world like Canada which have a different system and it's something we're going to look at." But Miller admitted that the industry has no plan in place to pay back those who are carrying a debt from for-profit schools.
Whatever the industry's plans for future, Oalmier said it won't help heal what happened. "If they tell you something, investigate it before you enroll in their program. You really need to find out the truth and how to further your passion or your dream," she said. "That way, you don't end up like me." After ABC News' interview with Pepicello, the University of Phoenix offered Oalmier a scholarship for a bachelor's degree of her choosing. Oalmier said she is considering their proposal. Pepicello also said he plans to change the school's recruiting practices, especially the current model of compensation, and will be offering students a "test drive."
Click HERE to read a letter to ABC News from William Pepicello.
'-=
~1!,niversity of Phoenix
Office of the President
Stte<~ t
4615 Eost Elwood
Phoenx. AZ 85040
August 18, 2010 Dear ABC News: Thank you for allowing us this opportunity to share our perspective directly with Good Morning America's viewers and online readers, following my recent interview with Chris Cuomo.
As I told Mr. Cuomo, University of Phoenix has strong student protection measures in place, and we do not tolerate deceptive practices by any employee. We have strict and unambiguous policies in place to ensure prospective students are able to make a fullyinformed decision about the University and their ability to succeed here, including the realities of incurring debt to pay for a college education.
It saddens and disappoints me to note that sometimes, these policies are not adhered to by our employees, though I want to stress that we take immediate action to address any such violation, up to and including termination of the employees involved. Let me be clear: even one violation of our student protection policies is one too many, and as president of this University I am committed to ensuring it does not happen. In fact, we have al ready undertaken a number of important new measures focused on student protection, including: Financial literacy tools that help students understand the facts about financial aid and how much they need to borrow, which has already resulted in an approximate 30-percent decrease in the number of students who take out the maximum loan amount; A free three-week program called University Orientation, which helps students with little or no college experience understand what it takes to succeed in a challenging academic environment like ours, before taking on the burden of college debt; A digital call-monitoring system to track and record tens of thousands of phone calls every day, between prospective students and counselors, for any evidence of false or misleading information; and A firm commitment to completely eliminate enrollment targets as a component of the evaluation and compensation of our enrollment advisors. Our main focus is and will always be serving our students, and ensuring their success by equipping them with the tools they need to compete and thrive in a changing global economy. We are extremely proud of our track record in serving students, and even more proud of the thousands of working learners who have improved their lives and advanced their careers after graduati ng from our University. Consider these results from our 2009 Academic Annual Report:
During their enrollment, University of Phoenix students experience greater annual salary increases than the national average for all workers: in 2008, our bachelor's program students experienced an 8.5% percent salary increase, while our master's program students saw an average increase of 9.7%; University of Phoenix students report higher satisfaction rates than their peers across the nation in each of the ten categories surveyed by the National Survey of Student Engagement; We are a leader in educating "non-t raditional" college students, a group that comprises 73% of all college students, according to the U.S. Department of Education; and At about $12,000 per year. Universitv of Phoenix tuition and fees are in the mid range nationally, and our textbook and material costs are dramatically lower than average.
We are committed to remaining at the forefront of Innovation in higher education and, coupled with the measures we are undertaking to enhance student protection, we are confident University of Phoenix will yield even greater outcomes for our students.
'&, ~~ J.~ello,
William President University of Phoenix
From:
To:
CC:
Date: Subject:
Kvaal, James Kanter Martha Taggart Bill Ochoa. Eduardo Bergeron, David Madzelan Dan Gomez Gabriella Finley, Steve Yuan. Georgia Hamilton, Justin
8/19/2010 10:35:54 AM
ABC undercover
This story is expected to run tonight
ABC News Investigates For-ProfitEducation: Recmiters at the University ofPhoenix ABC News Gets Answers for Student Who Claims She Was Duped by Online School
Post a Comment By CHRIS CUOMO, GERRY WAGSCHAL and LAUREN PEARLE Aug. 19, 2010 FarkTechnoratiGoogleLiveMy SpaceNewsvineRedditDeliciousMixx Yahoo Ads for online schools are all over the Internet, plastered on billboards in subway cars and on television. The University ofPhoenix, with nearly 500,000 students, is the biggest for-profit college. But some former students said they were duped into paying big bucks and going deeply in debt by slick and misleading recruiters.
Melissa Dalmier, a 30-year-old single mother of three from Noble, Ill., enrolled in the associate's degree in education program at the University ofPhoenix to reach her dream of becoming an elementary school teacher. (ABC News) "I don't want anyone else to be sucked in," said Melissa Dalmier, 30, ofNoble, lll.
The mother of three had big dreams to be an elementaty school teacher, so when she saw ads for the University of Phoenix pop-up on her computer, she e-mailed them for more information. A few minutes later, Dalmier said she got a call from one of the school's recruiters, who she said told her that enrolling in the associate's degree in education program at the University ofPhoenix would put her on the fast-track to reaching her dream. "[The recruiter said] they had an agreement with lllinois State Board of Education and that as soon as I finished their program rd be ready to start working," she recalled. Within 15 minutes, Dalmierwas enrolled. Since she didn't have enough money to pay for tuition, she said the recruiter helped her get federal student aid. In total , she took out about $8,000 in federally-guaranteed student loans. But just a few months after Dalmier started, she said she learned the horrible truth: the degree program she was enrolled in would not qualify her to become a public school teacher upon graduation in Illinois. "It was an outright lie. A bold faced lie," she said. Watch more of the undercover investigation tonight on" World News" at 6:30p.m. ET and later on" Nightline" at 11:35 p.m.ET It's not the first time that the controversial school, which obtains almost 90 percent of its revenues from students paying tuition from federal aid, has come under fire for its recruiting methods. The University ofPhoenix was one of 15 for-profit schools whose aggressive recruiting practices were the subject of hearings held by Sen. Tom Harkin, D-Iowa. The Government Accountability Office sent investigators to for-profit schools across the countty and found that all of them were misleading potential students.
In 2004, the University ofPhoenix paid nearly $10 million to the Department ofEducation to settle allegations that it had
violated rules about its recruiting practices. The school did not admit any wrongdoing. "I think maybe the whole orchard is contaminated," Harkin said. "There's a systemic problem with the system itself that needs to be addressed." ABC News wanted to know firsthand whether what Dalmier said happened to her, would happen to us, so we sent one of our producers undercover to meet with a University of .Phoenix recruiter. Our producer told the recruiter, who was working out of an office in Houston, Texas, that he aspired to be a teacher and planned to live in either Texas or New York. The recruiter told him to enroll in the Bachelor's of Science in Education program, and with that degree and some student teaching, he would be set. Producer: I just want to understand clearly. I can go to University of.Phoenix, do my bachelor's degree, and 100 percent for sure I can go back to either Texas, or New York and I can sit for those exams and once I finish those exams .. .! can teach. Recruiter: Then you can become a teacher. Yes. That is true. What's your e-mail address? Despite her assurances, the recruiter's claim was not true. Even with successful completion of the required certification testing, a degree from the University ofPhoenix does not guarantee a teaching certificate in either of those states. When we confronted Dr. William .Pepicello, president of the University of.Phoenix, about the recruiter's false promise, he
said it was "indefensible." "It's wrong. Can we do better? Absolutely. Do we train our people to give that kind ofrnisadvice? Absolutely not. And we can do better, we will do better, you know, we already have some initiatives that we talked about that we're putting in place because at the end of the day, we have to get it right." But this was not the first time that the university's recruiting practices have come under scrutiny. In December 2009, after two former employees came forward and accused the university of violating federal financial aid regulations with its recruiting practices, without admitting wrongdoing the school agreed to pay $67.5 million to resolve the accusations. The two whistleblowers received $19 million in the settlement. When asked if the 2009 settlement was a sign that "we got caught," Pepicello disagreed. "No, I wouldn't say it's proof that we got caught. I mean, it's certainly proof that we weren't doing as well as we could. We could do better," he said. The recruiter also told our undercover producer he could take out as much as $35,000 in federal financial aid to pay for school. She also said that there might even be some money left over after tuition was paid. Recruiter: I tell students to take out the max and whatever you don't need or you don't use then use it [for whatever]. But it's easier to take out more than you need and send back the excess versus you didn't take out enough. Producer: What are the kinds of things though? I mean in terms oflike that I could use it for? I mean, what ifl just... because you're going to have to have money to walk around. Recruiter: They don't care. Right. They don't. They just tell you use it for educational purposes. Producer: And they don't ... They don't what? Recruiter: No one follows up. No one says, What happened to this money? You received a check for $562, where did you spend it? Producer: It's your business. The university president said that there was no excuse for a recruiter to push someone to borrow to the max. 'It's absolutely indefensible. It is not the way that I intend to run this university," Pepicello said. For-Profit Universities Contributing to Financial Crisis? Experts say recruiters who are misleading students may only be the tip of the iceberg. Students who have attended forprofit schools are defaulting on their loans at an alarming rate, which experts say may be contributing to the next big financial crisis. At the University of Phoenix's headquarters, the loan repayment rate was 44 percent, according to data from 2009 provided by the Department ofEducation; students at their Nellis Air Force location had a repayment rate of36 percent. At the headquarters of Brown Mackie College, another for-profit school, the repayment rate was 27 percent. Harris Miller, who heads the for-profit industry's lobby group, told Chris Cuomo that default rates at for profit schools are comparable to other schools which service similar student populations.
Recruiters from for-profit schools obtained $24 billion in student loan and grant money for the 2008-2009 school year, according to Government Accountability Office and Senate reports. "These schools are marketing machines masquerading as universities," said Steve Eisman, a renowned hedge fund investor who predicted the last big mortgage crisis. "I thought there would never again be an opportunity to be involved in the short side as an industry as social destructive and morally bankrupt as the sub-prime mortgage industry ...Unfortunately, I was wrong." Though for-profits get the lion's share of their tuition from financial aid, the default rates on loans for students who attended for profit schools are alarming. About 50 percent of the students at for-profits drop out, according to Eisman, so schools need to keep adding new students, and have to try to recruit just about anyone-- even those most vulnerable in society, he says. Benson Rawlins was considered homeless last year when he met two recruiters from the University of Phoenix, who gave three seminars at Y-Haven, a shelter for transitional men in Cleveland, Ohio, or in effect, a homeless shelter. Rawlins doesn't have aGED, but said the recruiters had no qualms trying to sell him an expensive associate's degree. "It seems like it isjusttoo much all about money," he said, "Instead of helping someone get an education." The university told ABC News it does not tolerate recruitment at facilities like Y-Haven. "We can assure you that anyone who participated in the recruitment of residents from homeless facilities in Cleveland no longer works for the University," said Alex Clark, a spokesperson for the University ofPhoenix. "Any such activity is strictly forbidden by our Code ofBusiness Conduct and Ethics, and employees who violate this policy face disciplinary action up to and including termination." Harris Miller said even though the schools serve an important role by providing higher education to students who wouldn't ordinarily get one, many schools' recruiting practices need to be changed. Miller claimed that universities began to change even before the GAO's report on their misleading practices, including changing how recruiters are compensated (so they do not receive bonuses or prizes for recruiting students), offering "test drive" programs to help people figure out if higher education is for them and focusing more on consumer protection. When asked why for-profit universities don't return money back to those who have been misled by their solicitations, Miller said: "There are other countries in the world like Canada which have a different system and it's something we're going to look at." But Miller admitted that the industry has no plan in place to pay back those who are carrying a debt from for-profit schools. Whatever the industry's plans for future, Dalmier said it won't help heal what happened.
"If they tell you something, investigate it before you enroll in their program. You really need to find out the truth and how to further your passion or your dream," she said. "That way, you don't end up like me."
After ABC News' interview with Pepicello, the University of Phoenix offered Dalmier a scholarship for a bachelors degree of her choosing. Dalmier said she is considering their proposal.
Pepicello also said he plans to change the school's recruiting practices, especially the current model of compensation, and will be offering students a "test drive." Click HERE to read a letter to ABC News from William Pepicello.
From:
To: CC:
Date: Subject:
Robert MacArthur <nnacarthur@altresearch com> Robert MacArthur

3/26/2010 8:40:22 AM APOL -- Weak comments from the Street into the eps numbers on Monday

203-244-5174
This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The finn does not make a market or hold positions in the securities mentioned herein, nor does the finn maintain any investment banking relationships in such securities.
CREDIT SUISSE
26 March 201 0 Americas/United States Equity Research Education Services
Apollo Group Inc.

Rating Price (25 Mar 10, US$) Target price (US$) 52-week price range Market cap. (US$ m) Enterprise value (US$ m) NEUTRAL* [V) 62.43 65.001 78.94 - 53.86 10,161.11 8,300.44
(APOL)
stock ratilgs are relative to the relevant count!}' benchmarl<. 'Target price is for 12 months. {V] =Stock considered volatie (see Disclosure Appendix).
APOL Q2 Preview: See Few Surprises, But Risks To The Downside

APOL Reports 02 (February) Results on Monday, March 29, Before Market Open. Call will follow at 8 AM ET. Dial in info is: (877-292-6888, passcode: 56178523). Bottom line. We don't expect any major surprises, but think the risks are to the downside. Expected Operating Results; See Slight Downside Risks To Starts, Not EPS. We don't expect a large EPS surprise versus $0.78 Credit Suisse Estimate (CSE) or $0.81 consensus, as Apollo preannounced $0.77-$0.82 expected EPS on February 19. We do see downside risk to CSE/consensus starts (+10.5% CSE vs +8.4% consensus and Q1 's +13.7%) and enrollment (+15.5% CSE vs +14.6% consensus and vs Q1's +18.4%) estimates due largely to the ongoing business transition that management has indicated may weigh on Associates starts growth; we expect any upside to come from operating margin. See Slight Downside Risks to FY10/ FY11 Consensus; Reduce Ests. We doubt management will give EPS guidance, but we expect broad color on starts, enrollment, margin and negative Q4 BPP seasonality expectations may lead to slight downward revisions to FY10 and FY11 consensus estimates. We are lowering FY1 0 and FY11 EPS estimates from $5.20 to $4.91 (below $4.92 consensus) and from $5.65 to $5.50 (below $5.81 consensus), respectively largely to reflect more conservative starts and bad debt assumptions and more detailed modeling of BPP seasonality. We think risks remain to the downside. Expect Little New Regulatory Color. We don't expect significant incremental commentary regarding informal SEC inquiry or Gainful Employment. Thesis Update. Although we acknowledge (at 13x 201 OE EPS) APOL shares look cheap, there are a few sources of uncertainty that keep us on the sidelines. The uncertain regulatory environment presents obvious risks. However, we believe the biggest source of uncertainty for APOL shares relates to how much earnings growth will be hurt in 03 and beyond by the company's deliberately down-shifting Associates growth.
08/09A 4.22 14.8 85.3 3,974.2 1,220.5 6.02 10.8 7.6 -831 162.76 9.3 -1,202.2 08/10E 4.91 5.20 12.7 88.3 4,914.4 1,416.5 7.59 8.2 5.9 -1 ,861 08/11 E 5.50 5.65 11.4 92.2 5,296.0 1,560.7 8.75 7.1 4.5 -3,187 08/12E 5.80 10.8 99.3 5,532.1 1,628.8 7.81 8.0 3.7 -4,178
Research Analysts Kelly Flynn, CFA 617 556 5752 kelly .flynn@ credit-suisse.com Patrick Elgrably, CFA 312 750 2974 patrick.elgrably@credit-suisse.com Adam Shatek, CPA 312 750 3317 adam.shatek @credit-suisse.com
Share
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performance
Oil M 25. 2009 MO' 34, 20!0, :Y251111 - USS76 52 ..
:~
MarOO
Jtn.09 -pri:e Sep.Q9 Oe;;OO -lrdexedS&P !'DO
On 03124110 the S&P 500indexc/osedat 1167.72
Quarterl:l EPS 2009A 2010E 2011E
Q1 1.12 1.47
Q2 0.77 0.78
Q3 1.26 1.49
Q4 1.06 1.10
Financial and valuation metrics Year EPS (CS adj.) (US$) Prev. EPS (US$) P/E (x) P/E rei.(%) Revenue (US$ m) EBITDA (US$ m) OCFPS (US$) P/OCF (x) EV/EBITDA (current) Net debt (US$ m) ROIC (%} Number of shares (m) BV/share (08/09A, US$) Net debt (current, US$ m) Net debt!tot. cap. (%)(08/09A,
Source: Ccme.i!n.t: data, Credft Suisse estimates.
IC (08/09A, US$ m) EV/IC (x) Dividend (08/09A, US$) Dividend yield (o/o)
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 of this report. Investors should consider this report as only a single factor in making their investment decision.
CRCDITSUISSE
26 March 201 0
APOL Earnings Preview

Earnings Date/Call Details
Apollo will report 021 0 earnings on March 29 before market open and will host a conference call at 8 a.m. ET. The dial in# is 877.292.6888; passcode 56178523.
Summary of Modeled Expectations

In the following table, we detail our "key metrics" expectations for the second quarter:
Exhibit 1: Apollo 0210 Earnings

US$ in millions, unless otherwise stated
0210E Feb10
C red~ Suisse estimate Consensus Actual
0110A Nov.09 NA NA 1,270.3 $
0209A Feb09 NA NA 876.1
0210E YoY Growth
0210E Seq Growth
0110A YoY Growth
S 1,076.6
1,076.1 NA $
22.9 % 22.8 %
15.2% 15.3%
NA NA
30.8%
NA
NA
-46.5% -44.7%
Credn Suisse estimate Consensus Actual
$0.78 0 .81 NA $ 0210E Feb-10
NA NA 1.47 0110A Nov.09 205,400 171 ,000 71,900 7,300 455,600 0110A Nov.09 52,200 32, 100 13,100 700 98,100 0110A Nov.09 2,177 2,850 3,017 3.016 $2.576 2,439 2,090
NA NA
1.7% 5.2%
NA NA
30.7%
0110A YoY Growth
$0.77
0209A Feb-09 170,500 150,200 70,500 6,500 397 7001 0209A Feb-09 4 1,700 25, 100 12,500 700 80,000 0209A Feb09
NA
0210E YoY Growth
NA
0210E Seq Growth
Total Enrollments Associates Bachelors Masters Doctoral Total
204,019 176,224 72,057 7 ,074 459,373 0210E Feb-10
19.7% 17.3% 22% 8.8% 15.5 %

0210E YoY Growth
0.7% 3. 1% 0.2% 3.1% 0.8%

0210E Seq Growth
26.9 % 16.5% 3.0 % 12.3 % 18.4%

0110A YoY Growth
~
Associates Bachelors Masters Doctoral Total 44,619 30,873 12,312 560 88,364 0210E Feb10 Gross Revenue Per Student Associates Bachelors Masters Doctoral Total Total , Net of Discounts Total, Net of Discounts and Other Revenue
7.0% 23.0 % 1.5% 20.0% 10.5%

0210E YoY Growth
14.5% 3.8%
6.0" /o
20.0%
9.9%
0210E Seq Growth
14.0% 23.0% 1 .5 % 36.4% 13.7%

0110A YoY Growth
1,870 $ 2,501 2,622 2.914 2,112 1,879
1,773 2,405 2,469 2649 $2.149 2,os1 1,900
I
I
5 .5 % 4.0% 62% 10.0% 4.5% 2 .9 % - 1.1%
14.1% 12.2% 13. 1% 3.4% 12.8% -1 3.4% -10.1%
7.4% 4.2 % 6.5 % 15.4% 5.0 % 4.1% -3.3%
Bad Debt (% of Revenue)
0210E Feb-10 6.8%
0110A Nov.09 4.9%
0209A 0210E 0210E 0110A Feb-09 YoY Change Seq Change YoY Change 4.1% 269 bp 186 bp 134 bp
Source: Company data, Credit Suisse estimates
Guidance/Estimate Changes
We doubt management will give EPS guidance, but we expect broad color on starts, enrollment and margin expectations as well as negative 04 BPP seasonality may lead us to slight downward revisions to FY1 0 and FY11 consensus estimates. We are lowering our FY10 and FY11 EPS estimates to $4.91 (+16.5%) and $5.50 (+12.0%) from $5.20 and $5.65, respectively. Our 0210 EPS estimate remains at $0.78, although we have changed line item assumptions, including our bad debt assumption, somewhat. Key changes to 2010 estimates include:
Apollo Group Inc. (APOL)
CRCDIT SUISSE Enrollment growth to 14.1% from 15.4%; Starts growth to 9.6% from 12.8%; Revenue per student growth, net of discounts, to 3.7% from 4.8%; Revenue growth to 23.7% ($4,914.4 mm) from 27.7% ($5,075.1 mm); Bad debt ratio to 5.8% from 5.1 %; Operating margin to 26.1% from 26.8%.
26 March 201 0
Key changes to 2011 estimates include: Enrollment growth to 4.3% from 5.9%; Revenue per student growth, net of discounts, to 3.6% from 2.4%; Revenue growth to 7.8% ($5,296.0 mm) from 8.7% ($5,484.9 mm); Bad debt ratio to 5.5% from 5.0%; Operating margin to 26.8% from 26.6%.
Discussion of Expectations
Bottom Line: Expected Read-Through and Share Price Reaction
We don't expect many surprises as Apollo negatively preannounced 02 earnings on February 19. However, we think risks to starts, enrollments, FY1 O/FY11 consensus expectations and stock price reaction are to the downside.
We think risks to starts, enrollments, FY1 O/FY11 consensus expectations and stock price reaction are to the downside.
Preannouncement Details
On February 19, management preannounced the following 02 expectations: $1 .07 billion revenue. $0.77-$0.82 EPS including $0.02 litigation-related charge and $0.07-$0.09 negative impact from BPP acquisition. 6.8%-7.1% bad debt expense as a percentage of revenue (for 03 & 04, management expects bad debt to decrease as a percentage of revenue, but be flattish on an absolute basis). The above figures exclude Insight Schools results, which are expected to be reported as discontinued operations beginning in 02. Insight contributed $11 .6 million in revenue in 0110, $6.6 million in 0209, and $20.6 million in FY2009.
In 02, through February 18, Apollo repurchased 3.4 million shares; the Board also authorized an additional $500 million buyback on February 18.
Expectations for Results vs Consensus

Given the recent preannouncement, we don't expect a significant EPS surprise versus $0.78 Credit Suisse Estimate (CSE) or $0.81 consensus. We do, however, see downside risk to CSE/consensus starts (+10.5% CSE vs +8.4% consensus and Q1's +13.7%), and enrollment (+15.5% CSE vs +14 .6% consensus and vs Q1's +18.4%) estimates due largely to the ongoing business transition that management has indicated may weigh on Associates starts growth. As previously discussed, management announced on the 01 earnings call that the company has embarked on a business transition aimed at driving "better prepared" enrollments and shifting the mix away from Associates towards
CRCDITSUISSE Bachelors and Masters enrollments. Pursuant to this effort, Apollo has been piloting a new "University Orientation" program that requires prospective students with fewer than 24 accumulated credit hours to enroll in a free 3-week orientation program prior to enrolling in classes or receiving Title IV loans. Management expects this could hurt short term starts and enrollment growth, but help student retention and other business metrics over time. Management indicated on the 01 earnings call that the "University Orientation" pilot negatively impacted 01 starts growth by - 200 bps during 01; we believe the pace of the pilot rollout, which is very hard to predict given lack of management guidance on this issue, will significantly impact how starts growth will be impacted in 02 and beyond. Also of note, our forecasts reflect our expectation that Apollo starts and enrollment YoY growth rates will be negatively impacted by one fewer enrollment week (12 weeks versus 13 weeks last year) for Associates programs due to a calendar shift; this will not impact revenues, but we estimate it may lower 02 starts growth by 400-500 basis points. We expect any EPS upside will likely come from margin. We forecast a 435 bps YoY decline in operating margin, which calls for further deceleration from 01's -67 bps, 04's +138 bps and 03's +525 bps. We expect margins will be weighed down by BPP results and increased bad debt. BPP is highly seasonal given its more traditional fall start period and the timing of certification exams. Management indicated in the 02 preannouncement that it expects a $0.07-$0.09 loss from BPP for the seasonally weak 02. We forecast 6.8% bad debt expense as a percentage of revenue, versus 4.9% in 0110, 4.1% in 0209 and management's preannounced 6.8%-7.1 %. Management has attributed the increased bad debt expense to the economic climate, the mix shift to Associate program students, and recent operational changes implemented in 0409 such as the 30 day Title IV funds disbursement delay and evaluating transfer credits in advance of loan certification ; we hope they will provide a more detailed explanations on the upcoming earnings call.
Legal/Regulatory Color
26 March 201 0
We expect minimal color on the informal SEC inquiry that Apollo announced the day of the 04 earning release; we would be surprised to see resolution this soon. We also doubt that management will have any new color regarding the Department of Education's Gainful Employment proposal or on any of the "Program Integrity" issues.
How Much EPS/Revenue Outperformance Has Apollo Delivered in The Past?
Apollo exceeded the 0110 consensus EPS estimate by $0.01, excluding one-time items (which equated to a 0.5% upside surprise) after beating earnings by $0.02 in 0409. Apollo has exceeded consensus estimates in each of the past six quarters. Apollo beat the consensus revenue estimate in 0110 by $40.7 million (equaling a 3.3% upside surprise), after exceeding the consensus revenue estimate in 0409 by $42.2 million. Overall, Apollo has exceeded consensus revenue expectations by an average of $32.6 million, or 3.3% over the past six quarters.
APOL has beaten consensus revenue and EPS estimates in each of the prior six quarters.
CRCDIT SUISSE
26 March 201 0
Exhibit 2: EPS Outperformance Versus Consensus ($)

$0.20
Exhibit 3: EPS Outperformance Versus Consensus (%)

25.0% . . - - - - - - - - - - - - - - - - - - - - - - - , 20.0% 19.2%
$0.15
$0.14 15.0%
$0.10 10.0% $0.05 5.0% 0.5%

0.0%
so.oo
Source: Thomson One, First Call
Exhibit 4: Revenue Outperformance Versus Consensus ($ in millions)

$58.15
Exhibit 5: Revenue Outperformance Versus Consensus
$60.00
$40.00
$20.00
$0.00
How Have Apollo Shares Traded Around Quarter In the Past?
In the week leading up to the quarterly earnings release for the past six quarters, shares of APOL have been up 0.8% on average. Following the past six quarters' earnings announcements, APOL stock declined 1.6% on average the trading day after the earnings announcement, but returns have varied significantly. The trading day after the 0110 earnings release, shares declined 5.4%.
Exhibit 6: APOL Stock Performance Week Before Earnings Announcement
Exhibit 7: APOL Stock Performance Trading Day After Earnings Announcement

15.0%
5.0%
4.4%
5.0%
5.0%
15.0% 25.0%
J __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _...J
.8
17.7%
e
0
<(
Source: FactSet, Credit Suisse estimates
Source: FactSet, Credit Suisse estimates
CRCDIT SUISSE
26 March 201 0
Companies Mentioned (Price as of 25 Mar 10)

Apollo Group Inc. (APOL, $62.43, NEUTRAL [V), TP $65.00)
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 APOL
APOL Date Closing Price (USS) Target Price Initiation/ (USS) Rating Assumption 91 - - - - - - - - - - - - - - - - - - - - - - - - -
ss
4/2/07 4/9/07 6/18/07 2/21/08 3/28/08 6/20/08 7/30/08 10/29/08 12/2/08 1/9/09 4/21/09 4/29/09 4/30/09 6/8/09 8/18/09
43.25 48.37 63.21 41.21 52.83 62.31 65.01 75.68 85.27 61 .15 62.48 62.95 65.18 64.33
47 70 50 60 70 75 88 95 65
NC N
0
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Cfooirg Prire
R
N
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0 lnilialiJl!Assurrption
Rating
O=rull!ltom; N:lll!utmt U:Urdefll<!dam R=Restricted; NR=Not Rlled; NC:NotCoveed
65
R N
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts' stock ratings are defined as follows: Outperform (0): The stock's total return is expected to outperiorm the relevant benchmark* by at least 10-15% (or more, depending on perceived risk} over the next 12 months. Neutral (N): The stock's total return is expected to be in line with the relevant benchmark* (range of 10-15%} over the next 12 months. Underperform (U): The stock's total return is expected to underperiorm the relevant benchmark* by 10-15% or more over the next 12 months. Relevant benchmark by region: As of 2f!h May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on {1) a stock's absolute total return potential to its current share price and (2) the relative attractiveness of a stock's total return potential within an analyst's coverage universe .., with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock's total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock's total return relative to the analyst's coverage universe*'. For Australian and New Zealand stocks a 22%and a 12% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively, subject to analysts' perceived risk. The 22% and 12% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively, subject to analysts' perceived risk. ..An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
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26 March 201 0
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See the Companies Mentioned section for full company names. Price Target: (12 months} for (APOL} Method: Our $65 target price for APOL is derived from our discounted cash flow (DCF}-based model and based on the following estimates: 2009-19 revenue CAGR (compound average annual growth grate) of 7.0%, 2009 operating margin of 27.5% going to 37.2% by 2019, a WACC (weighted average cost of capital} of 16%, and terminal free cash flow growth of 3%. Risks: Several factors may affect Apollo's achievement of our $65 price target: 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 a high concentration of Apollo stock ownership within the Sperling family which could vote against proposals that actually benefit Apollo. 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. See the Companies Mentioned section for full company names. The subject company (APOL} 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 (APOL) within the past 12 months. Credit Suisse provided non-investment banking services, which may include Sales and Trading services, to the subject company (APOL} within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (APOL) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (APOL} within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (APOL} within the past 12 months. As of the date of this report, Credit Suisse Securities (USA) LLC makes a market in the securities of the subject company (APOL). Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (APOL} within the past 12 months. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada}, Inc.'s policies and procedures regarding the dissemination of equny research, please visn http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
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26 March 201 0
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APOL 0210 Preview.doc

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Rob MacArthur 11/13/2009 11 :45:42 AM APOL analyst presentation yesterday
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FINAL TRANSCRIPT
Thomson StreetEvents"'
APOL- Apollo Group at Signal Hill Education Preview Investor Conference
Event Date/Time: Nov. 12. 2009 I 9:00PM GMT
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Nov. 12.2009 I 9:00PM, APOL- Apollo Group at Signal Hill Education Preview Investor Conference
CORPORATE PARTICIPANTS
Chas Edelstein
Apollo Group - Co-CEO, Director
Brian Swartz
Apollo Group - CFO
CONFERENCE CAll PARTICIPANTS

Trace Urdan
Signal Hill Education - Analyst
PRESENTATION
Trace Urdan - Signal Hill Education - Analyst
Okay we're going to go ahead and get started. Please find a seat if you can. That would be great. I am very grateful to Apollo Group today for helping me back cleanup here and, as somebody described, the home stretch between conference and cocktails. We're very delighted to have with their first appearance at our Signal Hill Education Conference, are very excited fort hat reason. There's obviously a lot of interest in what they have to say, so that's another reason to be excited. From the Company today we have Co-CEO, Chas Edelstein, and CFO, Brian Swartz, and so they are going to tell us about their Company and we're going to ask them some questions. Chas?
Chas Edelstein - Apollo Group - Co-CEO, Director

Okay thank you, Trace. It's a privilege to be here. I'll try to spend a brief amount of time on a few overview type slides and then we can leave time for you to ask both of us some questions. The Safe Harbor provisions, I'll just leave here for you to read and just a brief agenda. We'll talk a little bit about our philosophy, how we think about what our mission is and what we're trying to accomplish at Apollo Group and how we look at long-term value creation. An educated world is a better world. It is really the philosophy.ln fact, you may see some of this sort ofthinking in our advertising going forward. It really is a concept that was what the Company founding was based upon over 30 years ago and that there really, you know, at that time there was no good way for adult learners to access the education, post secondary education market, and we've been innovating in that area really ever since. Our on-line education is celebrating its 20-year anniversary this year. When I first saw that I didn't even realize the Internet had been in existence for 20 years but it turns out it has. This is a slide just to give you a sense of how we talk to people internally about what we're trying to do and our values. And these are the four pillars of value, where it talks about our different constituencies and how we think about the way we make decisions in our business. Integrity and social respon sibility, we want to do the right thing and give back to our communities and that's important for our business because the business has a social mission. Changing lives through education is about delivering a high quality education to as many people as possible who can benefit from the education and we deliver that message very consistently to our people. We want to be sure that we have the best job that we can in the education sector and that's how we look to delivery long-term value, which is a cash oriented concept, returns on cash, and that's how we think about the value proposition.

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Just briefly, in term s of the market, we won't spend much time on this at all. You've been steeped in it all day today but it's important to note that 66% of working adults don't have bachelor's degrees and that's a group of people that can double their income if they have degrees. So the business is really about in the U.S. about reaching the people, who are not in the post secondary system and bringing them in and we tailor our programs to help students that might not be successful at a traditional institution. A lot of our students have risk factors and they have kid s or their jobs or they're married and we put services in place that really help them. That's the premise for how we're looking to grow the business in the U.S. And overseas the numbers are even larger. You know, by 2025 we expect there to be 250 million students in the post secondary education, in need of post secondary education. The numbers are very large and I get asked questions sometimes about where are you in the state of maturity as an industry and our belief is there's a long way to go, both in the U.S. and in overseas for sure. And the reason is, the thing that drives the growth Is, the value proposition to the student and we can never forget that. That is what drives our growth, our own profitability and our cash flows and the value proposition here is one way you see it, which is people with more education are employed, people with more education earn more money, but that's the fundamental piece that we can never lose sight of. This is a surprising statistic here. We talk about traditional schools and serving traditional students. It 's really eye opening to note that 73% of students in the U.S. today and in post secondary education are non traditional so, in fact, traditional students are the minority, traditional being graduating from high school, going and living on campus sort of the way I went to college. Most of the people in post secondary are not in that situation now and that' s another rea son for the growth that we've seen in our market. So we are in the business of providing the flexibility and the services that are needed by these non-traditional students. So how do we do that? an overview of the Apollo organization, the biggest piece by far at University of Phoenix with 90% of the revenues of the combined organization and University of Phoenix is - you know, continues to have good growth and good growth prospects and there'sa number of our other businesses, such as our global business where we're growing internationally, that we're looking to to add to our growth prospects and the longevity of those growth prospects but it's very clear to us that the lion's share of the economics, at least in the near term, in the next several years, is certainly going to be driven by University of Phoenix. The University of Phoenix, just to give you a sense of what it feel s like, it's focused on working adults. They tend to be older. The average age is around 30. They tend to be more female than male and about 46% minority versus around 39% in the population so it 's skewed toward minority students and that's really what we feel is part of our social mission. And so what do we do to meet the needs of this type of student body, our unique type of student body that has some of these risk factors? Well, we talk a lot about the student experience. The way we think about it Is what are the touch points with the student and what help do they need along the way? And that's what we try to bring to bear for those of you that listen to our conference calls, you hear about some of the programs and initiatives that we make in trying to be sure that we're providing the services to these students that they need to get through the program and reap the benefits of the degree that we offer in a high quality way. That includes certainly the faculty and the focus on the academic quality, which we spend a lot of time in terms of training the faculty who tend to be practitioners and really know their subject that they're teaching and the academic quality that we measure in terms of looking at the outcomes to the students and making sure that we're accountable in measuring the academic quality that exists. That's the regional accreditation is important to our students and it's important to us, as well as many of the other programatic accreditations that we have. Maybe I'll just take a minute to show you a commercial if we've got it teed up on what we're showing to the market. (Video Playing)
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This is really the next step of the I am a Phoenix campaign that you may have originally seen where we profiled our students and the successes that they've had. This is a campaign that we've more recently rolled out profiling our professors and our faculty and the success in the backgrounds that they have. Again, our research is showing that's it's important to our student base. It tends to be a more, an adult, an older student base, where they want to know what the backgrounds of the people that are going to be teaching them and so that's-- it's something that we're focusing in on our campaigns, as well as the substance. Maybe just to give you a little background on Apollo Group, for those that don't know us, it's a joint venture that we have with Carlyle. We own over 80% of the venture and we've made three acquisitions, a Chile, Mexico and london in the venture. And really the objective of the venture is to build a global network where our students can have the benefit of places around the world to look at if they might want to transfer to. The schools themselves share best practices and we have a vision of a global network where we're really buying things that will start with a seed, that we can plant and grow from that seed where maybe we can help with technology, where the existing school doesn't have the ability to go on line or help with some marketing practices or where we can add some value to what we buy internationally. Here are the three companies that we purchased already. We see -- we have Western International University on this slide as well because it's another vehicle that we -- even though it's not in the Apollo Group joint venture -- it's another vehicle that we'll look to for international focus and international growth and we're making investments in Western International now, hiring new management team that we've had in place for a few months and really looking to grow that business in addition to the University of Phoenix business certainly. Just a little bit about long-term value creation and how we think about creating value for all the shareholders, as we think about how we deploy our capital, it's very clear that our highest return asset is University of Phoenix and will be for a long time, many years. The incremental returns on capital in that business are almost 200% and that is a very capital efficient model, so certainly any capital requests from the people that are managing the University of Phoenix, those are the very highest things on our list. And then after that we look to other investment opportunities that we have to invest in our existing businesses and WIU, as I just mentioned, is an example where we see an opportunity to get some good returns on the capital investing in that business that already has a good reputation and accreditation and the base that they need. And we look at other acquisitions. We also look at a potential return of capital to shareholders in that equation and think about that in terms of the returns that we're likely to get and, as those of you who have followed us know, we certainly have engaged in share repurchases over the last year or two in a significant way, as well as acquisitions and investing in University of Phoenix. We've been able to really do all of those things because of the very significant cash flow generation characteristics that this business has. Now the investing that we do is really in thinking about how we grow the cash flows in the long run and we believe solidly that the way to grow the cash flows in the long run is to be sure that the student is getting their value. If they are getting a return on their investment, then we are going to get return on investment. So our investments are to make sure the student gets their return. So that's why you see the focus on academic quality and making sure that we're delivering good outcomes to the students, both in an academic sense, what kinds of skills they're bringing to bear and making sure that we're being very up front and I guess educational with our students about what their opportunities are going forward. The other thing that, of course, we have to manage in the business are the risks of the business, the financial risks -- you know, you saw the pyramid that we showed about how we think about where we invest in the relative opportunities in the business. Regulatory and compliance, it's certainly an important risk in the business. The way we think about that is certainly process. We have to make sure we have all t he processes and procedures in place to make sure we're following the rules and we've spent a lot of time making sure we're doing that. It's a highly regulated business.
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The other part of that though is really culture and how we make sure we're doing the right thing by the student. I've talked about that a lot in even these shortened remarks because I want to be sure you understand how important that is to all the aspects of the business, not only the value to the cu stomer but in regulatory and compliance. In the end if we're doing the right thing by our students, then we're managing and having the right culture in that, we're managing the regulatory and compliance ri sk as well. So our reputational risk, the way you think about that is to be sure that everybody understands that we have to follow the highest ethical standards in our business. And so our long-term objectives, as we do that, is to really have a three to five-year growth path and this is what we're investing to do to grow our business at the top line and the revenue basis in the low double-digits and at the operating income level in the mid teens and that's really our objectives. So, with that, it's in a shortened way I wanted to just be sure we leave some time for Q and A, so I'll join my colleague, Brian, our
CFO, and we'll help with whatever we can.
QUESTIONS AND ANSWERS

Starting off with the last point you made I think, about the culture in the theme of maybe trust but verify, how do you --can you describe kind of the controls that you have basically for making sure that the folks that are still working in ground campuses are doing all the things that they need to? And maybe also speak just to the issue of recruitment and, you know, you have a culture and standards but how do you know that it's also being followed in addition to sort of leading? How do you measure and check and can you talk to that?
Chas Edelstein - Apollo Group -Co-CEO, Director

Sure. Brian, you want to talk a little bit about how we monitor some of the phone calls and the training that we do?
Brian Swartz - Apollo Group - CFO

Yes. I mean, the business is structured as such that we manage the business first of all regionally and for our graduation team s, which was on the slide with composed of finance counselors, academic counselors and enrolment counselors and in each of those functions, which are several thousand of our employees, we have functional leads that help manage both t he delivery of training, the types of people we hire, how we hire them, have frequency of training. We also go through processes of monitoring calling with each one of those counselors when they're on the phone with students, the types of things get said. If we hear things that are said that are maybe said the wrong way there's follow-up actions that are taken to both the manager and the counselors themselves and so it's an iterative process but I think the key is really developing the training and taking the training to the next level to make sure that if we do something wrong but making sure that doesn't become a systemic issue to the system and so we do. We spend a lot of time on talking about that and making sure we're sending the right messages.

There are some neat new tools in this area too that if, for example, there is a voice recognition tool where if somebody uses the word "guarantee," for example, unless there is the word "no" before it a flag gets raised, so there are tools you can use to monitor but the key is in training and culture and making sure people understand what's expected of them.
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Of course, and then similarly just I don't want to get bogged down with revenue recognition but I am going to ask a question that relates to my own pet theory. So, around attendance taking in the local level, who takes attendance? How does that work? How do you make sure that that's being handled properly, again, just at the ground campuses. Obviously in on line it's a little more straightforward.

Want to do it again?

Yes I mean when students-- generally our students come to class one night a week, so it's one evening, generally Monday through Thursday and when they come into class there's small group sessions. They sign in. We take attendance that's processed through in some cases it's an automated system and some region s where the attendance is loaded into the system and they're either in attendance or if they didn't sign in, they're then out of attendance. And so that's how it happens generally on the ground campuses. In the on-line environment it's a little bit different obviously because there's not one night a week. They can come on line whenever they want, 24 hours a day, seven days a week and attendance occurs once they log onto the system twice in any given week to make sure they are participating in the class discussion.

Taking attendance, by the way, is not required.

We do that at our option yes.

Chas, you showed that advertisement that I think was pretty compelling and you guys have this Phoenix campaign, which is something relatively new for you in terms of sort of image advertising and it's running in all kinds of places like the NBC Nightly News and places that I am pretty sure are not big sort of lead gen vehicles for you, so can you talk a little bit about what the motivation for the ad campaign is and sort of how you're thinking about it and how you're sort of measuring its effectiveness? How do you know if it's working and what are the standards and then how do you know whether you're meeting those objectives?

Well, the philosophy behind it is that the better your reputation is the less money you have to spend on advertising for to get students, to bring students in. So when you think about elite universities, which I understand is not our market, those universities don't spend a lot of money on advertising, yet they still manage to get people coming to them and interested. So we understand fundamentally that reputation lowers -- higher reputation lowers cost of lead generation. So that's the philosophy behind it so that is exactly the thought process there.

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We are spending increasing amounts of money to build reputation, which are not going to generate leads the day after the ads run but we believe will generate longer run benefits. So we measure that in a number of different ways. If, for example, more people or the things that we're doing more people are driven to our website as opposed to coming to through third-party lead aggregators, well our website leads convert at multiples of our other sources, so we can see what's happening in term s of what our costs of a new student enrollment is over time.
Trace Urdan - Signal Hill Education -Analyst

You've referenced in the presentation that you serve working adults and it's certainly true but my perception is that the nature of the work can vary pretty widely in your student population, so an Axia student who has maybe few credits and is really kind of getting going with their college education is very different obviously from somebody who is coming to you for a Masters in business and already has an established career. So how do you think about what the value, how the value proposition is different in that chain and where I am leading to is your guys are working adults? You don't worry so much about finding employment for them but might it not be the case that the students who are coming in at the Axia level really do have the expectation that when they come away with their degree that they really should be able to use that to kind of change the type of employment pretty dramatically and where does your responsibility in that equation fall?

Well, it's still the case that most of the students that come to us are working but I think that we are still learning about some of the needs of Axia students, you know, the Associate Degree students. That's newer for the Company though. That's in the last five or six years. It's not a 30-year history and I think in some of the things that we're learning about that we're trying to get better at our mission. And, you know, I talked in my remarks about our mission being trying to reach as many people as we can with a high quality education who can benefit. Well, so reaching as many people as we can speaks to our philosophy of open enrollment and that is going to continue to be our philosophy. But on the other hand, are there more people coming to us today either because we have Associate Degree programs available or maybe because the K-12 system is not preparing people as well as it was 10 years ago or whatever the reason. Are there more people coming to us that are less prepared for college and may have lower success in getting through college? College is hard and so if there are things we can do, given this changing environment, to better identify those students that would be a terrific thing. So the best, the ideal thing, would be if we could figure out how to identify that student before we pay for the lead. That would be perfect if we said, "Well, these are the criteria, leads that have come from this source or students at this number of credit hours" or whatever the criteria are, those are going to be really difficult. We could reject those leads as unlikely to be students that can benefit. You can have another screen, if you will, at the level after a student applies saying what can we do after a student applies to see if we can identify student s who are not likely to benefit and we're working on a test right now of a targeted group of students, students that generally have lower credit hours when they come in and putting them through a three-week orientation program, saying look we're not going to enroll you as students yet. We're not going to charge you. It's free but just go through this three-week program. It will give you a feel for what it's like and we're having students going through that saying, "Wait a minute, I'm not ready for this. This is hard." And they're self selecting out and so there are things that we're trying and doing now because of this increasing number of students that we're getting that are not as well prepared to try to be sure that we're focusing on the students who can benefit from the education. We're not trying to be an exclusive University. We're trying to make sure that the best we can to make sure we focus on students who can benefit.
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But isn't there- - I mean, I guess my question is basically this. I think that everybody who comes is sort of working adult because they need to live but some of the students I guess I believe, especially maybe more of the students that are coming in at the- in the Axia program and at the - with fewer credit hours are coming to the University with the expectation that this is going to unlock opportunities for me. This is going to go from so I can quit this job that isn't very productive for me and move into a career that I really am excited about and make that transition versus a sort the historical Apollo student who is somebody who is currently already maybe well along in their career path and needed to keep going. So, given that maybe, again, I don't want to put words in your mouth. But, given that maybe some of these students are coming with the expectation of changing their jobs, of moving to a new level, doesn't that kind of drag you guys into the career placement business to some degree?

You know, there's a -- that's not the focus of our energies right now. At some point in the future might it be? It's sort of hard to say but, as a university, we want to be in the education business. We're really not looking to be in the job placement business nor do we represent that that's what we're doing.

Okay fair enough. I want to give the audience a chance to ask questions. I don't want to -- I think maybe there might be. Does anybody have a question? We have some mikes that we can bring around and could we please start with the easy ones? Doug looks like he's going to ask you an easy one. Come on, Doug, ask an easy question back there. All right. I don't think we have anyone brave enough to raise their hand, so I am going to -- there we go.

There we go.
Trace Urdan -Signal Hill Education - Analyst

I knew we could do it. Come on down, Doug.
Unidentified Audience Member

I have two very unrelated questions. I'll say them both at once. Number one, just on the marketing side I personally have had bad luck investing with companies at main stadium so I wonder what the thought process behind that investment, how much you think it's worth, how much you spent. That's sort of the first thing I am curious about. And also, I know you've addressed this already but, as much as you can tell us about this SEC thing and how, like how the process begins, what kind of negotiation you might have had before that then if you're looking into it and as much as you possibly can tell us about that.

Okay. One, on the stadium question I can't actually tell you what the thought process that went into it. I wasn't at the Company at the time but it is a good partnership that we have with the Cardinals and cost of it we disclosed. It's an escalating cost over
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FINAL TRANSCRIPT
time. I think it goes up 3% a year and it's currently around $6 million a year, so it's not a material cost to the Company but the historical thought process I really can't -- it's a 20-year contract though. That I can tell you. And in terms of the SEC informal inquiry, that we -- there wasn't a sort of discussion but, you know, they informed us that they were planning on doing this. It's we disclosed it voluntarily. It's actually what it's called is a non-public informal inquiry but we just -- we thought it was the right thing to do but there wasn't a sort of discussion about it. The fact that we're cooperating with it, that's voluntary as well. An informal inquiry, it's up to us what we want to do. But it's just that's what we want to do. We want them to come in and see whatever it is they need to see. You know, I would say I am -- we take it seriously. I mean, that's a something that you don't want to take sort of lightly. I am comforted by the fact that I know the people that are involved at the Company. I mean, I know the guy sitting next to me, who is our CFO, who has an accounting background and came in to clean up some of the accounting practices that-- and make sure that everything was in good shape during some of the options problems the Company had historically. I know Joe D'Amico, who has a forensic accounting background, who came in as a consultant at that same time and has combed the accounting records of the Company and is now our President after being CFO. So I know the people and where their hearts are and I am very confident about that. You know, it's hard to say much about the substance of anything when you don't have much more of a base to know what it is that you're being asked to comment on. But I -- my hope is that they sort of do the work that they need to do and we can move on with it.

Chas, you've known this Company for a long, long time before you joined it.

True.

What surprised you most once you kind of came inside versus what you had understood before that happened?

I think a couple of surprises, maybe one on the positive side and one on the negative side, the positive one was probably that when you meet -- you know, as an investment banker I sort of know the executives at the Company. I hadn't had a chance to meet people down in the organization. When you go to the campuses I went to Cincinnati yesterday on my way here before I came here and I go to campuses. One or two days a month I spend going and visiting campuses. You meet the people in the organization, the people who are running the regions or running the campuses and they are passionate about what they're doing almost to a religious extent. It's this sort of desire to make a living and get into heaven at the same time, to tell their mother about what they're doing and just they want to tell me the stories about a student that they helped and what they did.lt's an asset that I wish I could just bottle and it's a great asset of the Company that it really didn't -you don't have a feel from the outside looking in to that. It's quite something. Probably the thing I was most negatively surprised about it when I first came a little over a year ago and I talked to people about what strategic ideas were and where we want to head, people would talk to me about one of the things we have to overcome is the fact that we're large and can we still grow and I am thinking large is one of the reasons why I came here. This is the resources that we have are enormous and the things that we can do with those resources and there's so much more room left to grow

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and I showed whatever, 60 million people that don't have a degree yet in thi s Country and hundreds of millions of people oversees where on line hasn't even started yet. It's still early in the infancy. I think there's so much opportunity in the industry and there Is -- and our size and resources of the kind s of people we can hire, technology people, like world -cla ss people where we can two or three years from now have a learner management system that is really, you know, it's the next generation. We have the ability to stay in a leadership position. I think that's one of the big exciting things and here I come in and people are telling me that's one of the things to get over. It was just a surprise to me, so 1 -
Interesting.
Kind of following on what you were just talking about, and we heard people discuss earlier today that with certain resources you could develop better and better on-line programs and be more and more competitive in that space. I was listening to Greg talk about something the other day that he basically talked about University of Phoenix and Apollo as a laboratory where you have this huge wealth of information of every keystroke anyone has made on line and you have insight into people's thought processes, things like. Can you talk about how you're using your resources and that information to maybe generate a better product going forward and further distinguish yourself?
I think that's one of the things that excites us. I mean, we've been tracking those keystrokes for 20 years and we've got lots and lots of data on hundreds of thousands of people and how they learn. Honestly, I don't think we've taken great advantage of that yet. I think that that's -- I would put that in my category more of opportunity than here is what we've done and here is the result. And because right now I think that that information is more data than information but I think it has the potential to do a lot. I'm not saying we don't do anything with it. I mean, we do some things with it in trying to understand, for example, in retention what are the factors that cause students to drop out with higher frequency? So we know things about their age or where they came from in terms of their zip code or where the lead came in from. There are things that we use the data for but in terms of the cognitive skills and what we can do to the academic quality in terms of our research, I think there's a lot more we can do there, so that's one of the future opportunities really more than past.
Anyone else?
Can you buyback stock?
Good question.
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Chas Edelstein - Apollo Group - Co-CEO, Director Well, our share repurchase is governed by a couple things. One, I showed you the pyramid where we think about the relative investments and what are the returns of those investments? You add to that with share repurchase when our, what our policies are. You know, we have certain blackout windows where we don't buy stock, you know. at the last month of the quarter and until earnings are released or two days after earnings are released and also the lawyers weigh in on that. so we're in dialogue with lawyers about what are the factors that beyond those policy windows that would enable us to buy stock or not buy stock so we don't talk about it, you know, exactly on this day the lawyers say this. On that day the lawyers say that but it is true that we consult with our lawyers about when in their view it's acceptable.
Trace Urdan -Signal Hill Education - Analyst And have they expressed an opinion with respect to the informal inquiry?
Chas Edelstein - Apollo Group - Co-CEO, Director I get an opinion from a lawyer almost every day.
Unidentified Audience Member Yes can you talk about what you're doing on the PR front and the legislative front, maybe that you weren't doing six months ago? And not marketing but more public relations, given everything that's going on.
Chas Edelstein - Apollo Group - Co-CEO, Director Well, I think -- I mean, I wouldn't call this PR but I would say substantively, with regard to our regulators, we have really had a focused effort on building relationship there so I don't know exactly all the things that went into those relationship building processes before but this management team was here but I can tell you that Joe D'Amico has spent a fair amount of time with folks at the Department of Education and making sure they understand how substantive we are about how we think about thi s and that's sort of the I guess the rea l aspect of it but it's not really PR. It's let us help you understand how we're thinking about it and let's be a partner. What are you thinking about? So we spend a lot oftimewith that but we have things in the advertising as well. I mean we just started a program in Washington, where in the Washington area where we're getting the word out. We have in certain publications we're trying to get our message out about what we're trying to do, the things I am talking about here, the things I talk about with our employees. It would be good for us and we understand that, not to just do that in our own offices but actually to let people know a little bit about it, so we have a much broader effort in those sorts of campaign s than we have in the past.
Unidentified Audience Member I do have one now. So you guys just finished your year and you gave three, you sort of gave long-term guidance and I'm sure you guys had a lot of discussions as to how you're going to figure those numbers out and what you're comfortable presenting to the investment community and that probably took weeks, months. It just struck me that we're here at plus 10% unemployment so how did that factor in at this point in time as you guys look out three years? How did you-- I mean, I am assuming you did some bottoms up and some top down, so how did you weave 10.9% unemployment today forward into 2010, '11 and '12 to get to your numbers?
10
FINAL TRANSCRIPT

You know, what I would say about that is that we're cognizant of the economy and we do think that we get some tail wind from that fact of where the unemployment is but remember most of the students that are coming to us are still employed. So my experience in a long-time participant in the industry, not in this role, but in an advisory role, is that generally schools that are more career oriented, more trade schoolish, they tend to have more cyclicality or counter-cyclicality with those markets than a university will, which is really more dampened, so I would say what you see in our longer-term targets that we talked about are lower growth rates than we're experiencing now but not dramatic changes and that's the right way to think about the tail wind that we might be getting.

All right, one more in the back and let's make this the last one.

I have a question. What's the chance that the regulators at the end of the day decide to move the Title IV limit from 90/10 to 85/15 or 80/20 and what would that -- what would the impact -- what kind of impact would that have on the market?

Well, to be -- so the 90/10 rule, for those that might no know it, there's a limit as to how much of your revenues on a cash basis you can get from Title IV, 90%. And that is part of legislative law. It's not part of the negotiated rule making, just so everybody is clear about that. That would require legislative change, not interpretative change, which is what's going on for negotiated rule making, so if you're asking what's my opinion about the chance of that legislation being changed, I think that there are greater numbers of people in Washington that understand that that particular rule is causing an unintended consequence. Our programs, they vary but they're generally around the limits ofTitle IV funds. Some are a little over, some are a little under but they're around that. If we were starting to bump into 90% and potentially going over 90%, which would put our participation in Title IV at risk, we would definitely consider raising prices in order to have funds coming in beyond Title IV. And for the government to push us and others into raising their prices in order to meet this rule is not really the intended consequence, so I don't think there will be a very near term, you know, in the next few months change to this. But I think in the longer term when Congress maybe next reauthorizes the Act. which is something like four years from now, I think there's more likely to be dialogue because I do think there's more of an understanding. There's more likely to be a dialogue to get to change that rule, to get it out and replace it with something else or -- they don't want to push us into raising tuition. I am pretty confident of that.

Okay we'll release you now. Thank you so much.

Thank you, Trace.
11

FI NAL TRANSCRI PT
Nov. 12.2009 I 9:00PM, APOL- Apollo Group at Signal Hill Education Preview Investor C onference
And t hank you, everyone, for coming t oday.
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1!:>2009 Thomson Reuters. All ri(1lts reserved. Republication or redstribution ol Thomson Reuters content, Inducing by
From: To: CC:
Robert MacArthur <nnacarthur@altresearch com> cclurrance@rai nmedia net roberta baskin Wittman, Donna Woodward Jennifer
3/24/20102:13:32 PM
Date: Subject:
APOL overstatement graphic (obviously keep to yourself)

203-244-5174
rmacarthur@altresearch.com
This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Altemati ve Research Services Inc. is forbidden . This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.
ALTERNATIVE RESEARCH SERVICES, INC.

RobettMacArthur tmacatthur@altresearch.com 203-244-5174 w 203-2 15-3843 c March 24,2010
Apollo Group (APOL) -- $63.40
Sell Short:
Market Cap. Shares Out. Short Interest Days short Avg. Daily Vol. St. eps est. 2010cy St. eps est. 20 l 1cy Px/book Px/sales Px/EBITDA
Source: Bloomberg
$9.8 bil
154 mil 8.4 mil 2.27 3.72mil $5.26 $6.14 6.7x 2.30x 7.0x
Final Pre-EPS Commentary Reporting 3/29 Confidence Level High Risk to the short thesis: Pell disbursement in 4Q09 of $317M could indicate strong revenue
"Hello Rob, After four months of relentlessly pursuing the unethical and corrupt charge of $1225 on my personal account, the Financial Grievance Committee of UoP met and appropriately decided to cancel the alleged debt. This is a testament to the power of persistence and insistence on justice. However, I am still fighting the battle of $4000 in Title IV financial aid that UoP applied for on my 1 behalf without my knowledge and permission."
Our biggest fear in APOL as we head into the EPS report befote the open on the 29th is our own naivete and timing. Adding some share buyback during the quarter and more PeU Runners, on the face, APOL could report a strong quarter ifPell is any indicator. In our last report, dated March 19th we sought to address issue of revenue/ emollment ovetstatement. We discovered APOL received $317M of Pell grant money up from $187.5M in the year ago period. Even w/seasonality that's high. It would not be hard for the stock to run to $70's assuming a big upside revenue from high velocity turnover. While the stock could see $70 our thesis remains, if anything, our conviction level is up. We assume ~$7.500 of Stafford loans to be taken out pet student that is also receiving Pell of$2.500. At $10k ofborrowing then $317 x 4 takes revenue for the quarter to $1.2 billion. That's high because of the churn discussed in the March 19th report but worth noting because of over weighting of Pell money versus last year. In the absence of a
In the interview, lhis student claims that a UOP enrollment cotmselor signed an "e-signature" document effectively forging lhe students ' signature and keeping the student enrolled and receiving funds for several courses after the student was in attendance.
1
174 Silver Spring Rd. Ridgefield CT 06877 rmacarthur@altresearch.com
March 24,2010
negative catalyst such a regulatory Issue, a strong EPS number should come as no surprise.
10/01/09 12131/09 122,672 $317,559 59% 40% 07/01/09 09/30/09 76,980 $189,413 -11% 52% 04/01/09 01/01/09 03/31/09 89,949 $189,278 3% 35% 10/01/08 12/31/08 87,345 $187,572 73%
Time Period UOP Pell Grant Recipients Pell Grant Disbursements to UOP ($000) Sequential Growth in Pel/ Recipients (%) YoY Growth in Pel/ Recipients(%)
06130109
86,209 $175,582 -4% 36%
APOL Total Associates & Bachelors Enrollments APOL Total New Associates & Bachelors Enrollments
09/01/09 11/30/09 376,400 84,300
06/01/09 08/31/09 364,800 87,100
03/01/09 05/31/09 342,700 74,800
12/01/08 02/28/09 320,700 66,800
09/01108 11/30/08 308,600 71,900
Potential Overstatement--See Attached Diagram Attached is a diagram outlining the potential ovetstatement of revenue and enrollment at Apollo. For clarity, the diagram has a few key assumptions: 400k students instead of the actual -455k, 200k new enrollments, lOOk drops per quarter, tuition of $4k per existing student and $2k (partial attendance) per new student. Netting out drops vs. new enrolhnents, total new enrollment would be up lOOk to 500k m 25% gtowth. If the company is not behaving properly i.e. making late refunds, incorrect refunds etc, and keeping students enrolled, essentially holding them hostage, the school may be "skimming" half, or more, money due back to the government. Assuming a 50% skim, the additional revenue would be up 37.5% vs. the 25% enroll1nent growth. For a teality check we observed the ratio of revenue growth to emolbnent growth and found that in every case going back going back several quarters, revenue was always higher.
1g10 REV GROWTH, YoY Associates Bachelors Masters Doctoral Gross Revenues Discounts Discounts as a % of Gross Revenues (BPs) Total ENROLLMENT GROWTH, YoY Associates Bachelors Masters Doctoral Total 36% 21% 10% 30% 24% 45% 76 23% 4g09 52% 23% 11% 24% 30% 33% 15 29% 3g09 53% 19% 7% 19% 26% 5% -81 27% 2g09 48% 15% 10% 19% 23% -6% -143 25% 1g09 50% 11% 10% 15% 22% 22% 0 22%
27% 16% 3% 12% 18%
37% 15% 5% 15% 22%
39% 13% 6% 17% 22%
41% 10% 5% 16% 21%
42% 7% 4% 16% 18%
2
Robert MacArthur m1acarthur@altresearch.com
203-244-5174 203-215-3843 March 24, 2010
Is this a fallacy? Are there other reasons this could be the case? APOL has pushed through some level of price incteases, which would contribute to the highet sales numbers. Better traction from advertising could drive as more unemployed people seek to return to college. Existing students could suddenly be increasing the number of classes being taken at any given time. Given that discounts were $61M last quarter up fiom $42.8M yoy, we doubt whethet higher pricing made an impact and that doesn't wash with the average revenue per student yoy: $2,177 1$2,027 or 7.4% for associates, and $2850 I $2717 or 4.8% for bachelor. Students are not doubling up, but then we are back to the advettising traction discussion. In the advertising, we think we have a substantial tailwind at our backs: "The price for advertising on Web sites of all sizes dropped by about 53 percent fiom Q4 2007 to Q4 2008, according to the index. The numbers also show that every vertical categoty suffered steep declines, with Business and Finance leading the way at 61 percent."2 Comparing against a 50% decline in the year ago period should remove the windfall of lower prices, flattening advertising as a percent of sales or growing if sales slow. Online ad pricing and advertising trends for 2009 showed an encouraging recovery fiom the economic downturn that hit publishers in 2008. Throughout 2009 ad pricing had been steadily gl'Owing till teaching the top in December 2009, where ad prices wete even higher than pre-recession. The PubMatic Ad Price Index 2009 states a 111% increase fiom the last quarter of 2008 to the last months of 2009. But which causes led to this strong recovery? 5 As demand picks up prices should recover. Online Advet'tising Stops Falling, Thanks To Search. After two straight quarters of annual declines, it looks ]ike online advertising revenues stabilized in the third quat'ter. The combined online advertising revenues of Google, Yahoo, Microsoft, and AOL rose 1.2 percent to $8 billion. (see detailed article Nov. II'" 09) Former Financial Aid & Emollment Reps Interview
Below is a transcribed section of an intetview with two fonner UOP employees. This tepresents about 8 minutes of an 80 minute conversation. Some vety minimal editing has been to make it flow more easily. The transc1iption is spliced into 2 parts as delineated by the solid line across, representing two sepa1ate sections of the convetsation. There we1e a few holes in the conve1sation that went unanswered (I didn't want to overstay my welcome grilling them for neal'ly 1.5 hours). We hope to have a follow up interview with source shortly. "D " was an emollment counselor both in Phoenix and at a regional ground campus so his experience was slightly longet. The wife, who also jumped into and out of the interview, was a fmancial aid supervisor. She recounted ugly stories of financial aid counselors doubling as collections agents or and
2
3
http://wwv.r.clicla.com/3632378 http://wwrw.masternewmedia.org/online-ad-pricing-and-advettising-trends-the-pubmatic-adprice-index-2009/ 4 http: I/techcrunch. coml20091 ll I 1llonline-ad vertising-stops-fa lling/
3
203-244-5174 203-215-3843 March 24, 2010
getting students to take out additional loans. She had also been a student. In our next report we will hopefully include more of her statements. One anecdote she recounted, she accidentally submitted a blank piece of paper for her online course for which she teceived an "A." <D> When you ask me about "How much does it cost?" my answer was not usually how much it costs. It was 'Well, I can tell you how to pay for it." You know what I mean? <Rob> Yeah. <D> So that just kinda ... We just kinda like danced around that, and then we would go back to: "Well, why do you want to go to school?", 'What' s wrong with your life right now?" ... 'What would your life look like if you had a degree?" And you really just kind of pump them up. It's really ... it's just kind of sad that the college education could be an impulse buy. That's what it was. It was an impulse buy for these people. <R> Do you think people were signing agreements to take out loans and they really didn't realize that they had to pay them back? <D> [sarcastically] Oh, are you kidding??? [more seriously] Ummm...yeah. <R> Just checking. <D> Yeah. Yeah, absolutely. I mean, they... we would explain it to them and they would think they understand, but they didn't realize it until they got information in the mail. By that time, it was aheady closed, [they were] ah-eady in school. You know, if somebody called me today thmugh Axia College, I could have them in class by next week. <R> Right. Do you feel like some of those people that were recruited should not have been recruited because of their lack of qualifications? <D> Umm... unfortunately - yeah. But I - I did the best I could with students. I would sit and talk to them. I had people there who I had to really teach them how to use then computer- in order to, you know, get the application filled out. You know, ah, I had one student who was going on-line, but he would come down to the campus and I would help him out-umm, take the time to work with him, show him how to copy and paste, and how to, urn, open documents and use the internet and his email and that kind of stuff... <R> Pretty basic stuff, I'd say. <D> Yeah, yeah. And uh... <R> Do they know how to read? <D> [pause] Well, in general - yeah. Yeah. Knew how to read, but that wasn't really my concern. My concern was: "can you fill out the application?11 <R> Yeah. <D> - you know, I didn't quality them to find out where they need to start or anything like that, because the way the school is set up, you take the first two classes - in Axia you take those no matter where you -where you fall. <R> Right. <D> That way, we can get them into school, and then work out the details. <R> I've heard a lot of stories about a high turnover of students, and low retention, particularly students that are taking out Pell Grants. Urn ... I've- I've heard that the Pell - that the dtop-out rate can be, you know, upwards of 50% after the second or third class. Urn, I've heard stories of students being told, uh, that they can take classes that cost $10,000, but the- and then they can borrow $15,000, and use the other $5,000 to do whateve it is they feel like, with the Pell Grant money. Do you know about any of that kind of st- thing, or ... ?
4
Robert M acArthur m1acarthu r@altresearch.com
203-244-5174 203-215-3843 March 24, 2010
<D> Yeah. Jfthere's money left over, then we let them know that it needs to be used for school expenses - but- you know, we could tell them that they're really the only ones that could decide what a school expense was ... because, if a person is about to lose their house, and they're not able to attend school, because of that, well -you know: is that a school expense? Js ... there's a lot of different things that can be looked at as "OK, well if I don't - if I don't use my [inaudible], then I'm not going to be able to go to school anymore, and therefore it's a 'school expense'." <R> R ight. <D> I mean, and, the students could figure out pretty quickly, that, uh, that it's not a reimbursement program where you're going to buy youT books and they're going to reimburse you. They~re going to give you -you're going to end up with the cash ... <R> You're talking directly about Pell Grants, correct? I mean, you're not getting this cash - the school receives the Pell Grant money and disbuTses it to the student, and if thete's, uh, T itle IV money that comes in, it just comes in to the school and the kid burns it off as a credit when it - just by taking classes. <D> Right, well - see, the loans would cover the school. The loans would cover the school, and the Pell Grant tended to be extra. 6 And you could tell you're students that, well, "OK - these are loans, but when you get your Pell Grant, that doesn't need to be paid off, so you take that money and put it towards your loans." But, who out there teally does that, you know? <R> You don't know how many students would have -what the retention rate would be after, like, the ftrst year? <D> [pause] Ah.. .I don't, but 1. ..1 don't recall really having very many students make it through the program, and we - that's one thing that I wish they would do, is let us Emollment Counselors know, down the line, how the students were doing, I mean they just disappeared off of our radar. We don't know what happens to them after their ftrst class. <R>I saw a posting by a former Financial Aid Counselot that said thete were a 100,000 students recruited, last quarter, and only 50,000 of them had - were there the followingby, by the end of the quarter.
<D> Yeah. That would- I mean -I would say that's pretty accurate. <R> A .50% drop-out rate in - within a S month period? <D> Yeah, and really the reason why is because you can't get somebody to, um, commit to ~ to 4 years on an impulse, you know what I mean? And that's what we did
<D> I don't know, I mean, my overall opinion is that, urn, it [the school/programs] could be good for a lot of people, but there's a lot of people that... don't need- they just don't have any business go ing that route, you know? <R> What percentage? <D> That's OK. I just need to think- I need to get a feel for it. When I was talking to people ... especially in Axia, because when I was enrolling people into Bachelors and Masters pl'Ograms- those people tend to have the skills. So that-that wasn't as bad. But Axia, where they maybe didn't have any prior knowledge, that's when it was worse, and I would say ... J would say 50% of the people I talked to, maybe, just ... for one reason or another ... maybe that wasn't the best route for them.
This implies to us that UOP may be taking out Pell grants for students that either dido 't need them or didn't qualify since it says the loans would cover the tuition. The revenue/emollment implications of this are substantial.
5
Robert M acArthur m1acarthur@altresearch.com
203-244-5174 203-215-3843 March 24, 2010
<D> Like you said, this could be like the next mortgage cl'isis, because ... thete's a lot of money going out to these people who can not ... teturn on their investment. They get half way through school, they,re in the same place they were before, without a degree, but now they've got all this debt. And they're not going to be paying it back because they're not out there getting the, the good jobs fiom the degrees that they earn - they're not getting the retmn on their investment. <R> So they could potentially accrue 20-30 thousand dollars worth of debt, and get into a $5 an hour job <D> Right. <R>- and never get out from under it? <D> Right. And there's just no return on the investment, and like, these are Government-backed loans <R> Do you know how many students they have now? <D> No. <R> About 460,000. <D> [long pause] [whistling thmugh teeth] 460, 000 ... <R> Do you know what they're revenue is? <D> [Silence.] <R> $4 billion. <D> [astonished] 4 bill ion doUars ... <R> And 86% of their revenue is coming fiom Title IV and ... student tmancial aid -
<D> Hhhmmm/1 And all of that money, I mean, a good portion of that is going to be defaulted on.
<R> What percentage do you think? so? 50? 20? <D> I. .. it's hard for me to say, but I would say.. <R> I don't mean to press you, but it 's kind of important. <D> Yeah, I mean ... I would say ... <R> 10? <D> You know-up, up to .5o%. <R> Just flat out default because they s- they quit after the first or second class? <D> Yeah, and they don't feel that they should have to pay it back. So, I would say maybe between 20 and 50 percent. And [it] would depend on what school you're looking at -
6
203-244-5174 203-215-3843 March 24, 2010
The rest of the group Pell grants: We highlighted the yoy g rowth of Ashford, (Bl'idgepoint-BPI) because ofthe 95% yoy growth rate in Pell money. For the quarter ended D ecember 09, BPI teported revenue of $131M, which by itself it S5% of revenue, not including the Title IV that goes with it. In other words, they are aggressively recruiting Pell Runners, too.
2009-2010 Awa1'll Year Gr ant Volume by Sd10ol Awanl Yea Quartel'ly Activity (1 0/01/2009-12/3112009) Sum of Recipients 122672 34062 19198 32205 18480 U864 13434 5594 10214 10032 4956 4937 8881 2,569,363 Sum of Disbursements $317,558,928 $67,892,847 $47,022,812 $40,494,275 $23,125,340 $20,848,677 $20,513,720 $14,184,138 $13,267,806 $13,260,830 $12,972,670 $12,848,901 $11,835,058 4,724,080,016
OPE ll)
School
State
%of disbu1-scmcnts 6.72% 1.44% 1.00% 0.86% OA9% 0.44% 0.43% 0.30% 0.28% 0.28% 0.27% 0.27% 0.25%
2098800 UN IVEUSII'Y OF PHOENIX 1072700 DEVUY UNIVERSITY 188100 ASHFOUD UNIVERSn'Y 458600 KAPlAN UNIVERSITY 145900 STRAYER UNIVERSITY 1014800 COLORADO TECHN ICAL UNIVERS ITY 2113600 AJfERICAN INTERCONTINENTAL UNIVERSITY \ 2166400 lNSTITUTO DE BANCA Y COMERCIO 1303900 S 0 UTH UN IVERSITY 153400 EVEREST UNNERS ITY 1019800 ECPI COLLEGE OF TECHNOLOGY 2559300 l iN ITED EDUCATION INSTITUTE 149900 EVEREST UNIVERS ITY
AZ
JL
JA JA
DC
co
IL
PR GA FL VA CA FL
2009-2010 Aw:u'll Yc:u Cnmt Volume by School Awanl YeaJ Q uarterly Acfi,-ity (07/0112009-09/30/2009) Sum of Recipients 76980 33056 33204 11032 %53 10767 6995 4,607,392 Sum of Disburse ments SJ89,4l3,197 $56,391,822 $51,569,166 $28,190,275 $25,795,418 $. 4,722,748 2 $19,075,618 9,183,611,+) 2.06% 0.61% 0.56% 0.31% 0.28% 0.27% 0.21%
OPEID
School
State AZ
2098800 UNIVERS ITY 0 F PHOEN IX 1072700 OEVRY UNIVERS ITY 458600 KAPL..<.\.N UNIVERS ITY 2166400 lNSTITUTO DE BANCA Y COMERCIO 267800 BRYANT & STRA'ITON COLLEGE 188100 AS HFORD UNIVERS nv 2151900 KEISER UNIVERS ITY
IL
lA
PR NY
lA
FL
7
203-244-5174 203-215-3843 March 24, 2010
8
203-244-5174 203-215-3843 March 24, 2010
From:
To: CC:
Date: Subject:
rob@altresearch <nnacarthur@altresearch com> rob@altresearch

6/ 18/2009 4:12:52 PM
APOL Philadelphia speech latest draft...comments and criticisms welcome
Robert MacArthur Alternative Research Service, Inc. Rmacarthur@altresearch.com

203-244-5174
This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This infonnation is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.
ALT ERNATIVE RESEARCH SERVICES, INC

Robert MacArthur rmacarthur@altresearch.com 203-244-5174 w 203-215-3843 c June 18, 2009
Ladies and Gentlemen: My name is Rob MacArthur. I am a research consultant in the investment industry. I have been following the for-profit education sector for over a decade. Over the many years I have watched the cat and mouse game between the Department of Education and the industry. Sadly, despite claims of being heavily regulated this industry has been largely unregulated tmder the Bush Administration. With a former APOL lobbyist at the helm of Post-Secondary Education, enforcement was lax despite numerous inspector general reports urging better enforcement. This disservice to tax payers has enriched the managements of the for-profit industry and left in its wake thousands of students who bought into the hopes of a finer future only to be overrun with student debt. I personally have no investments in the industry. I am here before you today to bring to your attention an issue which has received some press but has yet to be properly addressed by the Department; that is the corruption and chronic misbehavior of the for-profit education industry. There are many issues that the Department needs to address including: transferability of credits, default prevention, graduation rates, and of course, incentive compensation . Apollo Group, parent company of University of Phoenix, is largest school in the country. In 1998 the company had 71K students. That nmnber grew to 157K in 2002 and is presently 397K. How is tltis possible? In FY08 the company spent $322 million on advertising, most of which was on the internet. At the present rate of growth advertising will likely reach over $400 million dollars in 2009. The company spent an additional $385 million in FY08 on enrollment cmmselor compensation.
In fiscal 2008, 82% of University of Phoenix's $2.9 billion of revenue came from Title IV programs. And total revenue companywide was $3.1 billion in fy08. That's nearly $2.4 billion dollars of taxpayer money flowing through the company. In 2001 , with $770 million of revenue, UOP received only 10% of its revenue from Title IV programs.
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Robert MacA rthur rnJaca rthurl2'3@comcast. nel 203-438-0688 203-2 15-3843 June 18, 2009
Incentive Compensation Through heavy industry lobbying efforts and a f1iendly administration, the so called "Safe Harbor" provisions were established that effectively nullified the ban on incentive compensation for enrollment counselors. This devious loophole allowed the industry to bypass the regulation leading them to establish internal systems designed to prove that bonuses, that the industry calls "salaries," were based on factors other than the nmnber of enrollments made. This loophole has created a wave of defaulted debt and the taxpayer bears the burden. Enrollment counselors are overly incentivized to bring in students with no chance succeeding or paying off loans. There are many, many sad stories I can recount from direct interviews I have conducted with both former UOP students and enrollment counselors documenting the true horrific outcome for unsuspecting students. Similar stories are widely available in public depositions in the qui tam suit against UOP.
In the now frunous February 2004 progra.J.TI review of UOP, the author begins, "This report contains a serious finding regarding the school's substantial breach of its fiduciary duty; specifically that the University of Phoenix (UOP) systematically engaged in actions designed to mislead the Department of Education and to evade detection of it improper incentive compensation system ... "
The Department interviewed more than 60 present and former enrollment counselors prior to, and after the site visit. Most of the recruiters said that when hired, UOP told them that the job had tremendous finru1cial potential, a1.1d that they "could make a lot of money." UOP promised to "double or triple their salary in 3 to 6 months ... " In another deposition an enrollment counselor stated, " A: I was told to enroll students no matter what." ...regardless of qualifications. Another enrollment counselor complained that the potential student was illiterate but was forced to admit that person regrudless. The Department must take itmnediate steps to protect students from predatory marketing practices of this industry. Buried on its web site, UOP reports a graduation rate of only 9 .77%. Is that what the taxpayer deserves? Is tllis how we want to invest in America's future?
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Robert MacA rthur rnJaca rthurl2'3@comcast.nel 203-438-0688 203-2 15-3843 June 18, 2009
That national average graduation rate is closer to 55o/o.
Refund Calculations Regarding refunds, in an OIG report dated December 2005, the department found, "UOP applied inappropriate methodologies to determine the "percentage of Title IV aid earned" for calculation ... " "UOP did not have a policy to review the accuracy of payment period end dates for the purpose of calculating Title IV aid." "UOP systematically monitored students' status and progress, readjusting the beginning and ending dates of payment period to accommodate leaves of absence, "no shows" , failed courses or repeat courses. Referring to this process as "remapping", UOP readjusted payment period end dates and rescheduled second disbursement dates." - said the IG wrote another report in January 1oth 2008. And the issues at Apollo are proliferating. In November, 2008 Grand Canyon University came public with former APOL president Brian Mueller at the helm. Mr. Mue11er left Apollo in July of 08. In August of 08, the Office of the Inspector General issues a subpoena related to alleged enrollment practice violations and in September a lawsuit was filed citing rare for a company to go public while under such legal burdens. Grand Canyon' s revenues were up 66% in the March quarter of 09 to $59 rni11ion-not bad for a company whose revenue in 2005 was $51 million. Another company Bridgepoint, filled with fonner UOP employees, came public in April of 2009. They also have OIG audit under way. Their 2007 revenue was $85 million and $218 in 2008 and $84 million alone in the March 09 quarter. On May 26 2005, John Higgins, the Inspector General testified in Congress that 74% of their institutional fraud cases involve proprietary schools. " Violations .... occur when refunds are not paid tilnely, when incorrect calculations result in returning insufficient funds, and when institutions fail to pay refunds at all, which is a criminal offense under HEA." In March of 2005 the SFA wrote a letter UOP regarding its audit of WIU, a division of Apo11o Group. The Department found that 37 .5o/o of refunds were
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Robert MacA rthur rnJacarthurl23@comcast.nel
203-438-0688 203-2 15-3843 June 18, 2009
not made within the 30 day legal limitation. They found inaccurate refunds and refunds not paid at all. WTU incorrectly calculated refunds 25% of the time. Many late funds cite were up to 800 days late. Is this abiding by the spirit of the administrative capability statutes? I think not. While I understand the Administration ' s desire to improve access to college, the for-profit model is not an efficient way to achieve that goal. Intel even announced a few years ago they would no longer accept students with a diploma from UOP. One needs look no further than the ripoffreport.com and consumercomplaints.com other web sites where hundreds of complaints from former students can be found. Rather than recount their stories I am entering several into the record. The Department is ill-prepared through no fault of its own to deal with such ntthless, sophistication and distain for the law. Current regulations that are obsolete or have been softened by industry lobbying over years need to be improved. I have 3 specific recommendations: Incentive compensation for enrollment counselors should be suspended or at the very least based on graduates going out the door not warm bodies commg. Move the proposed " 3rd default rate" calculation change to apply retroactively not starting with the 2009 cohort but with current default rate data. Stru1ing with the 2006 default rate data the government would better protect itself against default rate manipulation as laid out in detail in the IG' s December 2003 report. Lower the cohort default rate loss of eligibility threshold from 30% to 15%. I am submitting my text for the record and would gladly provide supporting docmnentation for any of the facts referenced in my comments upon request.
Disclaimer This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for
Robert MacA rthur rnJacarthurl23@comcast.nel
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use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.
Robert MacArthur rnJaca rthurl2'3@comcast.nel
203-438-0688 203-2 15-3843 June 18, 2009
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Finley Steve Si~el Brian Burton Vanessa Scaniffe. Dawn Morelli, Denise Marinucci, Fred Jenkins Harold Woodward Jennifer Wolff. Russell Sann~ Ronald Wanner, Sarah Vamovitsky Natasha Yuan, Georgia 9/22/2010 8:51 :16 AM article from the author of the GE study that was published last week
From HigherEdWatch:
Guest Post: Gauging Gainful Employment
September 21, 2010 By Ben Miller Newspaper readers across the country have been greeted the past several days with full.-page color ads featuring large pictures ofsmjJing nurses, medical assistants, and mechanics under the headline "I don 't count? Some in Washington think I don't." The ads warn that new Gainful Employment regulations that the U.S. Department ofEducation has proposed would put 100,000 people out of work and eliminate educational opportunities for up to one million lowincome and minority students. This ad campaign is funded by Corinthian Colleges , a for-profit higher education company that could have a lot to lose if these regulations-- which would penalize proprietary schools for saddling students with more debt than they can pay back-- go into effect. So it should come as no surprise to readers of Higher Ed Watch that the ads ' claims are a bit hysterical. I recently conducted my own analysis of the Education Department's proposed gainful employment rule by looking at the pricing, repayment rates, and estimated salary information for over 12,600 proprietary school programs. I found that, under these standards, only a small share of programs would be in danger of being removed from the federal student aid programs. These new standards, however, would probably force many for-profit colleges to alter their pricing and approach to student debt- changes, that would, in other words, ultimately benefit the low-income and minority students these schools predominantly serve. The issue of Gainful Employment dates back to the first Higher Education Act of 1965 and makes perfect sense -if you
train people for specific jobs or vocations, you need to show that your graduates are actually able to find employment in the fields in which they train. Despite being on the books for 45 years, Congress never actually defined a way to measure gainful employment, instead giving colleges that offer vocational programs a free hand to report job placement and salary data in whatever way they saw fit. But now, with widespread allegations of lending abuses at for-profit colleges , the Education Department has decided that it wants to curtail that freedom. Under the regulatory proposal it released in July, the Department would start determining whether a program provides gainful employment by using hard data that judges programs by the ratio of the debt that graduates assume relative to their current earnings and the rate at which they are able to repay it. If programs offered by for-profit colleges meet certain thresholds on those measures, they' ll be fine and nothing will change. But if they exceed specific benchmarks, they risk losing eligibility for federal student aid. Programs that fall in between will have to warn students that they may be taking on high debt levels and could have their enrollment capped. Given the reliance of the for-profit education industry on federal student aid dollars, a proposal that threatens schools' participation in these programs is understandably very controversial. Much of the debate has centered on how many and what types of programs are likely to be affected. The Education Department estimated that about 5 percent of programs --representing about 8 percent of students at for-profit schools-- would lose eligibility. A study by an advisory company called the Pamtheon Group and funded by Cotinthian Colleges estimated the effect would be four times as large, affecting 32 percent of for-profit students. Such wildly different estimates makes it difficult to accurately gauge the standard's effect, let alone see what types of programs are most likely to be in danger. To shed more light on the subject, I decided to conduct my own analysis. Overall, my findings are not that dissimilar from the projections made by the Education Department. About 4 percent of programs would become ineligible for federal student aid, while 16 percent would remain fully eligible. Another 65 percent of programs would retain eligibility for student aid but have to warn prospective students about the debt levels they are likely to incur. The final 15 percent would fall into the "restricted" category and would have their enrollment capped. Not surprisingly, I found that the effects would be slightly greater at bachelor's degree programs, with about 8 percent losing eligibility and about 29 percent being restricted. That makes sense- obtaining a bachelor's degree takes longer, so students are likely to borrow more debt relative to their starting incomes. There are two categories of programs that appear to be most vulnerable. The first are those that train students in lowpaying occupations, like medical assistant, cosmetologist, and cook/chef. The second are those in high-tech areas that have better earnings opportunities, but also substantially higher costs. These include programs in areas like e-commerce, graphic design, design and visual communication, and Animation, Interactive Technology, Video Graphics and Special Effects. It's worth noting that there aren'ttypically lots of available jobs in these areas, so the pay is only good if you can get it. One of the difficulties with all these estimates is that there isn 't a reliable source that shows federal and private loan borrowing information for graduates by institution. Instead, my analysis assumed that student debt levels are roughly equal to the cost of tuition, fees, books, and supplies less federal grant aid. Tlus makes sense-- you borrow to pay for your education. Most students at for-profits are working full-time, so their salaries can cover living expenses and other costs. If anything, one would think this assumption slightly overestimates borrowing levels-- while about 92 percent of for-profit students take out loans, surely some must drag down the average by not borrowing at all or taking out only a small amount of money. So imagine my surprise when the main lobbying group for proprietary schools released a statement criticizing the report for vastly undercounting the amount of debt for-profit college students take on. The Career College Association tried to lay the blame on students , saying that they often borrow far more than they need. But it's not clear that schools are innocent in this practice. Recent investigations by the Government Accountability Office and ABC News have revealed
that some of the largest for-profit higher education companies have been encouraging their students to take out as much student loan debt as is available. Regard!ess, CCA' s argument sends a strange message : asking regulators to back off on the grounds that borrowing levels are even worse than we imagined. If this is true, then that only makes a stronger case for why the government needs to keep a closer eye on these institutions. Ben Miller is a policy analyst at Education Sector , where he writes for the blog The Quick and the Ed . Prior to joining Education Sector, Miller was a program associate in the Education Policy Program at the New America Foundation and a prolific Higher Ed Watch contributor. His views are his own and do not necessarily reflect those of the New America Foundation.
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Finley Steve Si~el Brian Burton Vanessa Scaniffe. Dawn Morelli, Denise Marinucci, Fred Jenkins Harold Woodward Jennifer Wolff. Russell Sann~ Ronald Wanner, Sarah Vamovitsky Natasha 2/112010 10:18:46 AM Article from the Chronicle on the Program Integrity negotiated rulemaking
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(much less detailed than the Inside Higher Ed article that Brian sent around earlier)
http://chronicle.com/article/Panel-Revising/63825/ January 31,2010
Panel Revising Higher-Education Rules Fails to Agree on Several Key Issues
By Jennifer Gonzalez Washington A panel charged with negotiating 14 regulations that govern colleges' eligibility for federal financial aid failed to reach consensus on several key issues, including how colleges can compensate student recruiters and how providers of vocational education must measure whether their graduates have achieved "gainful employment." The panel, which included federal officials and representatives of colleges, students, lenders, and others, ended three months of meetings on Friday after reaching consensus on only nine issues. Among them were the definition of a highschool diploma, the timeliness and method of disbursement of student-aid funds, and how to monitor student academic progress. The panel's decisions wouJd have become final only if it had reached consensus on every issue. Because it did not, the future of all14 regulations is now in the hands of the U.S. Department ofEducation. The department will probably follow the panel's recommendations on the nine issues the group agreed upon. But it is not clear how the department plans to handle the issues still under dispute-including the two most contentious, the rules on incentive compensation for student recruiters and on how colleges must define "gainful employment."
Division Over Incentives
In the middle of last week, it looked as if the panel was getting close to reaching consensus on the topic of incentive compensation. A subgroup of negotiators offered the department an alternative to the rule education offic1als had proposed. The department's recommendation, which took many of the negotiators by surprise last fall, was to eliminate the 12 "safe harbors" created in 2002 to clarify a ban on incentive compensation for student recruiters. The safe harbors specify types of college compensation plans that do not violate the ban.
Panel members were concerned that the department's proposal would leave institutions without any guidance on what is or is not pennissible. The department reviewed the subgroup's proposed alternative, which suggested eliminating the safe harbors but provided more guidance to colleges than the department had offered. Under the subgroup's proposal, institutions could make merit-based adjustments to employee compensation as long as those adjustments were not based on success in securing enrollments on a per-student basis or in helping the students acquire student aid. Elaine Neely, senior vice president for regulatory affairs at Kaplan Higher Education Corporation, who represented the for-profit higher-education sector in the negotiations, continued on Friday to argue that the language of that alternative was too stringent. "What we see in this is that we won't be able to compensate employees for doing their job," she said. "Based on the language here, we cannot compensate for the number of career fairs they go to, the number of students they speak to, the number of students they advise. Unless I completely misread this, you can't compensate a recruiter for increasing the number of minorities on campus." At the 1lth how, Ms. Neely suggested changes to the language but the department soundly rejected them. Because she did not sign off on the other negotiators' suggested alternative, it had to be shelved.
No Agreement on 'Gainful Employment'
The issue of defining "gainful employment" had seemed to stall in discussion on Thursday and never regained traction. To be eligible to participate in the federal student-aid programs, providers of vocational programs are required to prepare students for "gainful employment in a recognized occupation." But federal regulations do not define gainful employment or how institutions should measure their performance on that issue. So the department set out to define the issue during the negotiations. The department defended its proposal, which would measure gainful employment by using a debt-to-income ratio for graduates, an idea that drew opposition from many panel members. Only the student and consumer advocates on the panel appeared to support it. Opposition to the proposal centered around three arguments. Some panelists said it amounted to social engineering. Others cited a lack of data supporting its effectiveness. And some, equating the department's proposal to tuition control, questioned whether the department had the legislative authority to regulate such a matter.
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Brian Jenkins, Harold Marinucci, Fred Finley Steve Sann, Ronald

4/21/2010 10:54:34AM Article on Gainful Employment issue from Inside Higher Ed
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Going Ahead With Gainful Employment April 21 , 2010 WASIDNGTON -- A long recession and a wavering job market have brought for-profit higher education institutions into the public eye as never before. Big advertising budgets have given them name recognition. Dramatic enrollment growth (fueled by increasing amounts of federal financial aid) and assurances to students that a degree or certificate is the path to a comfortable job in a specific field have brought them scrutiny. Many newspapers, websites and TV networks have told the tale of programs at for-profit institutions that don't prepare students for the jobs they've been all but promised-- and plunge them into debt in the process. While the anecdotes are often true, they' re only part of the story~ plenty of for-profit colleges (the institutions themselves prefer the term "private sector" or "market funded") do prepare students for good jobs and don 't sink them in a pool of post-graduation debt. Title IV of the Higher Education Act of 1965 requires all for-profit offerings other than those clearly designated as "liberal arts," and non-degree vocational programs at nonprofit institutions, to show that they prepare students for "gainful employment in a recognized occupation." If they don 't, they're not supposed to be eligible for federal financiaJ aid dollars. No one, the U.S. Department ofEducation has contended, seems to have a satisfactory way of determining which programs meet that standard. "It's illuminating for us that when we ask institutions how they 're complying with this current law, we have not received adequate answers," says Bob Shireman, deputy undersecretary of education. "And this is the law." Through a process of negotiated rule making that began last year after passage of the Higher Education Opportunity Act in 2008, the department has sought to develop a formulaic solution to the dilemma, in the form of regulations that defme "gainful employment'' using data on incomes and debt loads, as well as completion, job placement and loan repayment rates.
In essence, this is a crude mechanism to assess the quality and value of vocational programs. The "good" programs that
help students get jobs without saddling them with debt could continue to exist and deliver Pell Grants and subsidized loans to their students. The "bad" programs-- the ones found to lead graduates to jobs they could've gotten without the educational experience or that don't pay well enough for borrowers to repay their loans-- would be identified and put under closer scrutiny. Representatives of the for-profit sector have aggressively fought such an approach, but most analyses so far suggest that the proposed regulations are unlikely to be a sector killer. The department has acknowledged the need for nonprofit and for-profit vocational programs, and has estimated that just 6 to 8 percent of programs that qualify for Title IV under
gainful employment would potentially need to change under the proposed rules. In research that's been circulated but not yet publicly released, the Career College Association, the trade group that represents for-profit colleges and universities, has less-conservatively estimated that close to 20 percent of career college programs and a third of the colleges' students would be affected. In what the department would consider a positive outcome, some of the "bad" programs would shut down, while others would lower ptices or work to improve their completion and job placement rates. Though some observers have suggested that rewriting federal financial aid policy would be a better way to address these problems, the Obama administration's Education Department is seizing on the opportunity it has now, with Democratic majorities in both houses of Congress, to effect change. The revision of the gainful employment rules could be a once-inan-administration (if not once-in-a-career) chance for Shireman-- who has advocated for reform and increased protections for borrowers since serving in the Clinton White House-- and his staff to tackle what they consider to be a major source of student debt. Shireman himself does not put it that way. "We have to do everything we can in the regulatory process, as well as in the legislative process, to protect taxpayers and students," he says. "We have these regulatory opportunities so we have to take them." He does acknowledge that he is unwilling to wait for the next renewal of the Higher Education Act, in 2013, when lawmakers would be most likely to make major changes in the law. "We' re not going to wait for a reauthorization to ensure that federal funds are being used appropriately." The department sent a version of the regulations to the White House Office of Management and Budget this month, and, though it's sti ll being revised, a final draft will be published by mid-June. Over the summer, there will be one last chance for public input and, by Nov. 1, the regulations will be printed in the Federal Register, to go into effect on July 1, 2011. Defining Gainful Employment The Education Department was slow to formulate a proposed definition of gainful employment. In November and December, during the first two week-long rule making sessions, the discussion among negotiators focused on whether the department had the statutory authority to establish a formulaic definition of gainful employment. Many negotiators saw the department's suggestions-- particularly one that sought to determine the value a credential would add to a recent graduate' s earning power, and to use that to determine an acceptable maximum tuition - as price controls. The most vocal opponent was the 1 negotiator representing for-profit institutions, Elaine Nee!y, senior vice one president of regulatory affairs at Kaplan Higher Education. In December, Neely said she was "flabbergasted that [the department] would impose price controls when clearly Congress itself has not been able to come to the decision to do that on higher education." By warning of a "slippery slope" toward price controls throughout higher education, Neely was able to get many representatives of nonprofit institutions on board in opposition to the proposal.
An idea that took up much less of the panel's time was the department's proposal to determine whether the starting
salary in the field for which a program prepared students was sufficient to pay the average annual debt obligation of the program's graduates. If the average debt load for a program's graduates was $9,000 on a 10-year loan with a 6.5 percent interest rate, students would have loan obligations of $1 ,250. With a debt-service-to-income ratio of 5 percent, the starting income in that field would have to be at least $25,000 to be considered "gainful employment." By mid-January, as the department and negotiators prepared for the third and final round of rule making, this debtservice ratio had become the department's preferred regulatory path. Based on a partial reading of a 2006 paper by
Sandy Baum, of the College Board, and Saul Schwartz, of Ontario's Carleton University, the department's ratio became 8 percent. (While Baum and Schwartz's paper discusses 8 percent as a generally accepted standard, most likely derived from mortgage underwriting standards, the authors suggest that a ratio as high as 18 percent could be appropriate for single people earning $150,000 annually.) Under the proposal made in January, which remains the only complete definition made public by the department, vocational programs would be eligible for Title IV funds if their graduates' median atmuaJ payments on a 10-year loan were no more tl1an 8 percent of the Bureau of Labor Statistics' 25th percentile of annual earnings for people in occupations for which a given program prepared students. Programs that exceed 8 percent could still be eligible for Title IV funds by producing what the department considers good outcomes: by showing that its graduates' annual earnings are higher than the BLS' s 25th percentile and keep the debt-income ratio below 8 percent; by documenting that students have at least a 75 percent repayment rate on federal loans; or by demonstrating a program completion rate of at least 70 percent and an in-field employment rate of at least 70 percent. In the third round of negotiations, debate was contentious and without resolution. Terry W. Hartle, senior vice president for government and public affairs at the American Council on Education, said he worried about cost, privacy and the potential for "unintended consequences." A former Bush administration Education Department official, Todd Jones, president and general counsel of the Association of Independent Colleges and Universities of Ohio, said he saw the proposal as ripe for lawsuits. Department officials were unwilling to reconsider the approach entirely, though they were open to constructive feedback. "We put things on the table partly because we think they're a good idea and partly to get input," Shireman says. The department started with its most extreme-- but politically viable idea-- and was ready to negotiate, but many negotiators seemed too intent on persuading officials to obliterate the proposals to make good, constructive suggestions. And, since the third round of negotiations ended in late January, the department has continued to discuss the proposals with stakeholders and to get feedback. "We recognize that some people felt- even we felt- that there was not enough discussion at negotiated rule making for whatever reasons," Shireman says. "So we continue to hear from associations and institutions, getting input from tl1em that continues to be helpful, to continue to hear what suggestions they have about what the term gainful employment should mean." Who Would Be Hit In broad terms, the Department ofEducation's goal is to determine which programs really are preparing students for gainful employment and not sinking graduates into chasms of debt. "There's a tremendous number of students graduating with incredibly high levels of debt," says Rich Williatns, higher education associate at the U.S. Public Interest Research Group, who represented students on the negotiated mle making panel. "And in some cases they' re unable to enter the fields they studied at the levels they tllought they'd be qualified for." Pauline Abernathy, vice president of the Institute for College Access and Success, anticipates the regulations "will lead to programs that are currently leaving students in terrible debt either having to change the quality of their programs or their cost structure." Before Shireman joined the Obatna administration, he was TICAS's president. But it's unclear whether the department' s proposed mles would really weed out those programs and would do so in a
way that kept all good programs up and running. "I don't think you can draw a line that separates the wheat from the chaff perfectly," says Mark Kantrowitz, publisher ofFinaid.org. "The choices are tough-- you either throw out the baby with the bathwater or, because you want to keep the baby no matter what, you're going to get some bathwater too. I think that' s a reality that everyone needs to come to terms with." When applied to the existing landscape of vocational programs, the department's approach would seem to favor programs at public institutions over private ones (either for-profit or nonprofit), those that required fewer credits earned over more credits, and those in higher-paid fields like nursing and information technology over lower-paid careers in the arts. Because the rules would apply only to certificate programs at community colleges, state universities and private, nonprofit institutions, they're less likely to force any real change at nonprofits. Tuition on these programs at public institutions is so low that it' s relatively rare for students to take out loans. If they do, they're likely to be small. Even at private nonprofits, where tuition is likely to be of a similar magnjtude as at for-profit colleges, the fact that the rules apply only to non-degree programs will keep many programs out of regulatory reach. Shireman and other department officials have insisted in many instances that the department is not "out to get" for-profit colleges and that it is not the department's intention to regulate the sector out of existence. "We have made it quite clear that we are interested in improvement and outcomes all across the spectrum, all across the sectors," he says. Nonetheless, it seems clear that the gainful employment regulations will force the most change on for-profit institutions, which will have to choose between lowering tuition, improving student outcomes or shutting down programs that don' t align with the rules. In the short run, at least, all of these options would hurt the institutions' bottom lines. Even if some programs end, says Abernathy, ofTICAS, "there will be plenty of other for-profit programs that will be very eager and capable of being able to meet that need, but that do so in a way where students and taxpayers are better off" For a field in which a for-profit institution offers multiple certificate and degree options, the ones that cost the least-- and often require the fewest credits-- are the ones least likely to be regulated out of existence. If an institution offered certificates, associate degrees and bachelor' s degrees in, for example, culinary arts, that allied to the same Labor Department-classified jobs and the same Bureau of Labor Statistics-reported 25th percentile of income, it's logical that the 8 percent rule would make the preferred outcome a certificate and not a bachelor' s degree. Kantrowitz, ofFinaid.org, says that though the department's existing proposals "really didn't consider the impact on bachelor's and graduate degrees," he thinks the next draft of regulations will because the department hasn't shown any indication of wanting to discourage students from pursuing longer programs. "Take an associate's degree versus a bachelor' s degree. Students are in school twice as long, paying twice the tuition, but they don 't have twice the income." Though programs would have the option of collecting their own salary data rather than relying on the BLS numbers, institutions often find it difficult to collect this information. As of now, observers say, few institutions have a comprehensive view of their graduates' incomes. Kantrowitz and others have suggested that the department use different labor data-- in his own calculations, Kantrowitz used federal Census data, which details age group and educational attainment but not field of employment-- but the ideal data set does not exist. Apollo Group, which owns the University of Phoenix and other institutions, said in a March 30 earnings call that it has begun the process of analyzing its programs. But, "given the number and range of disciplines offered by our universities
as well as the uncertainty regarding the implementation process of the draft proposal, our analysis is both extensive and complex." In mid-March, analysts at Morgan Stanley said they thought that Education Management Corp. (which runs the Art Institutes and Argosy University, among others) and ITT Educational Services would need to undergo the most widespread change to meet the regulations because of high tuition rates and, at Education Management, an enrollment that leans heavily toward low-paying arts fields. Two companies that would have very few endangered programs, according to Morgan Stanley: American Public Education, Inc., which focuses on serving members of the military and public servants, who are less Likely to take out student loans; and Capella Education Company, whose programs have very low loan default rates and would be able to qualify for Title IV funds under one of the alternative definitions ofgainful employment. Gregory W. Thorn, Capella's vice president of government affairs and general counsel, agrees that his company would probably have to make few changes to abide by the gainful employment regulation. "Capella is viewed by folks within the department as a high quality institution," he says. "We have a degree of comfort that however this plays out, Capella would be fine and Capella would be in good shape." And yet, until the final regulations go into place and the institution can collect and calculate all the appropriate data, Capella can't be sure that it's out of the woods. "There are so many moving parts," Thorn says. "It's premature to engage in speculation on how this is going to play out ... at Capella on a program-by-program basis." A leader at another for-profit institution with low cohort default rates said he also thought his programs would meet at least one ofthe gainful employment rules, but still worried that they might not. Insufficient data and a still-unclear sense of the precise regulations the department will decide upon has left him feeling a bit uneasy about the outcomes. The Feedback At every hint that the Department of Education is backing down from proposed regulations that would force some programs offered at for-profit colleges to lower their ptices, improve their outcomes or shut down, Wall Street analysts and the for-profit institutions breathe a sigh of relief When Secretary ofEducation Arne Duncan testified before the House of Representatives' Education and Labor Committee on March 3, and was questioned on the gainful employment regulations, his comments that the department was "by no means wedded to any one direction" and "[didn't] want to be overly heavy-handed" were perceived by forprofit boosters as signs that the department was open to scaling back the regulations. Before and since, the Career College Association and lobbyists for for-profit institutions have pounded the halls of Congress trying to get members to put pressure on the department. Some members of the Congressional Black Caucus sent a letter to Duncan charging that the rules are discriminatory because for-profit institutions disproportionately serve minority students. A bipartisan group of 18 House members wrote to Duncan asking that he puii the plug on the department's approach altogether. Last week, when a report from Credit Suisse cited someone "close" to the Office of Management and Budget as saying that the department had seemingly decided to soften one of the alternative methods of qualifYing for Title IV, higher education stocks soared as the rumor spread. The source told the bank that the option to demonstrate a progran1 completion rate of at least 70 percent and an in-field employment rate of at least 70 percent had become a 50 percent completion rate and a 70 percent employment rate.
Though it is one of the possibilities the department is considering, the switch to a 50 percent completion rate is not final. Officials submitted a draft to the OMB to begin the process leading to the publication of rules and the public comment process, but are said to be continuing to analyze data and listen to feedback. The for-profit institutions tout these small bits of news and others as indications that the department may be backing away from its tough-line approach, but it is unclear whether any perceived motion on the department's part wiLl actually materialize as dramatic changes to the next draft of regulations. Teddy Downey, of Washington Research Group, says he doubts the department would take any steps that would dramatically lessen the reach of the regulations. In an e-mail message last week after the Credit Suisse rumor circulated, he said he anticipates "a very low chance that this change will amount to a truly significant loophole."
In an interview, he went further. "I don't think the department would do anything it doesn't think will have the desired effect. I think they have the data to support whatever they choose to do."
Kantrowitz, ofFinaid.org, is skeptical of whether the department has the data, but he agrees that the department isn't backing down on gainful employment. "They're not going to do anything that doesn't have teeth in it," he says. "It may just be some kind of educated guess, but it's going to have teeth." -Jennifer Epstein
From:
To:
Robert MacArthur <nnacarthur@altresearch com> grovesb@sec goy melvin goldberg@oag state ny.us Woodward. Jennifer
7/26/2010 9:30J6 AM At 90% of revenue from Uncle Sam--what about separation of church and state.?
CC:
Date: Subject:
July 25, 2010 Why Do You Think They're Called For-Profit Colleges?
Michael Morgenstern for The Chronicle
Michael Morgenstern for The Chronicle By Kevin Carey Michael Clifford believes that education is the only path to world peace. He never went to college, but sometimes he calls himself"Doctor." Jerry Falwell is one of his heroes. Clifford has made milJions of dolJars from government programs but doesn't seem to see the windfall that way. Improbably, he has come to symbolize the contradictions at the heart of the growing national debate over for-profit higher education. Until recently, for-profits were mostly mom-and-pop trade schools. Twenty years ago, a series of high-profile Congressional hearings, led by Senator Sam Nunn, revealed widespread fraud in the industry, and the resulting reforms almost wiped the schools out. But they hung on and returned with a vengeance in the form of publicly traded giants like the University ofPhoenix. Entrepreneurs like Clifford, meanwhile, have been snapping up dying nonprofit colleges and quickly turning them into money-making machines. Most of that money comes from the federal government, in the fonn ofPell Grants and subsidized student loans. Phoenix alone is on pace to reap $1-billion from Pell Grants this year, along with $4-billion from federal loans. A quarter of all federal aid goes to for-profits, while they enroll only 10 percent of students. Unfmtunately, a large and growing number of graduates of for-profit colleges are having trouble paying those 1 oans back Horror stories of aggressive recruiters' inducing students to take out huge loans for nearly worthless degrees are filling the news. The Obama administration, flush with victory after vanquishing the student-loan industry this year, has proposed cutting off federal aid to for-profits that saddle students with unmanageable debt. Congress has rolled out the TV cameras for a new round of hearings that are putting for-profits on the hot seat. One observer called the event "the Nunn hearings on steroids."
I spoke with Michael Clifford recently as he was driving down the California coast to meet with a higher-education charity he runs. He's an interesting man-sincere, optimistic, a true believer in higher education and his role as a force for good. A musician and born-again Christian, he learned at the knee of the University ofPhoenix's founder, John Sperling. In 2004, Clifford led the sale of a destitute Baptist institution called Grand Canyon University to investors. Six years later, enrollment has increased substantially, much of it online. The ownership company started selling shares to the public in 2008 and is worth nearly $1-billion today, making Clifford a wealthy man. He has since repeated the formula elsewhere, partnering with notables like General Electric's former chief executive, Jack Welch. Some of the colleges that Clifford has purchased have given him honorary degrees (thus "Doctor" Michael Clifford). Clifford will concede, in the abstract, to abuses in the for-profit industry. But he rejects the Obama administration's proposal to cut off federal aid to for-profits at which student-debt payments after graduation exceed a certain percentage of the graduates' income. In fact, he denies that colleges have any responsibility whatsoever for how much students borrow and whether they can pay it back. He won't even acknowledge that student borrowing is related to how much colleges charge.
Rob MacArthur Alternative Research Services, Inc. 203-244-5174 rmacarthur@altresearch.com
This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from tlus report without the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.
From: To:
Robert MacArthur <nnacarthur@altresearch com> Robert MacArthur 8/16/2010 3:38:20 PM Barmack
CC:
Date: Subject:
Student Aid Policy Analysis
Summary and Analysis of Gainful Employment NPRM

Mark Kantrowitz
Publisher of FinAid.org and FastWeh. com
August 15, 2010
EXECUTIVE SUMMARY The US Department of Education published a Notice of Proposed Rulemaking (NPRM) OD Program Integrity: Gainful Employment in the Federal Register on July 26, 2010. 1 The NPRM will have a 45-day public comment period ending on September 9, 2010. lt defines gainful employment in terms of affordable debt restrictions based on a triad of three metlics, a loan repayment rate, a debt-service-toincome ratio and a debt-service-to-discretionary-income ratio. This "three strikes" rule provides for-profit colleges and vocational certificate programs with three opportunities to maintain eligibility for federal student aid. The proposed definition of gainful employment appears to represent a reasonable compromise that separates the wheat from the chaff without discarding too much wheat. However, the proposed rule will negatively impact colleges that serve greater numbers of low income and minority students. More than half of Pell Grant recipients at for-profit colleges are enrolled in colleges where the loan repayment rate is under the 35% threshold and an additional third are e nrolled in colleges that are between the 35% and 45% thresholds. lt is unclear how the proposed rule will affect for-profit medical schools, many of which have very low loan repayment rates due to most graduates relying on deferments and forbearruJces during their residencies and internships. The loan repayment rates for the publicly-traded for-profit colleges do not seem to be consistent with common intuitions and analyst statements conceming institutional quality. Default management programs are likely to start emphasizing the use of income-based repayment instead of deferments and forbearances. Deferments and forbearances have no impact on the loan repayment rate, while widespread use of income-based repayment may be sufficient to shift a program from the restricted zone into the fully eligible zone. Colleges are also likely to become more selective in their admissions policies and to adopt aggressive counseling and services for the students who are most likely to drop out and default on their loans. METHODOLOGY This analysis of the Gainful Employment Notice of Proposed Rulemaki.ng (NPRM) is based on several documents: The version of the Gainful Employment NPRM that was released on July 23, 2010 The version of the Gainful Employment NPRM that was published in the Federal Register on July 26, 2010
Federal Register 75(142):43616-43708, July 26, 2010.

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The press release that was provided to news media at 6 pm on July 22,20102 (as well as the additional details that were disclosed during the conference call with reporters) The release of data and technical documentation for the Gainful Employment NPRM on August
13,20103
This student aid policy analysis paper represents an updated and expanded version of the July 26, 2010 preview paper, Gah~ful Employment NPRM Proposes "Three St1ikes" Rule.
RECOMMENDATIONS
The gainful employment definition will apply only to for-profit colleges (and certain vocational training programs at non-profit colleges) because of the statutory language. However, Congress should consider applying these affordable debt rest:J.ictions to all colleges. Just because a college lacks an overt profit motive does not mean that it should be permitted to routinely graduate students with excessive debt. In addition to requiring colleges to disclose the three metrics in all communications with prospective students, whether online, in ptint or in person, the US Department of Education should itself disclose the loan repayment rates and debt to income ratios to students. When the US Department of Education began disclosing graduation rates as part of FAFSA on the Web, it caused high school seniors to rank graduation rates higher among their college selection criteria, as demonstrated by the Fastweb and Maguire Associates College Decisionlmpact Survey. The US Department of Education should consider disclosing the loan repayment rates and debt to income ratios on the FAFSA and on the College Navigator web site to enable students to compare colleges based on the affordability of the student debt. They should disclose the met:J.ics for all colleges, including for-profit, non-profit and public colleges. Perhaps the disclosure can use a green (eligible zone), yellow (restticted zone) and red (ineligible zone) color coding scheme to help families iuterpret the metlics. The US Department of Education does not need any statutory or regulatory authority in order to disclose this data. The US Department of Education should consider allowing loan repayment rates to be based on a ptior set of four fiscal years, similar to the manner in which the debt to income ratios may be based on a prior three-year period. Programs that use this option would be required to demonstrate loan repayment rates greater than the 45% threshold. This accommodation is necessary for medical schools which tend to have lower loan repayment rates because of the routine use of deferments and forbearances by medical school graduates during their residencies and internships. The US Departl11ent of Education should consider publishing deferment and forbearance rates for all colleges. This will better inform analysis of the differences between loan repayment rates and cohort default rates. The definition of the loan repayment rate should be based on reductions in the ptincipal and accrued but unpaid interest balance of a loan, as opposed to just reductions i.n the principal balance of the loan. Reliance on just reductions to principal causes significant delays in the recognition of borrowers who have resumed making full voluntary monthly payments on their loans.
2
A copy of the press release may be found at www.finaid.org/educators/20100722gainfulemploymentrelease.pdf. ifap.ed.gov/eannouncements/081310ReleaseGainfuiDataTechDocNPRM.html and www2.ed.gov/policy/highered/reg/hearulemaking/2009/integrity-analysis.html
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The US Department of Education should consider modifying the proposed rules to calculate debt to income ratios at the institution level when the institution 's individual programs lack sufficient completers to yield statistically significant results. Statutory changes are beyond the scope of tbe rulemak.ing process. However, there are two consequences of the proposed regulatory changes that may require Congressional action: The main tool for compliance with the affordable debt restrictions of the gainful employment NPRM will i1wolve tuition reductions. However, the main tool for institutional compliance with the 90/10 rule is to increase tuition rates. These statutory and regulatory requirements are in conflict with each other. Since encouraging tuition reductions is a better public policy objective, Congress should consider modifying or repealing the 90/10 rule to remove this conflict. Section 479A(c) of the Higher Education Act of 1965 provides colleges with the authority to "certify a loan amount or make a loan that is less than the student' s determination of need (as determined under this part), if the reason for the action is documented and provided in written form to the student" on a case-by-case basis, so long as this action does not discriminate on the basis of race, national origin, rel igion, sex, marital status, age, or disability status. However, the US Department of Education has issued subregulatory guidance that limits the ability of colleges to use this authmity. Specifically, on page 3-94 of the 2009-2010 Federal Student Aid Handbook, the US Department of Education writes "Also note that your school cannot engage in a practice of certifying Stafford loans only in the amount needed to cover the school charges, or to limit unsubsidized Stafford botTowing by independent students." Between this guidance and the caseby-case restriction, colleges are precluded from adopting lower loan limits for students according to field of study or degree program. This is particularly problematic for colleges that offer Associate's degree programs because the Stafford loan program has a single set of aggregate loan limits for all undergraduate degree programs. While these aggregate loan limits may be appropriate for Bachelor's degree programs, the limits are too high for Associate's degree and certificate programs. The 150% timeframe SAP restliction does not preclude students who transfer from one college to another or switch degree programs from accumulating an excessive amount of debt for an Associate's degree. Congress should consider adopting separate lower aggregate loan lin1its for Associate's degree and certificate programs and providing colleges with the authority to set lower loan limits based on the field of study and/or degree program.
PROPOSED DEFINITION OF GAINFUL EMPLOYMENT The proposed definition of gainful employment establishes affordable debt resoictions on educational programs at for-profit colleges. The affordable debt resuictions are implemented through three metlics, each of which has two thresholds. If a program satisfies none of the three meu-ics, it loses eligibility for federal student aid. This is effectively a "three stlikes and you're out" rule. The metrics with the most forgiving looser thresholds are as follows:
J. A loan repayment rate of at least 35%. 2. A debt-service-to-income ratio of at most 12%. 3. A debt-service-to-discretionary-income ratio of at most 30%.
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All three metrics are applied to all borrowers entering repayment, not just those completing the program. The loan repayment rate is applied to just federal student loans. The debt-service-to-income ratio and the debt-service-to-discretionary-income ratio are applied to both federal and plivate student loan debt. A program that fails to satisfy at least one of these metlics may not offer federal student aid to new students. It may offer federal student aid to current students for the remainder of the current award year and one additional year, provided that it warns them about the program's low repayment rates and high debt-to-earnings ratios. The debt to income ratios indicate whether a borrower is capable of repaying the debt while the loan repayment rate indicates whether a borrower is actually repaying the debt. Almost all of the programs with a loan repayment rate over 45% satisfy at least one of the prefened debt to income ratios. It is only at loan repayment rates under 45% that the debt to income ratios provide additional differentiation among programs. There are also three additional preferred thresholds that are tighter. Programs that satisfy at least one of these tighter thresholds are fully eligible for federal student aid. Programs that do not satisfy at least one of these tighter thresholds are subject to cettain restrictions and are refened to as "restricted programs." The tighter metrics are as follows:
1. A loan repayment rate of at least 45%. 2. A debt-service-to-income ratio of at most 8%. 3. A debt-service-to-discretionary-income ratio of at most 20%.
Programs that do not satisfy both the first and either of the second or third of these tighter metrics will be required to disclose their repayment rates and debt-to-earnings ratios to thei1 students . A total of 55% of programs would be required to warn students about their low loan repayment rates and high debt -to. . 4 erumngs rat1os.
In several sections of the NPRM the US Department of Education asks whether it should adopt stlicter standards for the three metrics.
Page 43619: "While we believe that these restrictions are appropriate considering the poor performance of these programs, we seek comment on whether programs with a loan repayment rate of less than 45 percent but higher than 35 percent should be subject to the loss (~f title IV, HEA programfunds. " Page 43620: "We seek comment on whether a program with a loan repayment rate below a specified threshold should be ineligible for title N, REA funds, regardless of the debt-to-income ratio. "
It is unclear why the US Department of Education is treating the disclosure of loan repayment rates and debt-toearnings ratios as a sanction, instead of requiring all colleges to disclose this information. Requiring the disclosure of these rates and ratios for all colleges would be beneficial to students, enabling them to compare colleges according to the affordability of the student debt. The US Department of Education should consider disclosing this information on the FAFSA, the Student Aid Report and the College Navigator web site, just as it currently discloses graduation rates.
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Page 43623: "We spec~fically seek comment on whether the 30 percent threslwldfor the first three years of employment is appropriately rigorous or whether the Department should consider using the 20 percent of discretionmy income or 8 percent of average annual earnings to define programs as ineligible."
While it is not unusual for the US Department of Education to seek specific comments on part of a proposed tule in an NPRM, these three comments would appear to signal that the US Department of Education is unlikely to soften the thresholds in the final rule in response to public comments.
SANCTIONS ON RESTRICTED PROGRAMS

The restricted programs will be subject to a limit on enrollment equal to the average enrollment during the past three years.5 Restricted programs will also be required to obtain employer certification that the program satisfie s the employer's requirements. Using a three-year moving average effectively forces a reduction in enrollment the first year a program becomes restricted, since most programs at for-profit colleges have been experiencing double-digit annual enrollment growth and the moving average will be below the most recent year's total enrollment figures. This is illustrated by the foUowi.ng graph, which assumes a 25% emollment growth rate. The setting of the enrollment based on the moving average begins in the fourth year, in the section of the graph marked in red. The y axis has been truncated to start at 90% instead of 0% in order to enlarge the graph to show detail on the damped oscillation of the enrollment figures. The fluctuation s settle down by the fifth year of moving averages, identified as year 8 in the graph.
Changes in Enrollment for 25% Growth Rate

160% 150% 140% 130% 120% 110% 100% 90%
10
11
12
13
14
Years
New programs will be subjected to limits on enrollment growth based on projected enrollments for the next five years (until loan repayment rate data is available for the program}, unless the institution already offers a similar eligible program. New programs will also be required to "demonstrate employer support for the program."
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LOAN REPAYMENT RATE The loan repayment rate is essentially a performing assets ratio. It calculates the percentage of original federal loan balances at repayment (including interest that was capitalized at repayment) that are generating payments to plincipal. It is based on all borrowers who left the program, including completers and drop-outs/stop-outs, during the prior 4 federal fi scal years, but excludes borrowers who entered repayment within the last six months of the most recent fiscal year. 6 Borrowers in an i.n-school or military deferment are excluded from both numerator and denominator. It weights the repayment rate by the original principal balance of the loans, yielding a measure of the financial perfonnance from the federal government's perspective. The loan repayment rate definition addresses most of the flaws in the cohort default rate as identified by a 2003 audit report by the Office of the h1spector General at the US Department of Education. 7 The loan repayment rate counts only the loans of borrowers who are making payments to principal, includi11g borrowers who have paid off the loans in full. 8 The loans of borrowers who are delinquent, in an economic hardship defetment, in a forbearance or in default will be counted in the denominator but not the numerator of the loan repayment rate. In addition, borrowers in income-contingent repayment or income-based repayment who are not making payments of more than the interest that aCCJ1les will be counted in the denorn.il1ator but not the numerator. This reduces the loan repayment rate by about 7%, since slightly more than half of bonowers in income-contingent and income-based repayment are paying less than the interest that accrues and about 15% of active borrowers are in these repayment plans. However, bonowers in income-contingent repayment or income-based repayment who are participating in public service loan forgiveness will be treated as though they are making payments to plincipal, reducing that offset slightly. (The press release restJicts this offset for public service loan forgiveness to borrowers who completed the program.) The press release reports that the average loan repayment rate for students at for-profit colleges is 55%: " In addition, while 88 percent of recent bmTowers from nonprofit institutions and 80 percent of botTowers from private institutions were able to pay down the balance of their student loans in recent years, only 55 percent of borrowers attending for-profit institutions were able to pay off more than acc111ed interest." A similar statement occurs in Appendix A on page 110 of the pre-publication version of the gainful employment NPRM: "On average, 80 percent of recent borrowers from public institutions and 88 percent from nonprofit institutions paid at least a penny more than interest on their loans si nce FY 2006 i.n FY 2009, compared to 55 percent at for-profit institutions." These figures are not consistent with the average loan repayment rates reported below in the "Loan Repayment Rates by Sector" section and in the following table (LRR ~ 0.0%), namely 53.7% at public colleges, 56.0% at non-profit colleges and 36.4% at for-profit colleges. The figures are also not consistent
The federal fiscal year runs from October 1 to September 30. The last six months of the federal fiscal year start on March 31. The fiscal year is also used with cohort default rates. 7 Audit to Determine if Cohort Default Rates Provide Sufficient Information on Defaults in the Title IV loan Programs, Office of the Inspector General, US Department of Education, ED-OIG/A03-C0017, December 2003. www.ed.gov/about/offices/list/oig/auditreports/a03c0017.pdf 8 loans paid in full by consolidation do not count as paid in full until the consolidation loan itself has been paid in full. Until then the consolidation loan is included in the numerator if the borrower has made payments to principal on the loan.
6
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with the average loan repayment rates for institutions with loan repayment rates over the 45% threshold, as demonstrated by the following table.
4-year
Non-Profit
2-year
The figures in the press release are also not consistent with the Institutional-Level Repayment Rates from page 43619 of the Gainful Employment NPRM as published in the Federal Register. The overall loan repayment rate should equal the average of the loan repayment rates for the< 35%, 35% to 45% and~ 45% categories, when weighted by the percentages of institutions in each category.lf we assume that the average loan repayment rate is the maximum loan repayment rate for the< 35% and 35% to 45% categories, namely 35% and 45%, respectively, that shou ld yield a lower bound on the average loan repayment rate in the~ 45% category. Thus we have 35% 40.0% + 45% 23.8% + x 36.2% =55%, where xis the lower bound on the average loan repayment rate in the~ 45% category. Solving for x yields
X= (55%- 35%.40.0%-45% 23.8%)/36.2% = 83.7%
That lower bound on the average loan repayment rate in the~ 45% category seems quite high even for an overall average, considering that only the most elite institutions have loan repayment rates that are in this range (e.g., Harvard 75.1%, MIT 87.0%, Princeton 76.9%, Yale 72.3%, California Institute of Technology 92.4%, Carnegie Mellon University 79.1%, and UC Berkeley 72.8%). The figures in the press release may be reporting the percentage of institutions with loan repayment rates of at least 35%, which are 79.8% at public colleges, 87.9% at non-profit colleges and 59.3% at for-profit colleges. These figures round to 80%, 88% and 59%, respectively.lt is possible that 55% was substituted for tbe figure at for-profit colleges through a typographic enor, as tbe 55% figure appears repeatedly in the NPRM in other contexts (e.g., the percentage of programs subject to the reporting of loan repayment rates and debt to income ratios).
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CORRELATION OF LOAN REPAYMENT RATES WITH DEFAULT RATES The overall correlation of loan repayment rates and 2-year cohort default rates among all colleges is very weak, with an R2 of 32.5%. If the set of colleges is limited to just the for-profit colleges, the conelation becomes even weaker, with an R2 of25.1 %. The correlation of loan repayment rates with 3-year cohort default rates among all colleges is slightly stronger, with an R2 of 42.7%. There is, however, a strong almost linear relationship between each loan repayment rate and a maximum 2-year cohort default rate, after omitting a handful of outliers, as illustrated by the following graph. For example, only 2 of 2,702 institutions with loan repayment rates of 45% or more have a 2-year cohort default rate above 25%. Similarly, only 3 of 946 institutions with loan repayment rates of 35% to 45% have a 2-year cohort default rate above 30%.
Maximum 2-Year CDR per LRR

y = -0.4626x + 0.4846
R2 = 0.9374
0%
20%
40%
60%
80%
100%
Maximum LRR
Likewise there is a strong almost linear relationship between each loan repayment rate and the maximum 3-year cohort default rate, after omitting a handful of outliers, as illustrated by the following graph. For example, no institutions with loan repayment rates of 45% or more have a 3-year cohort default rate above 43%. Similarly, no institutions with loan repayment rates of 35% to 45% have a 3-year cohort default rate above 50%.
Maximum 3-Year CDR per LRR

80.0% 70.0% 0:: 60.0% 0 u 50.0% E :I 40.0% E :;c 30.0% "' :2 20.0% 10.0% 0 .0%
y
= -0.6866x + 0 .7397 - - 2 = 0.9536 R
+-~,.-----'-----------------
.0% 20% 40%
r---
60%
80%
100%
Maximum LRR
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This graph is the upper frontier of the following scatter-plot of the relationship between loan repayment rates and 3-year cohort default rates.
3-Year Cohort Default Rates by Loan Repayment Rates

80.0%
~ ::J
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70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0%
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0
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... "' >

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Loan Repayment Rate
While any given loan repayment rate must have a cohort default rate below a particular threshold, the converse is not necessarily true. An institution can have a 2-year coh011 default rate under 25% and still have a loan repayment rate under the 45% threshold. This is because colleges use a variety of default rate management techniques, such as deferments, forbearances and consolidation, to rutificially reduce their coh01t default rates. Defennents and forbearances, for example, can be used to push a borrower who is likely to default outside the 2-year or 3-year default rate window. There might be a strong conelation between the sum of deferment, forbearance and default rates and the loan repayment rate, but data concerning deferment and forbearance rates at all colleges is not publicly availableY Another way to determine whether a college is actively managing its cohort default rate is by comparing the 2-year and 3-year cohort default rates in the Ttial 3-Year Cohort Default Rate spreadsheet published by the US Department of Education. 10 Since it takes 360 days of nonpayment for a default to occur, the 2year cohort default rate etlectively provides a 1-year window in which a default can occur and the 3-year cohort default rate effectively provides a 2-year window in which a default can occur. Thus one would expect the 3-year cohort default rate for an individual college to be no more than twice the college's 2year cohort default rate. Colleges for which the 3-year cohort default rate is triple the 2-year cohort default rate were almost certainly managing the cohort default rate through the end of the 2-year cohort default rate window and abandoning the botTowers dming the third year. A total of 459 colleges have 3year cohort default rates that are at least triple the 2-year cohort default rate, slightly more than lO% of
9
Colleges for which the ratio (deferment rate+ forbearance rate)/(default rate) is greater than 2.5 are likely to be actively managing defaults by encouraging borrowers to use deferments and forbearances to push them out of the 2-year or 3-year default rate window. 10 federalstudentaid.ed.gov/datacenter/library/TriaiYearCDR.xls
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the total. These include 263 for-profit colleges (57.3% of the total), 88 non-profit 4-year colleges (19.2%), 25 non-profit 2-year colleges (5.4%), 33 public 4-year colleges (7.2%) and 50 public 2-year colleges (10.9%). The average loan repayment rate for a 3-year cohort default rate of 30% or higher is 25.9% with a standard deviation of 11.4%. This means that most colleges with a trial3-year cohort default rate of 30% or more will not have loan repayment rates above the 35% threshold on eligibility. The following chart illustrates the average loan repayment rate versus 3-year cohort default rates in 5% increments, with error bars based on one standard deviation.
Average Loan Repayment Rate by 3-Year Cohort Default Rates

90.0% 80.0%
a: "'
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...
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70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%
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70%
20%
30%
40%
60%
3-Year Cohort Default Rate
Current default aversion programs emphasize the use of deferments and forbearance s to avoid defaultiJJg on federal student loans. These progtan1S will probably start emphasizing income-based repayment instead. Although only about half of borrowers in income-based repayment will count toward the loan repayment rate, that compares favorably with deferments and forbearances, where none of the borrowers count toward the loan repayment rate. Deferments, forbearances and income-based repayment are all effective in manipulating the cohort default rate, but only income-based repayment can have an impact on the loan repayment rate. Switchi.ng default aversion programs from deferments and forbearances to income-based repayment will likely u1crease the loan repayment rate by up to about 10% to 15%, assuming an average defetment and forbearance rate of about 25%. That is enough of a difference to shift a loan repayment rate from the restricted zone (35% to 45%) into the eligible zone (2:: 45%) and from ineligible (assuming a loan repayment rate of 25% or more) into the restricted zone. While the use of income-based repayment may be motivated by a desire to manipulate the loan repayment rates, incomebased repayment provides genuiJle benefits to both the borrower and the federal government as compared with the use of deferments and forbearances.
. 10 -
Colleges may be able to manipulate the debt to income ratios by adopting tuition or financial aid policies that reduce median debt at graduation for just the students who complete the program. For example, the college could charge a lower tuition rate for students in the second year of a two-year program. Such reductions could be targeted at just the small subset of the students needed to shift the median, namely students whose cumulative debt is just above and under the median. This type of manipulation would be most beneficial to programs with low graduation rates, since the bulk of the tuition revenue for such programs will be from students who do not complete the program. Thls type of manipulation can be detected by the presence of a large gap in the disttibution of borrowers by debt above the median. Average debt is not prone to thls type of manipulation. Colleges will also become more selective (e.g., requiring a test to determine commitment to completing the program), reduce dropouts through " try before you buy" policies, and adopt aggressi.ve counseling and services for students who are most likely to default on their loans (e.g., students who are single parents, students who work full time and emoll part-time). Colleges will also evaluate the extent to which parttime emollment conttibutes to lower completion rates and, consequently, a lower loan repayment rate. Note that the data published by the US Department of Education repotts institutional loan repayment rates. It is possible that a college will have an institutional loan repayment rate greater than 45% but still have individual programs with loan repayment rates less than 45%. LOAN REPAYMENT RATES ARE VERY LOW AT MEDICAL SCHOOLS Medical schools have low loan repayment rates because most medical school graduates suspend repayment using a deferment or forbearance duriJlg their residencies and internships, which last several years after graduation. 11 Unlike the debt to income ratios, which have the option of using a previous 3year period, the loan repayment rate is limited to just the 4 prior federal fiscal years. 12 Many medical schools, as a result, will be limited to the debt to income ratios in order to maintain eligibility for federal student aid funds. For example, 320 colleges wi.th "Medical", "Medicine", "Health" or "Physician" in the name of the college had 30 or more borrowers in the denominator. The overall loan repayment rate for this group of colleges was 37.5%. Of these colleges, 42.2% had loan repayment rates under the 35% threshold and 16.9% had loan repayment rates between 35% and 45 %. For example, Harvard Medical School has a loan repayment rate of 24.4% and Johns Hopkins University School of Medicine has a loan repayment rate of 31.0%. The following chart shows the dist:Iibution of medical schools according to loan repayment rate in 5% increments.
11
The elimination of the 20/220 rule effective July 1, 2009 means that most medical school graduates will no longer qualify for the economic hardship deferment. Depending on whether these borrowers shift to forbearances or income-based repayment, loan repayment rates at medical schools may be significantly different in the future than during the initial introduction of the gainful employment rules. 12 Perhaps the US Department of Education should allow the use of an earlier set of fiscal years for medical schools?
- 11 -
Distribution of Medical Schools by Loan Repayment Rate

16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
-
--
I I
,__,
1-
-t- I-
Loan Repayment Rate
PERCENT OF DOLLARS VERSUS PERCENT OF BORROWERS

The loan repayment rate calculates the percentage of original loan dollars that are producing payments to principal. This is in contrast with the cohort default rate, which calculates a percentage of borrowers who have defaulted. The use of dollars is necessmy to measure the financial impact on the federal government. However, as the following graph demonstrates, there is a very strong correlation between the percentage of borrowers who are makjng payments to principal and the loan repayment rate. The average va1iance is only 2.5%, with a standard deviation of only 3.8%.
% of Borrowers Paying to Principal

...
Ill
Ql
0 ... ...
co
c:
Ql Ql
...
v ...
c..
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0%
y = 0.9997x + 0.0255 R2 =0.9586
20%
40%
60%
80%
100%
Loan Repayment Rate
- 12 -
DEBT-TO-INCOME RATIOS
The debt-service-to-income and debt-service-to-discretionary-income ratios are based on all education debt, including both federal and private student loans. P1ior debt at the same or a related institution is included. Income is based on actual earnings data from the Social Security Administration. 13 (The use of Social Security earnings data addresses the problems associated with borrowers who do not file a federal income tax return because of low income, since such borrowers still have FICA taxes withheld and reported to the Social Secmity Administration.) The calculation of discretionary income will be the san1e as for income-based repayment, reducing income by 150% of the poverty line, and will assume a family size of one. Debt will be based on the median student debt 14 for the three most recent award years prior to the earnings year of students who completed the program. This includes students who graduated without debt. 15 Programs have the option of using the prior three-year pe1iod (i.e., 4, 5 and 6 years prior to the earni11gs year), but then would be restricted to the preferred 8% and 20% thresholds. Since the less resttictive truesholds are 50% higher than the preferred thresholds, this will mainly be useful for programs where income jumps by 50% in three years. For example, medical school graduates typically strut off with low salruies during their residencies and internships, but then switch to a much higher six figure salary three or four yerus after graduation. Using the prior three year period might also be useful during a recession when new graduates have difficulty getting a job, especially in industries with massive layoffs like the auto industry. The use of discretionary income and actual earnings presents an effective solution to differences in degree programs without requiting any kind of a special exception or adjustment for those programs. The same rules will apply to all programs, regardless of educational attainment. For example, the previous proposal to use Bureau of Labor Statistics data had an inherent bias against Bachelor's degrees and more advanced degrees, since an MBA in accounting would map to the same average wage data as for an Associate's degree in accounting. Using actual erunings addresses this problem. Similruly, college graduates with advanced degrees can devote a greater percentage of their income towrud repaying debt than graduates who hold just ru1 Associate's degree or ce1tificate, and so are more likely to satisfy a debt-service-todiscretionary-income trueshold as opposed to a debt-service-to-income trueshold.
AVERAGE EARNINGS VERSUS MEDIAN INCOME

The use of earnings as opposed to income yields an increase i11 the debt to income ratios because earnings are lower than income. The use of means as opposed to medi.ans yields a decrease in the debt to i.ncome
The colleges will provide the US Department of Education with lists of the students completing each program. These lists will be provided to the Social Security Administration, who will report average earnings figures for each program. Neither the US Department of Education nor the colleges will have access to individual earnings figures for privacy reasons. 14 Parent PLUS loans are excluded. Parent-only private education loans, such as the Wells Fargo Student Loan for Parents, appear to be included based on the draft regulation's use of the phrase "private educational loans" as opposed to "private student loans". 15 Since 93.1% of students at for-profit colleges graduate with federal and private student loans (86.0% at for-profit less-than-2-year institutions, 97.6% at for-profit 2-year institutions and 97.0% at for-profit 4-year institutions), the inclusion of all completers as opposed to just completers with debt will have a minimal impact on the debt to income ratios at for-profit colleges.
- 1313
ratios because means are greater than medians. The following data comes from table 8 (income) and table 9 (earnings) of the US Census Bureau's Current Population Survey, 2006 Annual Social and Economic Supplement. 16 The figures are for year-round full-time workers for all races.
Median Earnings
I Mean Earnings
Median Income Mean Income
$35,053 $38,077 $35,535 $38,980
--
$41,593 $50,411 $42,092 $51,774
$50,438 $56,327 $51,391 $58,001
$70,691 $90,707 $71,308 $92,546
$57,902 $74,440 $60,213 $77,198
The use of eamings as opposed to income increases the debt-service-to-income ratios by 0.9% to 3.8%, depending on the degree program. The use of means as opposed to medians decreases the debt-service-toincome ratios by 7.9% to 22.2%, depending on the degree program. The combi11ed effect is a decrease in the debt-service-to-income ratios of 6.7% to 21.4%, depending on the degree program. This is the equivalent of a 0.8% to 2.6% point decrease in a 12% debt-service-to-income ratio. The smallest size decrease is for Associate's degree programs. COMPARING THE METRICS The three metrics can be confusing because the details differ. The following chart illustrates the key differences among the metrics.
Year Number of Years Type of Students Type of Loans
Fiscal Year (October to September) 3.5 (4 fiscal years minus the last six months of the most recent fiscal year) All students who left the program, including both completers and dropouts Just federal student loans, including the Stafford and Grad PLUS loans. The Parent PLUS loan is excluded. Income: Calendar Year 3 (either the 3 years prior to the earnings year or the 3 years before that) Just students who complete the program Federal and private student loans incurred by students at the same or related institution.
PHASE-IN OF THE NPRM The three metrics will be phased in, with programs not subject to a loss of eligibility or the debt warning disclosures until the 2012-13 award year starting on July 1, 2012. During the fust year of implementation, forming programs within each category of program. the loss of eligibil ity will be limited to the lowest-pe Petf"ormance will be measured by the loan repayment rate. Each category will be defined based on the type of degree or certificate awarded. Within each category the loss of eligibility will be capped at no more than 5% of completers during the plior award year. The remaining ineligible programs would be treated as rest:Iicted, in addition to the programs already in the rest:Iicted zone. The US Department of Education estimates that 5% of programs representing 8% of students would lose eligibility and that 8% of programs representing 8% of students would be in the restricted zone. The cap
16
Note that US Census Bureau data includes only individuals who are employed and as such does not include individuals with zero earnings and zero income.
- 14 -
may or may not reduce the number of programs losing eligibility during the first year, as the cap is based on 5% of completers while the 8% figure is based on the number of students emolled in the affected programs. However, while programs with lower loan repayment rates tend to have lower graduation rates, they also tend to have lower enrollment rates. Empirical analysis suggests that the 5% completion cap will affect slightly less than 5% of enrollments. Opportunities for colleges to adapt to the new rules may be limited despite the phase-in because several of the years in the prior three-year period and the prior four fiscal years have aiJeady passed.
IMPACT OF THE NPRM ON PELL GRANT RECIPIENTS

The following table shows the correlation between the percentage of students receiving a Pell Grant and the loan repayment rates across all colleges, not just those subject to the gainful employment requirements. Average loan repayment rates were based on the sum of the corresponding original loan balances for all of the institutions within each range. Except for the institutions with a percentage Pell Grant recipients of 80% or higher, the average Joan repayment rates demonstrate a Jjnear relationship. 17
b.O%0.0%-19.9~
0.0%-29.9~
0.0% -39.9 40.0%- 49.9%
18.4% 24.2% 15.9% 10.9% 8.8% 7.9% 4.5% 2.8% 1.5%
61.7% 54.1% 46.6% 38.3%
The loan repayment rates are likely to have a significant impact on Pell Grant recipients, since Pell Grant recipients are disproportionately enrolled at institutions with loan repayment rates under the 35% threshold. Institutions with a higher percentage of Pell Grant recipients have a lower loan repayment rate. Generally, institutions that have 40% or more of Pell Grant recipients are unlikely to satisfy the 45% loan repayment rate threshold. Similarly, institutions that serve 50% or more of Pell Grant recipients are unlikely to satisfy the 35% loan repayment rate percentage. Colleges with loan repayment rates under the 35% threshold represent 26.5% of Pell Grant recipients. Colleges with loan repayment rates between 35% and 45% represent 21.7% of Pell Grant recipients. As the following tables illustrate, for-profit colleges represent 23.6% of Pell Grant recipients, with 12.4% of Pell Grant recipients enrolled at for-profit colleges that are under the 35% threshold (52.2% of Pell Grant recipients at for-profit colleges) and 8.1% enrolled at for-profit colleges that are between the 35% and 45% thresholds (34.1 % of Pell Grant recipients at for-profit colleges).
17
The flattening out of the trend at institutions with a percentage Pell Grant recipients of 80% or more may be due to greater volatility from a smaller sample size, since relatively few institutions have such a high percentage of Pell Grant recipients.
- 15 -
All Colleges 4-year 2-year

~ear
26.5% 25.7% 24.6% 62.2% 52.9% 42.9% 64.0% 63.4% 23.7% 23.3% 41.4% 61.8% 22.7% 24.3% 20.0% 39.8%
100.0% 66.0% 26.9% 7.0% 23.6% 10.0% 7.1% 6.6% 19.5% 18.9% 0.4% 0 .2% 56.9% 37.2% 19.4% 0.2%
For-Profit 4-year 2-year < 2-year Non-Profit 4-year 2-year

~ear
Public 4-year 2-year ...__5}:Jear
I For-Profit
12.4% 2.6% 11.5% 26.5%
8.1% 3.3% 10.3% 21.7%
3.2% 13.6% 34.9% 51.8%
23.6% 19.5% 56.8% 100.0%
Non-Profit Public Total
For-Profit Non-Profit Public Total
52.2% 13.1% 20.3% 26.5%
34.1% 17.0% 18.2% 21.7%
13.6% 69.9% 61.5% 51.8%
1oo.o% 1 100.0% 100.0% 100.0%
Given that such a high percentage of Pell Grant recipients are likely to be affected by the gainful employment rules, the US Department of Education should conduct further analysis of the impact of the NPRM on Pell Grant recipients, especially those who graduate. The extent to which for-profit colleges have low loan repayment rates because they serve a greater proportion of Pell Grant recipients is uoclea.r. Financialmetrics like the loan repayment rates and debt to income ratios do not clarify the degree to which for-profit colleges are serving an under-served population or exploiting it. CORRELATION OF GRADUATION RATES WITH LOAN REPAYMENT RATES The following table shows the correlation of graduation rates with loan repayment rates across all colleges, not just those subject to the gainful employment requirements. Institutions with graduation rates of 40% or higher are likely to satisfy the 45% loan repayment rate threshold.
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Loan Repayment
0.0%-9.9% [ 10.0% - 19.9% 20.0% .__ - 29.9% 30.0% - 39.9% 42.1% 35.1% 38.6% 42.0% 48.3% 56.0% 58.4% 63.3% 66.3% 66.3%
---
f""-. ,. .
1\0.0%- 49.9~
~0.0%- 59.9~
0.0% -79.9~ . 0.0%- 89.9~ 0.00-' - 100~
The following table illustrates graduation rates by institution type as well as the distribution of FfE enrollments and share of completers by sector.
All Colleges 4-year 2-year [if year For- Profit
~r
2-year < 2-year Non-Profit 4-y_ ear 2-year < 2-year Public 4-year 2-year < 2-year
45.2% 53.4% 24.0% 67.9% 45.9% 30.4% 56.8% 67.1% 62.2% 62.2% 52.1% 73.6% 39.7% 52.2% 20.0% 78.3%
100.0% 67.6% 29.4% 3.0% 11.6% 5.9% 3.0% 2.8% 21.3% 21.0% 0.3% 0.1% 67.1% 40.8% 26.2% 0.1%
100.0% 79.9% 1 15.6% 4.5% 11.8% 3.9% 3.7% I 4.1% 29.3% 28.9% 0.3% 0.2% 58.9% 47.1% 11.6% I 0.2%
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LOAN REPAYMENT RATES BY SECTOR The following table shows the loan repayment rates by institution type. Community colleges have a 40.3% loan repayment rate despite having only a 20.0% graduation rate, probably because fewer students graduate with debt and the average debt at graduation is much lower. This is in contrasts with for-profit 2year colleges, which have a 34.3% loan repayment rate and 56.8% graduation rate, probably because of the much greater incidence of high debt among the graduates.
All Colleges
~ear
51.3% 53.3% 38.3% 35.5% 36.4% 37.4% 34.3% 34.7% 56.0%

""'I
2-year < 2-year For-Profit 4-year 2-year < 2-year Non-Profit

~ear
2-year < 2-year Public 4-year 2-year < 2-year
-56.0% I -_2_ 1.9%

40.2% 53.7% 55.7% 40.3% 51.4%
""'I
The following table is based on the table of Institutional-Level Repayment Rates from page 43619 of the Gainful Employment NPRM as published in the Federal Register. Considering that 11.8% of non-profit colleges and 19.3% of public colleges (including 27.3% of community colleges) have loan repayment rates below 35%, Congress should consider extending the gainful employment rules to apply to traditional colleges in addition to for-profit colleges.
For-Profit 4-year 2-year

<2~
1729 218 565 946 1635 1434 156 45 1598 590 860 148 4962 2242 1581 1139
36.2% 25.2% 32.9% 40.7% 77.7% 78.3% 76.3% 64.4% 57.5% 74.2% 43.1% 74.3% 56.8% 72.1% 42.8% 46.0%
23.8% 32.6% 23.2% 22.1% 10.5% 10.5% 9.6% 11.1% 23.2% 14.9% 29.5% 19.6% 19.2% 13.8% 25.3% 21.3%
4o.o% 1 42.2% 1 43.9% 37.2% 11.8% 11.2% 14.1% 24.4% 19.3% 10.9% 27.3% 6.1% 24.0% 14.1% 31.9% 32.7%
Non-Profit
4-~
_l-y~
~year
Public 4-year 2-year
,___5_]::J ear
Grand Total 4-year 2-year
< 2-year
- 18-
IMPACT ON PUBLICLY-TRADED FOR-PROFIT COLLEGES The following table summarizes the loan repayment rates for the largest publicly-traded for-profit colleges.
:::::::::::::::::::::::: . .oan: epayment
40.1% ' - - - - - - - - - - - - - - - -39.7%] 39.1% - - - - - - - - - - - - - - - - - - -39.1% ] 38.5%
----------------------------------~379%~
~~-------------------
37.7% 37
This ranking of the publicly-traded colleges according to loan repayment rates does not seem consistent with commonly-held intuitions and analyst statements concerning institutional quality. The loan repayment rates also differ significantly from internal analyses by several colleges. (These internal analyses necessarily omit loans that have been consolidated because data concerning consolidation loans is not available to colleges through the NSLDS intetface.) It is possible that there is a bug in the COBOL
- 19 -
program used by the US Department of Education to calculate loan repayment rates. 18 The most likely source of error is in the treatment of consolidation loans that consolidate loans from more than one institution. lf these consolidation loans are not properly split according to souxce institution, the principal balance at the end of the fiscal year would be higher than the principal balance at the strut of the fiscal year for any borrower who consolidated duri11g the fiscal year. Even small amounts of debt from another institution could cause a bonower who is making payments to principal to not be identified as such. This would result in a lower loan repayment rate, especially for colleges that have a high transfer-in rate. OBSERVATIONS CONCERNING THE NPRM There are several potential issues in the NPRM's definition of gainful employment: Payments on a loan rue applied in a preference order, first to collection charges and late fees, second to accrued but unpaid interest, and fiJ1aUy to principal , per 34 CFR 682.209(b) and 34 CFR 685.2ll(a). The proposed definition of loan repayment rate in 34 CFR 668.7(b)(3) will count loans in the numerator only if the borrower made payments that reduce the principal balance of the loan as compared with the start of the federal fiscal year. But if a borrower has been delinquent, whether in the current or a previous fiscal year, there may be enough accrued but unpaid interest that there rue no reductions in the principal balance of the loan even if the borrower has resumed making all of the required monthly payments. On the other hand, if the borrower defaults or consolidates the loans, the interest is capitalized so that subsequent payments are treated as payments to principal. In both cases the borrower is making the same payments, but the form of the underlying loans has cha11ged. Perhaps the US Department of Education should require reductions in the outstanding principal and accmed but unpaid interest balance of the loan as opposed to just reductions in the principal balance. If a borrower has resumed making regular monthly payments, it should not have to wait months or even years for the borrower to catch up with all the accrued but unpaid interest if the borrower does not elect to capitalize the interest by consolidating the loans. The gainful employment NPRM does not adequately address situations in which a program has a small number of students and/or completers. With the cohort default rate Congress allows colleges with less than 30 bonowers entering repayment to base the cohort default rate on the three most recent award years. 19 The proposals for the loan repayment rates and debt to income ratios use 3 or more yerus. However, the use of programs as opposed to institutions sifts the data with a finer mesh, potentially yielding results that are not statistically significant. The US Department of Education noted this problem in its August 13, 2010 data release, warning that " ExtTeme caution should be exercised in instances where small numbers of bonowers entering repayment are observed." This is more of an issue for the debt to u1come ratios since the data sets may be smaller due to the limitation to just the students who complete the program. Moreover,
18
It is also possible that the consolidation loans entirely account for the differences without any bugs in the implementation of the COBOL program. Many colleges use consolidation loans as part of their default management plans. In addition, consolidation loans suffer from adverse selection, where borrowers who are at higher risk of default consolidate their loans to obtain a lower monthly loan payment or to switch lenders. However, the COBOL program is quite complicated, raising the risk of logic or coding errors. 19 See section 462(g)(l) of the Higher Education Act of 1965.
- 20 -
while the Social Security Administration will report average earnjngs data for each program in part to protect the privacy of the college's former students, if a program has only one completer the average earnings will equal that student's actual eamings. The Missomi data suppressed information when the program involved five or fewer completers. One possible solution is to aggregate the data at the institutional level when the data concerning individual programs lacks adequate statistical power. The draft regulation at 34 CFR 668.7(c)(2) specifies that the debt to income ratios will be based on the median debt of program completers. However, the column in the ge-cumulative-rates.xls spreadsheet released on August 13, 2010 that is labeled as "Median Federal Debt for those Entering Repayment" is actually the average (mean), not the median. Means tend to be a bit higher than medians, due to the potential for rightward skew (the reason why the US Department of Education proposed to use medians instead of means). On the other hand the actual debt to income ratios will be based o n the combi nation of federal and private student loan debt, which should be slightly higher than the federal debt figures. The two may balance each other. However, the column should either have been labeled conectly as a mean or a footnote should have been added to explai n that means had been substituted for medians for expediency. The draft regulation at 34 CFR 668.7(c)(2) does not specify whether the median is for all completers, incl uding those that graduate with no debt, or just the completers who graduate with some debt. The former seems to be the most natural interpretation, but this should be stated explicitly for clarity. Likewise, the regulations do not discuss whether the average earnings data will include completers who earned zero income. The Social Security Admi nistration does not necessarily have eamings data for completers who earned zero income. This can potentially be inferred from the lack of earnings data for a given completer. The draft regulation at 34 CFR 668.7(c)(2) specifies that the debt to income ratios will not include debt from unrelated prior or subsequent institutions: "Loan debt does not include any debt obligations arising from student attendance at prior or subsequent institutions unless the other and current iJlStitutions are under common ownership or control, or are otherwise related entities." However, there is no sin1ilar language in the discussion of the loan repayment rates. lf the i.ntention is to include all federal debt, including debt at prior and subsequent institutions, it should be stated explicitly in the regulation for clarity. If not, then that should be stated as well. The inclusion of debt at the same institution becomes problematic when a student emoUs in the same institution for a second degree, such as a Bachelor's degree recipient enrolli ng i.n a Master's degree program. The inclusion of such debt effectively adopts a policy of encouraging colleges to require students to seek subsequent degrees from different institutions. On the other hand, cumulative debt affects affordability, and cumulative debt is under the control of the institution when both degrees are obtained from the same institution. Perhaps the US Department of Education should disti.nguish undergraduate debt from graduate and professional debt when determining what debt at the same institution should be included i11 the analysis. The draft regulation at 34 CFR 668.7(a)(3)(iii) does not define the word "prior", leading to a potential ambiguity. Earnings year is defined by 34 CFR 668.7(a)(3)(v) as a calendar year while
- 21 -
the three-year period (3YP) is defined in terms of award year. The regulations need to clarify whether the word "prior" permits an award year to overlap with a calendar year. For example, is the award year 2008-09 prior to calendar year 2009, even though the award year ends in the middle of the calendar year? The draft regulation at 34 CFR 668.7(c)(2) specifies that Parent PLUS loans are excluded. The use of the phrase "private educational loans" as opposed to "private student loans" would appear to include parent-only private education loans, such as the recently created Wells Fargo Student Loan for Parents. Since parent-only private education loans are a relatively recent phenomenon stimulated by the end of the FFEL program, the US Department of Education should confirm that its wording choice was deliberate and that it intended to include parent-only private education loans, perhaps by inserting "student and/or parent" before "piivate educational loans." The regulatory impact analysis in the third column on page 43634 of the Federal Register version of the NPRM indicates that 60% of the 2,086 propiietary institutions would satisfy the 45% loan repayment rate threshold and that 40% would fall below the 45% threshold. But the table on page 43619 of the Federal Register lists 1,729 for-profit colleges with 36.2% having a loan repayment rate of at least 45% (if one combines the three rows of data) and 60.0% having a loan repayment rate of at least 35%. Likewise the table on page 43630 of the Federal Register indicates that 40% of programs would have a loan repayment rate of at least 45%. Accordingly, it appears that the regulatory impact analysis has swapped the 40% and 60% figures. The table on page 4362 of the Federal Register shows 29,669 of 52,980 programs as restricted in the "Programs by Status" section. That's 55%. But the table on page 43630 of the Federal Register shows only 7% of the programs as restricted. Moreover, the "Affected Students by Status" section shows 265,000 of 3,190,476 students in restricted programs. That's 8.3%, consistent with the table on page 43631 of the Federal Register. The 55% figure is similar to the percentage of progran1S that are subjected to the debt warning/disclosure requirements (i.e., all eligible and restricted except for the 39% that are eligible under both the loan repayment rate and the 8%/20% metrics). Accordingly, it appears that the 29,669 figure was incorrectly labeled or should have been split into two figures. The draft regulations at 34 CFR 668.7(b)(3) states that "RPL also includes loans for borrowers whose payments dming that FFY qualify for the Public Service Loan Forgiveness program under 34 CFR 685.219(c), even if there is no reduction during the FFY in the outstanding principal balance of those loans." The regulations should clarify that qualifying for public service loan forgiveness includes bmrowers who are in the middle of the required service, not just those who have completed the servi.ce requirement. The regulations should also discuss how the US Department of Education plans to identify such borrowers since these borrowers do not currently file any forn1S stating their intent to obtain public service loan forgiveness or document employment i.n a public service job. The US Department of Education might be able to infer this from the borrower's employer as reported to the Social Security Administration. The gainful employment NPRM does not discuss how a college may regain eligibility after becoming ineligible.
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The discussion of the debt warning disclosure in the third column on page 43623 of the Federal Register states " An institution must provide the waming if the program' s repayment rate is less that 45 percent and, using 3YP and, if applicable, P3YP, the debt-to-income ratio is greater than 8 percent of average annual earnings or 20 percent of discretionary income." The intention is that a progran1 that does not satisfy both the 45% loan repayment rate threshold and at least one of the preferred debt to income ratios will be subjected to the wami.ng requirement. But the quoted language does not quite say this. The regulations at 34 CFR 668.7(d) regarding the debt warning disclosure state "unless the progran1 has a loan repayment rate of at least 45 percent and an ammalloan payment that is at least 20 percent of discretionary income or 8 percent of average annual income." The second "at least," highlighted in yellow, should instead be "at most."
The current draft regulations at 34 CFR 668.7(c)(2) base the annual loan payment on the "current annual interest rate on Federal Direct Unsubsidized Loans." This means that for-profit colleges are likely to lobby Congress for reductions in the unsubsi.dized Stafford loan interest rate. Page 131 of the pre-publication version of the gainful employment NPRM notes that several types of programs are most likely to be affected by the loan repayment rate restrictions, including cosmetology, vehicle maintenance, legal support services, culinary arts, ground transportation , audiovisual technology, and medical assistant services programs. Note that the Missomi data does not include cosmetology programs, so it is possible that cosmetology programs may be able to satisfy the debt to income ratios. Footnote 3 on page 43622 of the Federal Register notes that "For graduate and professional programs, separate data are not available on for-profit colleges. For professional degrees, the known debt levels at public and nonprofit institutions could be problematic if earnings are not sufficient." Since some graduate and professional degree programs- especially medical schools- have inherently low loan repayment rates, the lack of debt and earnings data for these programs makes it difficult to evaluate whether these programs will be able to satisfy the debt to income ratios. The use of the Missouli data is potentially problematic because minorities are represented at a much lower rate in the Missouli completion data. For example, 27.5% of the students in the Missouri sample were non-White, compared with 41.0% in the national sample. There are especially significant differences in the Hispanic and Latino population in Missouri. Unemployment benefits are not considered earnings. As such, the debt to income ratios will increase dming a recession or other economic downturn.
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Brian Jenkins, Harold Marinucci, Fred Finley Steve 9/7/2010 8:36:54 AM Chronicle article on lobbying by for profits on gainful employment
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*Tuesday, September 7, 2010 September 5, 2010
For-Profits Spend Heavily to Fend OffNew Rule
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Andi Stempniak for The Chronicle Dawn Connor, a veterinary-technology student at Globe U. who leads a student-lobbying group supported by the Career College Association: "I just want to get it out there that there are so many students who have had a positive experience." By Kelly Field Washington For-profit colleges, under attack in Congress and faced with regulation that could ravage their revenues, are staging an aggressive, but increasingly hopeless, campaign to ward off legislation and defeat a proposed stricture.
In recent weeks, their representatives have filed thousands of comments criticizing the Education Department's "gainful
employment" rule, which would cut off federal student aid to programs whose graduates have high debt-to-income ratios and low loan-repayment rates. Advocates of the colleges have flooded town-hall meetings in lawmakers' districts and pressured faculty and staff members to speak out against the proposal. As of early last week, more than 26,000 comments had been filed with the Education Department, a spokeswoman said. The colleges have spent hundreds of thousands of dollars lobbying Congress and federal agencies, nearly doubling their lobbying expenditures over the past year. Some of the most vulnerable companies spent three or four times as much on lobbying in the second quarter of2010 than in the same period in 2009. One company, Education Management
Corporation, spent eight times as much.
The fight has taken on new urgency in the three weeks since the Education Department released an analysis of loanrepayment rates suggesting that many programs could become ineligible for federal aid under the rule. Student aid is the lifeblood of many for-profit colleges, accounting for an average of77 percent of revenue at the five largest companies, according to an analysis by the Senate education committee. Without access to federal dollars, many programs would be forced to shut down. Lobbyists for for-profit colleges warn that the rule would displace millions of students and cost thousands ofjobs, undermining the Obama administration's efforts to revive the economy and expand college access. But supporters of the proposal, including consumer and student groups, say the rule would affect only low-quality, overpriced programs, eliminating those that fail to deliver on their promises to students. "The access fears are totally unfounded," said Pauline M. Abernathy, vice president of the Institute for College Access & Success, an Oakland, Calif-based nonprofit that advocates for affordable higher education. The rule would take effect next July, but its penalties wouldn't kick in until July 2012.
A Spending Spree
With so much at stake, for-profit colleges have intensified their lobbying, increasing spending by nearly a quarter, to $1.4-million, from the first to the second quarters of2010 alone. Some of the largest increases came from companies that could suffer the most under the rule, including the Career Education Corporation, Corinthian Colleges, Education Management Corporation, and Kaplan fuc. The biggest spender in the second quarter, which ended June 30, was Corinthian, which has nearly tripled its lobbying expenditures over the past year, to $310,000 in the second quarter. Only 26 percent of students who have left Corinthian in the past four years had paid down any principal on their loans as oflast September, according to the Education Department's analysis of loan-repayment rates. That's nine percentage points below the department's proposed cutoff for federal-aid eligibility. While the company's programs could still qualify for aid by passing a debt-toincome test, analysts for the for-profit sector have predicted that at least some of its programs would fail that test as well. Kaplan, which more than tripled its spending on lobbying between the first and second quarters, from $75,000 to $270,000, had a weighted average loan-repayment rate of28 percent in the Education Department's analysis, seven percentage points below the eligibility cutoff. Mark Harrad, a spokesman for Kaplan, said its increased spending on lobbying was "primarily the result of increased regulatory and legislative attention" to for-profits and "the fact that we brought on a new staff member." Cheryl Smith, a fonner top aide to Rep. David RObey, a Wisconsin Democrat who is the departing chairman of the House Appropriations Committee, joined Kaplan as a lobbyist this year. The lobbying effort extends all the way up to the chief executive of the Washington Post Company, which owns Kaplan. Donald E. Graham, son of the legendary publisher Katharine Graham, has made several trips to Capitol Hill to lobby against the rule. Mr. Harrad declined to say which offices Mr. Graham has visited. The Career Education Corporation, which reported spending $200,000 in the second quarter, more than twice what it
spent in the first quarter of this year, scraped by with a repayment rate of35.3 percent, according to BMO Capital Markets, which provides corporate analyses. But two of its colleges, the International Academy ofDesign and Technology and the Gibbs Schools, fell below the cutoff JeffLashay, a spokesman for Career Education, said it wanted to make sure that for-profit students are heard in the debate over the rule. "We're in the midst of frequently narrow-minded and unfair public criticism that lacks context, so it's important that we raise the level of public discourse and provide a voice for the more than two and a half million students" the sector serves, he said. Education Management Corporation, which raised its spending on lobbying from $10,000 to $80,000 per quarter over the past year, had a loan-repayment rate of 37 percent, just over the cutoff But one of its colleges, Brown Mackie, came in at only 21.4 percent, according to BMO. The company was one of three that hired Heather Podesta+ Partners, a law firm led by a top Democratic fund raiser with longstanding ties to Congress. DeVry Inc. and Concorde Career Colleges also retained the firm. It's not clear what the colleges have gotten for their money. While a few more lawmakers have added their names to letters opposing the rule, only one member, Rep. Robert E. Andrews, a New Jersey Democrat who is a longtime supporter of for-profits, has offered an alternative to the department's approach. Aides to members of Congress say lawmakers are reluctant to stick their necks out for a sector that has gotten so much negative publicity in recent months, particularly when the Education Department appears intent on tightening its regulations. "Democrats aren't going to get in the way of a moving bus and be portrayed as allowing for-profits to take advantage of students," said one Senate Republican aide, who asked not to be named.
Repairing Reputations
For-profit colleges have been on the defensive since last fall, when the department began holding a series of negotiations to craft the gainful-employment rule and other regulations aimed at the sector. The pressure mounted over the summer, when Sen. Tom Harkin, the Iowa Democrat who chairs the education committee, held a pair of damaging hearings on for-profit education. The tipping point seemed to come in early August, when the federal Government Accountability Office released the results of an undercover investigation that found widespread deception in marketing by for-profit colleges. Though the report's findings focused on recruiting, not job placement, they strengthened the department's case for regulation and made legislation involving for-profit colleges almost inevitable. In an effort to repair the sector's reputation and build opposition to the rule, the Career College Association urged its 1,400 members to flood Congressional town-hall meetings over the August recess. "Attending Town Hall Meetings and building relationships with Members of Congress are incredibly effective ways of combating the negative perceptions of our students and schools," the association said in a notice on its Web site. To prepare its members for the meetings, the association posted a Webinar that encouraged members to bring students-which the group called "our best asset"-to the meetings, along with "positive data to support our schools and
students." The material was created with the help of the press secretary to Rep. Jim Moran, Democrat of Virginia, whose brother, Brian, is the association's vice president for government affairs. It described the meetings as a way to "set the facts straight" about for-profit education and "begin creating a positive narrative about our schools." The trade association has also provided financing and technical support to a group of for-profit college students called Students for Academic Choice. The group, which was formed at the association's annual Hill Day lobbying event, in March, gathered 32,000 signatures on a petition opposing the Education Department's proposed rules and recently created a Web site using money from the association. A spokesman for the association declined to say how much the effort had cost, only that it was "de minimus." Critics of for-profit colleges have dismissed the group as an exercise in "astroturfing," an attempt by the Career College Association to manufacture opposition to the rule. But Dawn Connor, the student group's president, said she's genuinely concerned about preserving access to for-profit education. Ms. Connor, a veterinary-technology student at Globe University's campus in Eau Claire, Wis., said she had attended three nonprofit colleges but never got a degree. She said Globe offered smaller classes, better equipment, and more personal attention than the traditional colleges did. She called her decision to attend the for-profit college "the best choice I've made, by far." "I want other students to have that choice as well," she said. Ms. Connor estimated that about 150 students have joined the lobbying group. She said it is working with a lawyer to secure nonprofit status and is preparing to send an "action alert" e-mail to students who signed the petition urging them to submit testimonials on the group's Web site about attending for-profit colleges. "There is just so much negative press," she said. "I just want to get it out there that there are so many students who have had a positive experience." For-profit colleges have also gotten some support from the U.S. Chamber of Commerce, which sent a letter to the Education Department in mid-August warning that the proposed gainful-employment rule would "limit education and economic opportunities for many Americans." RolfLundberg Jr., the chambers chieflobbyist, said four or five of its employees are "very focused" on the rule and have attended a "couple dozen" meetings with Congressional aides in recent months. "We are in the crescendo phase of this effort," he said. Minority-group lawmakers and groups are divided on the rule. While the NAACP and the National Council ofLa Raza have endorsed the proposed rule, saying it would protect mjnority students, the National Hispanic Caucus of State Legislators said it would discriminate against students who have to borrow to attend college and has passed a resolution opposing it. The president of the Mexican American National Association, a pan-Latina group, has argued that the rule would establish "two tiers of colleges" and relegate minority students at career colleges to "second-class status." "I'm not a cheerleader for the career colleges," said Alma Morales Riojas, the association's president, in an interview. "But if we're looking to educate our community, we need as many options as possible."
In the House ofRepresentatives, several members of the Congressional Black Caucus have signed on to a pair of letters
to the Education Department. But the rule has split the Tri-Caucus, a coalition comprising the black caucus, the
Congressional Hispanic Caucus, and the Congressional Asian Pacific American Caucus. Forty-three percent of students attending for-profits are from minority groups, and almost 50 percent are among the first generation in their families to pursue higher education, according to the Career College Association. For-profit colleges argue that they provide access to underserved populations at a time when some public co!Jeges, faced with budget cutbacks, are turning students away. Critics of the for-profit sector say some colleges are taking advantage of those students, saddling them with debt and leaving them unprepared for a career. As Ranis N. Miller, president of the Career College Association, put it, "We see ourselves as helping minorities, the other side sees us as exploiting them."
A Flood of Comments
With the public-comment period set to end this week, groups on both sides of the gainful-employment debate have created Web sites that encourage people to submit comments on the rule. The Institute for College Access & Success, a leading supporter of the proposed rule, said its site had generated 800 comments as of early last week. That is dwarfed by the number of comments submitted through sites created for the Education Management Corporation by Bipac, a business-oriented lobbying group. Education Management recently sent an e-mail to its faculty and staff members urging them to file comments through the sites, which generate "customizable" form comments for students, faculty members, and friends and relatives of members of groups opposing the rule. Education Management has also hired DCI Group, described by O'Dwyer's PR Daily as a "brass-knuckled Republican PR firm," to contact its employees to help them craft "personalized letters" to the department, according to Higher Ed Watch, a blog of the New America Foundation. Todd S. Nelson, Education Management's chief executive, has sent an e-mail to the company's roughly 20,000 employees encouraging them to participate. "The proposed rule's potential consequences on EDMC could be substantial," he wrote. Critics of the rule concede that the department isn't likely to back down from its proposal, despite their efforts to defeat it. "I don't think there's anything that has arisen or will arise that will dissuade them," said one lobbyist for the for-profits. But the battle may be just beginning for for-profit colleges and their critics. The Education Department is expected to issue the final version of the gainful-employment rule by November l. After that, the action will shift to the Senate, where Senator Harkin is promising more hearings and legislation cracking down on "bad actors" in the sector. Goldie Blumenstyk contributed to this article.
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7/ 15/2010 10:24:24 AM
Chronicle of High Ed ran an article today re short selling...Here's an except. It's reasonably balanced
July 14, 2010 For-Profit Colleges, Under Fire From Regulators, Face a New Foe: Short-Sellers
U.S. Senate Committee on Health, Education, Labor, and Pensions Steven Eisman, who manages a hedge fund, says short-sellers should continue to identify weaknesses in the for-profit higher-education industry. Enlarge Image
U.S. Senate Committee on Health, Education, Labor, and Pensions Steven Eisman, who manages a hedge fund, says short-sellers should continue to identify weaknesses in the for-profit higher-education industry. By Paul Fain Wall Street has made a bundle on the rapid growth of for-profit higher education. But some sophisticated money managers are now betting against those companies in the stock market, and the influence of big money and related questionable behavior is clouding a debate about the industry on Capitol Hill. Last week, ProPublica reported that an unnamed investment company paid a researcher to draft a letter to the Department ofEducation about for-profit recruiters targeting potential students at homeless shelters. The researcher, who solicited signatures from officials at 20 homeless shelters, some of whom had no direct knowledge of for-profit recruiting, later admitted she was working for a short-seller who has a stake in a drop in value ofthe for-profits' stocks.
Steven Eisman, a hedge fund manager, made a splash with his testimony at a high-profile hearing in the U.S. Senate last month on for-profits. Mr. Eisman had famously bet against the housing market, and at the hearing he compared the growth and practices of career colleges to those of the subprime mortgage industry. The share prices of major for-profit companies took a hit after Mr. Eisman's June 24 testimony, as they did after a
similar speech he gave at an investors' conference in May. Shares ofiTT Educational Services, for example, fell 4.5 percent after the hearing, and Apollo Inc., which owns the University ofPhoenix, dropped 3.7 percent. Those were hardly isolated events. Hedge funds have driven much of the volatility in for-profits stocks, with many dumping their holdings or selling short in recent months. And Trace A Urdan, an analyst with Signal HI! Capital Group, said Wall Street firms use "leaks and access" in Washington to angle for their interests. Employees of investment companies have been regular fixtures on the Hill in recent weeks. "This feels like some weird distillation of insider trading," said Mr. Urdan, whose group helps education companies raise capital, and who advises investors on buying and selling education stocks.
Mr. Eisman's testimony was controversial even before he sat in front of the microphone. But scrutiny of his role has increased in the wake of the ProPublica report. In an interview with The Chronicle, Mr. Eisman said he had no
involvement with the researcher who created the homeless-recruiting letter. "That was not me," he said.
Rob MacArthur Alternative Research Services, nc. 203-244-5174 rmacarthur@al tresearch. com
This material has been prepared by Alternative Research Services Inc., a Connecticut-regi stered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, repli cating, or quoting from this report without the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The finn does not make a market or hold positions in the securities mentioned herein, nor does the finn maintain any investment banking relationships in such securities.
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Brian Finley, Steve Wolff. Russell Woodward. Jennifer Sann, Ronald Marinucci Fred 5/18/2010 8:33:48 AM Chronicle ofHigher Ed article on "gainful employment"
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Federal Proposal Could Jeopardize For-Profit Programs, Especially Bachelor's Degrees
Nathaniel Brooks for The Chronicle Nancy Kyer, a licensed practical nursing student, in the lab at Mildred Elley School in Albany, NY. Albany, NY, Wednesday, May 12, 2010. By Jennifer Gonzalez Mildred Elley, a two-year proprietary college that opened its doors in Albany, N.Y., in 1917, prides itself on helping people get back to work. But Faith A Takes, the college's owner and president, fears that a new federal proposal that would evaluate for-profit colleges by comparing their students' borrowing to their graduates' earnings will jeopardize her college's high-demand nursing, medical-assisting, and information-technology programs at the very time more adults are turning to the institution for training. The U.S. Department of Education is expected to unveil its plan in the next few weeks, and for-profit colleges like Ms. Takes's are scrambling to squash the idea. Administrators at those institutions say the department's proposal would force for-profit colleges to shut down educational programs. Programs in nursing, engineering technologies, and culinary arts are among those that could be affected because graduates in those fields may not make enough to satisfy the department's proposed debt-to-earnings ratio. Bachelor'sdegree programs, experts say, would be most at risk because students in those programs tend to borrow more than students in shorter-term ones. Officials at DeVry, Kaplan, and Keiser Universities all agree that the department's proposal could seriously jeopardize their bachelor's-degree programs. "The bachelor's degree as we know it would be gone," said Arthur Keiser, president ofKeiser University, which is based in Florida. The department has said its goal is to crack down on colleges that overcharge and underdeliver in training students for jobs right after graduation. Education Secretary Arne Duncan has said that former students of vocational programs have reported that they were enticed into poor-quality programs and are now saddled with loads of student-loan debt they
can't repay because they have no jobs.

Mr. Duncan wrote in a recent opinion piece for AOL News that the problems afflict only a small minority of vocational
and career programs. But, he added, the problems "will fester unless steps are taken to protect students and taxpayers."
Defining a Rule
The Higher Education Act of 1965 requires that proprietary and vocational colleges, other than those clearly designated as "liberal arts" and vocational programs not designed to lead to a degree, provide "an eligible program of training to prepare students for gainful employment in a recognized occupation." Compliance with the rule is a condition for those colleges' students to be eligible to receive federal financial aid. The rule took on more prominence in the late 1980s, when it was used to fight problems that arose after some for-profit colleges were found to be recruiting near welfare offices, low-income housing complexes, and homeless shelters. The colleges enrolled ill-prepared students who brought with them thousands of dollars in federal loans and grants that the colleges received upfront as payments for tuition. The for-profit sector's most-egregious abuses may be behind it, but problems persist. The sector continues to be called out on its high tuition costs, and the average default rate ofborrowers who attended for-profit colleges, 11.9 percent, is higher than that of students who attended public colleges, which averages 6.2 percent, or private, nonprofit colleges, at 4.1 percent. Aggressive recruiting practices continue to plague the industry, an issue highlighted in a recent PBS television documentary. In fact, the University of Phoenix settled a lawsuit last year that accused the university of improperly compensating its recruiters, in violation of laws governing federal student aid. The department's attention to the sector has a lot to do with its fast growth, too. Enrollment in the nation's nearly 3,000 for-profit colleges has grown faster than in the rest of higher education, by an average of 9 percent per year over the past 30 years. For-profit institutions now educate about 7 percent of the nation's roughly 19 million students who enrolJ at degree-granting institutions each fall. The higher-education act does not currently define "gainful employment" as described by the proposed rule. So the Education Department set out to do that late last year, convening a panel that included consumer advocates, for-profitcollege officials, and student advocates to re-examine the rule. Because the panel could not agree on a gainfulemployment definition, the department is now free to propose its own. The department has not yet finalized its proposal, but officials are considering requiring that a program's students do not take on loan payments that exceed 8 percent of graduates' expected earnings based on a 10-year repayment plan and Bureau ofLabor Statistics earnings data. The rule would apply to programs at proprietary colleges and any institution with programs less than two years in length. Under proposals the department has floated, programs that exceed the 8-percent limit could still be eligible for federal financial aid by showing that their graduates' true earnings were higher than the government averages or that 90 percent of all graduates repaid their loans~ by documenting that students have at least a 75-percent repayment rate on federal loans~ or by demonstrating a program-completion rate of at least 70 percent and a 70-percent job-placement rate. Last month analysts at Credit Suisse reported that the department was considering lowering the completion rate to 50 percent. However, it is unclear exactly which exemptions, if any, will be part of the department's final proposal.
The department is expected to release its final draft in the next few weeks, which includes 13 other rules related to forprofit colleges, with public comment to take place over the summer. Final rules will be set by November and go into effect in July 2011.
What's the Problem?
For-profit-college officials and their supporters say they are not clear what the department is trying to accomplish through the proposed gainful-employment regulation. If the department wants to regulate the sector's "bad actors," the proposal may do more harm than good, the advocates say. It may shut down some unscrupulous colleges, but it may also eliminate worthy programs and leave students without a college to attend. As part of its lobbying efforts, the for-profit sector is throwing around large numbers about how many programs and students would be affected by the change. But there are no good estimates of what the impact will actually be. One study at the center of the debate was commissioned by the Career College Association, which represents 1,400 colleges, most of them for-profit. That study, conducted by a professor of economics at the University of Chicago and a consulting company, was based on data from about 10,000 programs enrolling more than 640,000 students. It found that 18 percent of the programs, enrolling one-third of the students, would not pass muster under the proposed rule. Although a report on the study notes that the programs evaluated were not necessarily representative of the range of programs offered by for-profit colleges, the report's authors projected the impact of the rule, assuming that it would affect one-third of all students who enroll at for-profit institutions each year. Using that assumption, and historical trends on enrollment growth for the sector, the Career College Association has argued that the rule could eliminate programs for 360,000 students by next year, and a total of more than 5.4 million by 2020. Supporters of the rule view the study findings differently, arguing that they show that only a minority of programs would even be affected and that the proposed rule wouldn't necessariJy mean the end of the students' chance to pursue higher education because they could enroll in different programs that might result in their earning higher wages, or find colleges where the tuitions costs, and debt, are not as high.
If the department's aim is to curb excessive student debt, for-profit college officials say, then it should deal with individual students rather than propose a rule that would affect large numbers of students across an entire sector of higher education.
"The department assumes that every institution with a high debt-to-income ratio among its students is a bad actor," says Harris N. Miler, president of the Career College Association. "That's unfair." The department's plan, he and others say, will ultimately limit access and student choice, which runs counter to President Obama's call to increase the number of Americans with college degrees. Other supporters of for-profit colleges accuse the department of using the rule-making process to try to regulate tuition at for-profit colleges. For the 2009-10 academic year, average tuition and fees range from $7,020 at public four-year colleges to $14,174 at for-profit institutions and $26,273 at private nonprofit colleges, according to the College Board. Because salaries for a given occupation vary regionally, programs of equal cost and quality in different locations may have different abilities to meet the 8-percent threshold. For-profit colleges also have limited control over how much loan debt a student takes on and cannot stop students who agree to take on thousands of dollars in loans if they are eligible for those amounts.
"Our hands are tied," said Ms. Takes, ofMildred Elley, which has campuses in New York and Massachusetts. "But we are the ones being held responsible." For-profit colleges have complained that the department is focusing on the sector without examining the huge amount of debt that students, especially those studying the liberal arts, incur at nonprofit colleges. Mark Kantrowitz, publisher ofFinAid, a Web site that provides student-aid advice, said that if the department is serious of about curbing excessive student debt, then all of higher education should be subjected to the federal proposal. In fact, he says, nonprofit colleges should be wonied because some have graduation rates in the single digits and it's an open question whether they are providing value for the money students are spending. He said nonprofit colleges should not be surprised ifthey become the department's next focus. Among 2007-8 bachelor's-degree recipients who borrowed, median debt was about $17,700 at public, four-year colleges, $22,380 at private, nonprofit colleges, and $32,650 at for-profit institutions, according to the College Board. "A lot of theater-arts students rack up thousands of dollars of student-loan debt," he said. "No one can pay that back waiting tables."
Focus on the For-Profit Sector?
Pauline M. Abernathy, vice president of the Institute for College Access and Success, a California-based nonprofit group that advocates for affordable higher education, dismissed the idea that the department is out to get the for-profit sector. She says that community-college work-force programs would also be affected by the department's proposal. But unlike its for-profit counterpart, the two-year and technical-college sector welcomes the department's proposal. Both the Florida College System Council ofPresidents and the National AJijance of Community and Technical Colleges have written letters to Mr. Duncan supporting the department's efforts to define gainful employment. The council called the proposal a "fair measure that will help prevent students from borrowing more money than they could realistically repay, given the expected starting salary in the occupation for which they trained." Susan M. Lehr, vice president for government relations at Florida State College at Jacksonville, a two-year college, said the benefit of the department's proposal is that it allows institutions to get a better handle on which programs are producing students who can earn enough money to support themselves. "They come to us for gainful employment. That's the whole point," she says. Ms. Lehr, who usually works on state rather than national education policy, got involved with the federal gainfulemployment issue because, she says, she has seen firsthand the devastation left behind when students graduate from a for-profit with huge debt and no job. "They usually end up coming to our college for help," she says. Many higher-education officials and analysts say that Robert M. Shireman, deputy under secretary of education, is the driving force behind the proposal. Mr. Shireman, who did not return numerous calls and e-mail messages seeking comment on this story and who will be leaving his post at the department this summer, has long advocated for reform of student-borrowing policies and increased protections for borrowers. Before joining the department~ he was president of the Institute for College Access and Success. During his tenure, the nonprofit group brought public attention to the issue of rising student debt, prompting Congress to adopt income-based repayment options for federal student loans.
Higher-education analysts say he is not interested in waiting for the next reauthorization of the higher-education act, which is not scheduled to come up until 2013, to make sure that federal student-aid money is used properly. At a recent address before the National Association of State Administrators and Supervisors of Private Schools, Mr. Shireman acknowledged the efforts of the for-profit sector to meet the "critical demands from people out there who need higher education." However, he also made it clear that the colleges need to be good stewards of the federal money they rece1ve. The Career College Association has offered its own gainful-employment proposal, which focuses on expanding required disclosures to prospective students. Students would be informed of the consequences of taking on too much debt and be required to sign a document stating that they understand the risk. The association's plan would also require programs to prove that they prepare students for employment by vetting the programs with employers in the field and making sure students are better prepared to pass licensure and certification tests. When asked about the association's alternative proposal last month, the department issued a written statement saying it was "pleased that many participants in the program community have expressed views and presented information in this important area." The statement went on to say that the department looks forward to the association's comments on the draft the department proposes. However, it is highly unlikely that the department would abandon its own proposal in favor of a disclosure-only rule as suggested by the association.
Much-Needed Money
Michael Gutierrez, director of the for-profit Bryant & Stratton College's campus in Albany, N.Y., said the Education Department's proposal only considers what a student will earn in the early years after graduation for the purposes of repaying loans. That overlooks the fact that graduates will probably earn more in their careers over time and the value of their education will multiply, Mr. Gutierrez said. He said he was concerned that some of his college's popular programs, such as those in medical assisting, criminal justice, and business, could be in jeopardy if the Education Department's plan takes effect. Job-placement rates in those programs are about 90 percent, he said, but starting salaries are often low and many students will have borrowed more than 8 percent of their initial earnings. For example, annual tuition in the medical-assistant program is $7,335, and the starting salary in that field is about $24,000 a year. The proposal would basically force colleges to either lower tuition or get rid of some programs, he said. The main revenue source at for-profit colleges is tuition. So if revenue per student drops at a career college, which it will if tuition must be reduced to meet a debt-to-income ratio, it would likely lead to cuts in programs and student-support services, said Mr. Miller, of the Career College Association. For-profit-college officials have long argued that the many nontraditional students their colleges enroll need to take out loans to pay for tuition and living expenses. Their students tend to be older than traditional students and are often low- to middle-income working adults with families. Few have the luxury of dipping into their parents' coffers. Nancy A. Kyer, of Schaghticoke, N.Y., has worked as a medical secretary for 30 years. After her employer cut her
hours last year, she decided to enroll in a licensed-practical-nursing program at Mildred Elley. She wanted to make sure she had job security for the future. Ms. Kyer, who is 52, said she investigated other programs before selecting the proprietary school. She liked the program's flexibility because it allowed her to keep her day job while attending evening classes. Ms. Kyer's 54-crectit program will cost a total of$19,116 in tuition, and she expects to graduate with more than $15,000 in loans. "Is it a risky thing to do? Maybe," said Ms. Kyer, who expects to finish her studies early next year. "But everybody should have the opportunity to further their education."
From: Rob MacArthur <rmacarthur@altresearch com> To: Rob MacArthur CC: Date: 12/10/20094:19:44PM Subject: comments from the street re the hearings
Reactions from the Street analysts. The jerk who made these comments should probably frred for stupidity.
From Trace who' s in DC.
Much friendlier room for for-profit sector today. Morning discussion centered on whether or not you could eliminate rules entirely without massive confusion and lawsuits for all schools (not just for-profits). Consensus emerged that replacing safe harbors with no guidance whatsoever was unworkable. Department asked for blue sky ideas and this was deemed impractical as well. a point was made (effectively) that you could not just say what was forbidden because that inadvertently implied that everything else was allowed. So instead you need to say explicitly what is allowed.- result-the Chair named a working committee (including for-profit rep) that will convene at 8AM tomorrow morning and review each of the 12 safe harbors to find which elements are central, and where there is agreement and disagreement and the group will discuss again tomorrow with an eye toward providing clarity but eliminating loopholes so that the Department has very clear guidance for drafting new rules before the third session
Robert MacArthur Alternative Research Service, Inc. Rmacarthur@altresearch.com 203-244-5174 This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.
Industry Overview
Equity I United States I Education & Training Serv1ces 09 December 2009

Significant opposition to DOE 's proposal a positive
Gainful employment proposals were discussed at today's negotiated rulemaking (neg-reg) sessions. Neg-reg is the process the Dep't. of Education uses to update regul ation. The group was overwhelmingly opposed to the DOE's proposals to tie tuition to salaries or impose a maximum debt servicing-starting salary. This issue is not over but today was positive for for-profits & drove stocks up. We continue to like the group given attractive fundamentals but neg-reg is creating volatility & could lead to some potential changes in operations. We highlight Buy-rated DeVry, Capella, & Strayer as high-quality less countercyclical stories.
Sara Gubins Research Analyst MLPF&S sara gubins@baml.com Kevin C. Doherty Research Analyst +1 646 855 1961
+1 646 855 5607
MLPF& S
kev1n.doherly@baml.com David Chu Research Analyst +1 646 855 2589
MLPF&S
dav1d.j.chu@baml.com
Range of objections to gainful employment proposals

Only -3 of 15 negotiators seemed to be in favor of the DOE's proposals. The discussion was heated, & objections included whether this was in the DOE's purview (vs. Congress), that it would represent price controls, would be complicated to implement & might not fairly measure benefits of a program (both monetary & non-monetary). Members objected to not having draft regulation to review & not having enough time to consider the issue. Even those who liked the concept thought the DOE's proposals would be hard to implement.
Table 1: BofAML ratin s vs. consensus %breakdown No. of BofAML Rating opinions Buy Neutral Sell Neutral 24 67% 25% 8% Neutral 17 41% 41% 18% 62% 25% 13% coco Buy 16 18 CPI.A Buy 56% 44% 0% ov Buy 22 55% 45% 0% Buy 15 47% 53% 0% EDMC ESI Buy 21 62% 38% 0% Neutral LINC 9 56% 44% 0% 18 61% 39% 0% STRA Buy UTI Underperform 10 30% 20% 50% Ticker APOL CECO
Soun:c: Bloom berg
Topic could apply to a ll for-profit institutions

Most programs at for-profits must lead to gainful employment in a recognized occupation to access federal financial aid. Today the DOE said its gainful employment proposal would apply to all for-profit programs except liberal arts programs & would include non-degree programs at non-profits/public schools. As proposed, this could effectively create price caps on some programs & create 90/10 issues as for-profits can't receive >90% of rev. from federal financial aid.
Positive discussion today, but issue not over

This week is the 2"d of 3 rounds of neg-reg. The DOE will take feedback, revise regulatory language ahead of the 3rd session (Jan. 25-29, 201 0), when the committee will vote on proposed regulation. Today was positive as the group opposed tying tuition to salary/debt, but the discussion is not over.
Next up: incentive compensation tomorrow

Enrollment advisors cannot be paid a bonus based on enrollment. There are 12 safe harbors that clarify conditions under which payments are covered. The DOE proposes eliminating all safe harbors, which could require schools to change compensation plans & potentially raise costs -we view this as more of a nearterm issue than a change to long-term fundamentals. For example, eliminating the ability to raise advisor salaries 2x/yr is a potential change that would impact some schools. It also raises some questions about whether schools could pay lead aggregators on a cost-per-lead basis (parti cularly important fo r online). If not, schools & web inquiry providers could find a different pricing strategy, but it could be challenging.
Merrill Lynch 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 of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 4 to 6. Analyst Certification on Page 3. 10894374
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09 December 2009
Education & Training Services
Neg-reg background & process

The Department of Education has formed a committee to develop proposed regulations to maintain or improve the "program integrity" of Title IV student aid programs. After a series of three public hearings in June to gather input before the negotiated rulemaking (neg-reg) sessions, the DOE released an initial negotiated agenda and formed committees. The formal committee sessions began in November, with three monthly meetings lasting until early 2010. The sessions are open to the public. Regarding the process for negotiated rulemaking, a committee is formed representing various interests in the sector. The committee meets the first time to discuss the topics, the second time to review draft regulation by the Department of Education and the third time to vote on the draft regulation by the DOE. If 100% of the committee does not vote for all of the proposed regulations, authority falls to the DOE who drafts the final regulation, subject to a public comment period.
Changes would apply July 20 11 Any changes would not take effect until July 2011 , and we believe schools would have time to comply with changes. Not creating new law We believe the DOE is broadly focused on outcomes and accountability, and it is important to note that the end goal of the neg-reg process is to interpret current statute, not to create new legislation.
Table 2: Companies Mentioned Company Ticker

Apollo Group Capella Career Educa tion Corinthian Coli DeVry Education Mgml ITT Education Lincoln Strayer UTI APOL CPLA CECO
Recent Px
54.67 71 .88 26.25 13.79 54.29 20.72 87.37 20.55 197.93 18.58
Q-R-Q
B-2-9 C-1-9 C-2-9 C-1-9 8-1-7 C-1-9 C-1-9 C-2-9 B-1-7 C-3-9
Rating
Neutral Buy Neutral Buy Buy Buy Buy Neutral Buy Underperform
coco
DV EOMC ESI UNC STRA UTI
Source: BolA Merrill lynch Global Research
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09 December 2009
We, Sara Gubins and Kevin C. Doherty, hereby certify that the views each of us has expressed in this research report accurately reflect each of our respective personal views about the subject securities and issuers. We also certify that no part of our respective compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.
Capella Education Corinthian Colleges Inc Corporate Executive Board DeVry Inc Ecolab Inc Education Management Corporation Grand Canyon Education ITI Educational Services K12 Slrayer Education Inc.
BofAML ticker
CPLA
Bloomberg symbol
CPLAUS
Analyst
Sara Gubins Sara Gubins David Ridley.Lane Sara Gubins David Ridley-Lane Sara Gubins Sara Gubins Sara Gubins Sara Gubins Kevin C. Doherty Sara Gubins Sara Gubins Kevin C. Doherty Kevin C. Doherty Kevin C. Doherty SaraGubms Sara Gubins Sara Gubms Sara Gubins Kevin C. Doherty Sara Gubins
coco
EXBD DV ECL EDMC LOPE ESI LRN STRA APOL CECO CBG FDS JLL LINC MAN RECN RHI UTI MPS
coco us
EXBDUS DVUS ECLUS EDMCUS LOPE US ESIUS LRNUS STRA US APOLUS CECOUS CBGUS FDS US JLLUS LINC US MANUS RECNUS RHI US UTI US MPSUS
NEUTRAL
Apollo Group Career Education CB Richard Ellis Group Inc FactSet Research Systems Inc. Jones Lang LaSalle Inc Lincoln Educational Serv1ces Corp Manpower
UNDERPERFORM
Resources Connection Robert Half International Universal Technical Institute
RSTR
MPSGroup
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Bank of America~ Merrill Lynch 09 December 2009
Investment Rating Distribution: Education & Training Services Group (as of 12 Nov 2009) Coverage Universe Count Percent lnv. Banking Relationships Count Percent Buy 13 72.22% Buy 7 53.85% Neutral 4 22.22% Neutral 2 50.00"k Sell 5.56% Sell 100.00% Investment Rating Distribution: Global Group (as of 12 Nov 2009) Coverage Universe Count Percent lnv. Banking Relationships Percent Count Buy 1629 50.37% Buy 842 57.51% Neutral 821 25.39% Neutral 455 62.33% Sell 784 24.24% 49.31% Sell 357 * Com panies in respect of which MLPF&Sor an affiliate has received oompensation for investment banking services within the past 12 months. For purposes of this distribution, a stock rated Underperformis included as a Sell. FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RA T/NGS, indicators of potential price fluctuation, are: A- Low, B- Medium and C- High. INVESTMENT RATINGS reflect the analyst's assessment of a stock's: (Q absolute total return potential and (iQ attractiveness for investment relative to other stocks within its Coverage Cluster(defined below). There are three investment ratings: 1 -Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a stock and the firm's guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst's view of the potential price appreciation (depreciation). Investment rating Buy
~~
;:: ~
Ratings dispersion guidelines for coverage cluster* :5 70"k

:5 ~
Underperform N/A <: 20"k Ratings disperstons may vary from time to time where BofAML Research beheves it better reflects the investment prospects of stocks in a Coverage Cluster.
Price charts for the securities referenced in this research report are available at http://www.ml.com/research/pricecharts.asp, or caii1-888-ML-CHART to have them mailed.
MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report: Apollo Group, Capella Education, Career Education. Corinthian Coli, DeVry, Education Mgm~ ITT, Lincoln, Universal Tech. MLPF&S or an affiliate was a manager of a public offering of securities of this company w~hin the last 12 months: Education Mgmt. The company is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgm~ ITT, Lincoln, Strayer, Universal Tech. MLPF&S or an affiliate has received compensation from the company for non-investment banking services or products within the past 12 months: ITT, Strayer. The company is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: Apollo Group, Career Education, Corinthian Coli, DeVry, ITT, Strayer, Universal Tech. MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months: Apollo Group, Career Education, Corinthian Coli, DeVry, Education Mgmt, ITT, Lincoln, Strayer, Universal Tech. MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company or an affiliate of the company within the next three months: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, ITT, Strayer, Universal Tech. MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this company. If this report was issued on or after the 10th day of the month, it reflects the ownership position on the last day of the previous month. Reports issued before the 1Oth day of a month reflect the ownership position at the end of the second month preceding the date of the report: Apollo Group, Capella Education, Career Education, DeVry, ITT, Universal Tech. MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the company on a principal basis: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, ITT, Lincoln, Strayer, Universal Tech. The company is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: Apollo Group, Career Education, Corinthian Coli, DeVry, ITT, Strayer. The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall prof~ability of Bank of America Corporation, including profits derived from investment banking revenues.
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09 December 2009

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09 December 2009
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December 10, 2009
Education Services
Neg-Reg Day Three: Gainful Employment
Action
No change in thesis. We continue to recommend the post-secondary stocks which we feel have less risk and the best opportunity for growth independent of the macroenvironment, namely Strayer, Capella , and American Public. The ERP implementation at DeVry and the informal SEC inquiry at Apollo keep us on the sidelines of those two stocks.
Summary
Neg-reg day three. Day three of the second negotiated rulemaking session focused on gainful employment, ability-to-benefit (ATB) students, and definition of a credit hour. Not much incremental news on ATB or definition of a credit hour. Gainful employment. The discussion was very heated with little consensus on the inclusion of cost/earnings or debt/income models. Importantly, the Department of Education (DOE) language related to gainful employment would impact ALL for-profit schools (degree granting and vocational programs). but only non-degree granting programs at not-for-profit schools. - We question how the DOE will define gainful employment at schools like Strayer or Capella where most students are already employed when they go back to school. We think more debate will be required. Opposition calls it price fixing, consumer advocate in support. For-profit representative Elaine Neely, as well as several not-for-profit representatives, expressed concern about the idea of effectively "price fixing" and questioned the DOE's authority in making this level of interpretation out of the existing HEA language. Not surprisingly, consumer advocate Margaret Reiter was strongly in favor of proposed changes. Consensus seems unlikely. It seems highly unlikely, in our opinion. that the committee will come to a consensus on the topic of gainful employment. Ultimately, the DOE can choose to include the language it wants despite strong objections from the committee. However, there are still legal arguments that could keep it from passing including if the DOE has the authority to pass the regulation. Neg-reg running behind. Various representatives expressed concern that the neg-reg process is "very behind" as the DOE has not even presented clear regulatory language as it relates to gainful employment to be debated (yesterday's session was extended and today's will be as well). Our concern is the process could linger on beyond the third session scheduled for late January and continue to be an overhang on the space.
Education Services
December 10, 2009
Details
American Public (APEI- $32.88): Our $44 price target is based on 20x our NTM+1 EPS estimate, which assumes no expansion from current levels. Year-to-date, APEI has traded 18x-35x forward earnings with an average of 26x. Strayer (STRA - $202.50) : Our $260 price target is based on 23x our NTM+1 EPS estimate adjusted for interest income and $6.78/share of cash. Historically, Strayer has traded 19x-44x forward earnings, with an average of 29x. Capella (CPLA - $73.05): Our $96 price target is based on 25x our NTM+1 EPS estimate. Historically, Capella has traded between 17x-46x forward earnings, with an average of 28x. DeVry (DV - $57.23): Our $62 price target is based on 15x our NTM+1 EPS estimate, which assumes no expansion from current levels. Historically, DV has traded 13x-36x forward earnings, with an average of 24x. Apollo (APOL- $55.34): Our $60 price target is based on 10x our NTM+1 EPS estimate, which assumes no multiple expansion from current levels. Historically, APOL has traded 1Ox-46x forward earnings.
Company Specific Risks

APE I Competition. The post-secondary education market is highly competitive. While the American Public University System is well known within the military, the company is likely to encounter greater competition as it moves into the civilian markets. Competition is in the form of other for-profit higher education companies such as Strayer and University of Phoenix, as well as traditional non-profit two-year and four-year colleges and universities. particularly University of Maryland University College. Regulatory and accreditation risks. Providers of post-secondary education are subject to regulatory requirements as dictated by the Higher Education Act of 1965. Higher education institutions participating in Title IV funding are required to be accredited by an association recognized by the U.S. Department of Education. While American Public has not been subject to regulatory or accreditation issues in the past, any change in accreditation status, and resulting loss of Title IV eligibility, could have a significant effect on the company's reputation and ability to attract students. Dependence on the military. In 2008, approximately 65% of company revenues were derived from the Department of Defense (DoD) tuition assistance program . Additionally, we believe the company derives a significant portion of its revenues from the Department of Veterans Affairs in the form of G.l. Bill Benefits. Decreases in reimbursement levels related to DoD tuition assistance program or the G.l. Bill would negatively impact American Public Education. Further; inefficiencies in implementing the new G.l. Bill and Yellow Ribbon program including delayed disbursements from the VA could hurt cash flow. Shift to civilians adds incremental cost. Given increased competition and lower referral rates within the civilian market, student acquisition costs are generally higher for civilians than military personnel. Therefore, we expect selling and promotional costs to increase as a percentage of revenue.
Education Services
December 10, 2009
STRA Competition. The post-secondary education market is highly competitive. While Strayer is well known in the region in which it currently operates, the company is likely to encounter greater competition as it moves further away from the Mid-Atlantic States. Competition is in the form of other for-profit higher education companies such as University of Phoenix and DeVry, as well as traditional non-profit two-year and four-year colleges and universities. Online programs are becoming increasingly competitive, with more competitive offerings coming from both for-profit and non-profit schools.
Regulatory and accreditation risks. Providers of post-secondary education are subject to regulatory requirements as dictated by the Higher Education Act of 1965. Higher education institutions participating in Title IV funding are required to be accredited by an association recognized by the U.S. Department of Education. While Strayer has not been subject to regulatory or accreditation issues in the past, any change in accreditation status, and resulting loss of Title IV eligibility, could have a significant effect on the company's reputation and ability to attract students. Opening increased number of campuses. Between 2003 and 2005, Strayer opened five campuses per year. In 2006 and 2007 , management opened eight campuses, and nine in 2008. Management opened 11 campuses in 2009 and plans to open 13 in 2010. Operating margins could be at risk if Strayer is not as successful in executing the openings of the new campuses. Private loans. Comments by the SLM Corp (Sallie Mae) and other lenders have sparked investor concern over availability of student loans and the impact on for-profit post-secondary schools. We believe Strayer is relatively insulted from problems in the private lending market as only 3% of revenue is derived from third-party loans. CPLA Competition. The post-secondary education market is highly competitive. Competition is in the form of other for-profit higher education companies such as University of Phoenix, Strayer, and DeVry, as well as traditional non-profit colleges and universities. Online programs are becoming increasingly competitive, with competitive offerings coming from for-profit and non-profit schools. Regulatory and accreditation risks. Providers of post-secondary education are subject to regulatory requirements as dictated by the Higher Education Act of 1965. Higher education institutions participating in Title IV funding are required to be accredited by an association recognized by the U.S. Department of Education . Any change in accreditation status, and resulting loss of Title IV eligibility, could have a significant effect on the company's reputation and ability to attract students. Ability of graduates to obtain professional licensure. Some graduates seek professional licensure in their field of study following graduation. Some states have refused to license students who graduate from certain programs at Capella University citing that the program did not meet one or more of the state's specific licensure requirements (e.g., insufficient number of residency hours, lack of a state-approved clinical program). The inability of graduates to obtain professional licensure in certain states could tarnish Capella's reputation and potentially expose the company to lawsuits by the students. Growing the number of bachelor's programs. Part of Capella's growth strategy is to add more bachelor's programs over the next few years, which we believe adds some risk to the story. As compared to master's and doctoral students, bachelor's students generally have lower show rates, higher loan default rates, and are less likely to complete their degree. In addition, on an annual basis, bachelor's programs cost less than master's or PhD programs.
Education Services
December 10, 2009
Private loans. The SLM Corp (Sallie Mae) and other lenders have limited the amount of private loan money available to sub-prime students. We believe Capella is fairly insulated from problems in the private lending market as less than 1% of enrollment and revenue is derived from third-party loans. DV Low capacity utilization at DeVry campuses. After the tech boom subsided, many of the large campuses have experienced low capacity utilization which has weighed on operating margins over the last two years. While DeVry has been decreasing the size of or selling some of the larger campuses, if enrollment slowed , operating margins could come under pressure once again. Dependence on technology. Despite the company's efforts to diversify program offerings, DeVry University's curriculum remains heavily weighted in technology. If the tech market suffers a downturn, as seen in 2001-2003, enrollment growth could be at risk. Nursing growth uncertain. Part of DeVry's growth strategy includes expanding its nursing program into DeVry schools. In addition to the usual accreditation approval, the expansion also requires the approval of state nursing boards, which have historically been opposed to rapid growth of nursing programs. Competition. The post-secondary education market is highly competitive. Competition is in the form of other for-profit higher education companies such as ITT, University of Phoenix, and Strayer, as well as traditional non-profit two-year and four-year colleges and universities. Online programs are becoming increasingly competitive, with more competitive offerings coming from both for-profit and non-profit schools. Regulatory and accreditation risks. Providers of post-secondary education are subject to regulatory requirements as dictated by the Higher Education Act of 1965. Higher education institutions participating in Title IV funding are required to be accredited by an association recognized by the U.S. Department of Education. While DeVry is not currently subject to regulatory or accreditation issues, any change in accreditation status, and resulting loss of Title IV eligibility, could have a significant effect on the company's reputation and ability to attract students. Private loans. Comments by Sallie Mae and other lenders have sparked investor concern over availability of student loans and the impact on for-profit post-secondary schools. We believe DeVry is fairly insulated from problems in the private lending market as only 5% of revenue is derived from third-party loans and we believe very few of its students are high risk (i.e., sub-prime) . APOL International market. One of Apollo's growth strategies is to penetrate the international market. Entrance into new markets adds a number of increased risks related to local accreditation laws and regulation, political and economic instability, and currency. Regulatory and accreditation risks. Providers of post-secondary education are subject to regulatory requirements as dictated by the Higher Education Act of 1965. Higher education institutions participating in Title IV funding are required to be accredited by an association recognized by the U.S. Department of Education . Any change in accreditation status, and resulting loss of Title IV eligibility, could have a significant effect on the company's reputation and ability to attract students. Private loans. Comments by the SLM Corp (Sallie Mae) have sparked investor concern over availability of student loans and the potential impact on for-profit post-secondary schools. Apollo is relatively insulated from problems in the private lending market as only 3% of revenue is derived from third-party loans.
4
Education Services
December 10, 2009
Competition. The post-secondary education market is highly competitive. While Apollo is a leading provider of post-secondary education and University of Phoenix is a well-known brand, there is no guarantee that it will maintain its position in the marketplace. Competition is in the form of other for-profit higher education companies such as Strayer and DeVry, as well as traditional non-profit two-year and four-year colleges and universities. Online programs are becoming increasingly competitive, with more competitive offerings coming from both for-profit and non-profit schools. Dual-class shares and ownership structure. Founder John Sperling controls over 50% of voting Class B shares and his son, Peter Sperling, almost all of the remaining shares.
Education Services
December 10, 2009

Rating and Price Target History for: American Public Education, Inc. (A PEl) as of 12-09-2009
108/13109
0:$46
56
48 40 32 24
01 2007 02 03 2008 01 02 03 2009 01 02 03
16
Created by BlueMatrix
Rating and Price Target History for: Capella Education Company (CPLA) as of 12-09-2009
2009
Created by BlueMalrix
Rating and Price Target History for: DeVry Inc. (DV) as of 12-09-2009
Education Services
December 10, 2009
Rating and Price Target History for: Strayer Education, Inc. (STRA) as of 12-09-2009
1 Robert W. Baird & Co. maintains a trading market in the securities of APEI , CPLA, DV and STRA. 10 Robert W. Baird & Co. and/or its affiliates have been compensated by Strayer Education, Inc. for non-investment banking-securities related services in the past 12 months.
Robert W. Baird & Co. and/or its affiliates expect to receive or intend to seek investment banking related compensation from the company or companies mentioned in this report within the next three months. Investment Ratings: Outperform (0) - Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Neutral (N) - Expected to perform in line with the broader U.S. equity market over the next 12 months. Underperform (U)- Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis on safety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue and earnings. A - Average Risk - Growth situations for investors seeking capital appreciation with an emphasis on safety. Company characteristics may include: moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and earnings. H- Higher Risk- Higher-growth situations appropriate for investors seeking capital appreciation with the acceptance of risk. Company characteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and price volatility. S - Speculative Risk - High-growth situations appropriate only for investors willing to accept a high degree of volatility and risk. Company characteristics may include: unpredictable earnings, small capitalization. aggressive growth strategies, rapidly changing market dynamics, high leverage, extreme price volatility and unknown competitive challenges. Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a time horizon of 12 months but there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined by a subjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may be used to determine the value of a security including, but not limited to, discounted cash flow, earnings multiples, peer group comparisons, and sum of the parts. Overall market risk, interest rate risk. and general economic risks impact all securities. Specific information regarding the price target and recommendation is provided in the text of our most recent research report. Distribution of Investment Ratings. As of November 30, 2009, Baird U.S. Equity Research covered 603 companies, with 41% rated Outperform/Buy, 57% rated Neutral/Hold and 2% rated Underperform/Sell. Within these rating categories, 9% of Outperform/Buy-rated , and 6% of Neutral/Hold-rated, and 8% of Underperform/Sell-rated companies have compensated Baird for investment banking services in the past 12 months and/or Baird managed or co-managed a public offering of securities for these companies in the past 12 months. Analyst Compensation. Analyst compensation is based on: 1) The correlation between the analyst's recommendations and stock price performance; 2) Ratings and direct feedback from our investing clients, our sales force and from independent rating services; and 3) The analyst's productivity, including the quality of the analyst's research and the analyst's contribution to the growth and development of our overall research effort. This compensation criteria and actual compensation is reviewed and approved on an annual basis by Baird's Research Oversight Committee.Analyst compensation is derived from all revenue sources of the firm , including revenues from investment banking. Baird does not compensate research analysts based on specific investment banking
7
Education Services
December 10, 2009
transactions.A complete listing of all companies covered by Baird U.S. Equity Research and applicable research disclosures can be accessed at http://www. rwbai rd. com/research-insights/research/coverage/research-disclosure. as px . You can also call 1-800-792-2473 or write: Robert W. Baird & Co., Equ ity Research, 24th Floor, 777 E. Wisconsin Avenue, Milwaukee, WI 53202. Analyst Certification The senior research analyst(s) certifies that the views expressed in this research report and/or financial model accurately reflect such senior analyst's personal views about the subject securities or issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report. Disclaimers Baird prohibits analysts from owning stock in companies they cover. This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST The Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices used to measure and report performance of various sectors of the stock market; direct investment in indices is not available. Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the United States Securities and Exchange Commission, FINRA, and various other self-regulatory organizations and those laws and regulations may differ from Australian laws. This report has been prepared in accordance with the laws and regulations governing United States broker-dealers and not Australian laws. Copyright 2009 Robert W. Baird & Co. Incorporated Other Disclosures UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W. Baird Limited holds an ISO passport. This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the Financial Services and Markets Act 2000 (financial promotion) order 2001 being persons who are investment professionals and may not be distributed to private clients. Issued in the United Kingdom by Robert W. Baird Limited , which has offices at Mint House 77 Mansell Street, London, E1 8AF, and is a company authorized and regulated by the Financial Services Authority. For the purposes of the Financial Services Authority requirements, this investment research report is classified as objective. Robert W. Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license. RWBL is regulated by the Financial Services Authority ("FSA") under UK laws and those laws may differ from Australian laws. This document has been prepared in accordance with FSA requirements and not Australian laws.
BMO
Capital Markets
I U.S.
Education
Decem ber 8, 2009
Bridgepoint Education
(BPI-NYSE)
Stock Rating: Outperform Industry Rating: Outperform
Jeffrey M. Silber
BMO Capital Markets Corp.
212-885-4063
jeff.silber@bmo.com
P aul Condra
212-885-4176
paul.condra@bmo.com
Three-Year CDRs Up, But Not That Bad

Secu rities Info
Event
On Tuesday after the close, BPI released its unofficial three-year cohort default rates (CDRs). For Ashford University, three-year CDRs for the FY2005. FY2006. and FY2007 cohorts were 8.8%. 6.1%. and 17.4%. Tll.is compares with two-year CDRs of 4.1 %, 4. 1%, and 13.3%.
$14.59 Price (8-Dec) 52-VIA< High/low $22/$10 MktCap (mm) $781 Shs 0 /S (mm, BASIC) 53.5 Options 0/S (mm) na
Target Price Dividend Yield FloatO'S(mm) ADVol (25-day, OOOs)
$23 17.0 513
Price Performance
BIUDGDi'OINT ED DC {BPI)
22
20
.fr\
)~c~~.,.~
"''
~
1\
160 150 140 130 120
Impact
On Monday. these rates were provided to ll1e institutions for infonnational purposes onJy; they will be released to the public on Monday, December 14. We believe BPI released tll.is data, as it was not as bad as anticipated: given the jump in BPI's FY2007 two-year CDRs to 13.3%, we believe some were expecting three-year FY2007 CDRs would be considerably higher than the 17.4% reported. Wll.ile we note this data may be somewhat skewed by the fact that BPI's population was relatively small in FY2007, we are still encouraged and believe three-year rates for other providers may not be as frighteningly large as some expected. Still, the roughly 31% increase in the 2007 three-year rate is ll.igher than the 20% increase in the Title TV eligibility threshold (to 30% from 25%).
18 18 14
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10
Valuation/Financial Data
(FYDec.) EPS Pro Forma Pi E Rrst Call Cons. EPSGAAP FCF P/ FCF EBITDA ($mm) EVBITDA Rev . ($mm) EV/Rev Quarterly EPS 2008A 2009E 2008A $0,50 $0.45 $1.00
:l~,~-.~~~~---.,...J: 2009E $1 .17 12.5x 2010E $1.58 9.2x
~11E
$2.07 7.0x
$1. 17
$0.52 $1.42 10.3x $125 S.Ox $447 1.4x 2Q $0.02 $0.34A
$1.59
$1.36 $1.68 8 .7x $186 3 .4x $660 0.9x 3Q $0.07 $0.38A
$1.90
na $2.08 7.0x $246 2.5x
Forecasts
We are maintaining our current estimates.
$38
$218 1Q $0.03 $0.20A
$863
0.7x 4Q na $0.24
Valuation
BPI closed at roughly 9.2x our 2010 EPS estimate, a premium to the peer group median of roughly l5.8x.
Recommendation
We maintain our OUTPERFO RM rating and expect tJ1e stock to react positively to tll.is news.
Baance Sheet Data (09130/09) -$156 NEt Debt ($m m) T daiDebtiEBITDA O .Ox Total Debt ($mm) $1 EBITDA/In!Exp na NEt Debt/Cap. Prioe/ Bock 7.3x nm 37 DSO Ndes: All values in US$. Souroe: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
Please refer to pages 5 to 7 for Important Disclosures, including the Analyst's Certification.
BMO Capital Markets
About Three-Year Rates

On Monday, December 7, 2009, the Department of Education (ED) published three-year CDRs for FY2005, FY2006 and FY2007 (for example, the trial FY2005 CDR.s measures students who entered repayment on their loan between October 1, 2004, and September 30, 2005, and subsequently defaulted on or before September 30, 2007). The tmofficial data was only made available to the schools for informational purposes as three-year rates will eventually replace the current two-year rates. The ED will make the three-year CDRs public on Monday, December L4, 2009, on the Federal Student Aid Data Center: http://www.fsadatacenter.ed.gov/. The three-year year rates wi ll become official in 2012, when FY2009 CDRs are published. In 2012 and 2013, two-year rates will be published concurrently with three-year rates tmtil 2014, when only three-year rates will be published as this will amount to three sets of official data (FY2009, FY2010, and FY20ll). For more detail on CDR.s see our note published September 15, 2009. On Tuesday, after the close, BPI released its unofficial three-year CDRs for Ashford University (roughly 99% of total enrollment) and the University of the Rockies for the FY2005, FY2006, and FY2007 student cohorts. As shown in Exhibit 1, while the three-year CDRs were higher than the respective two-year CDRs for both schools, the dilierence - especially for the FY2007 CDR at Ashford University - was not nearly as bad as anticipated, given the jump in Ashford's two-year FY2007 rate to 13.3% from 4.1%.
Exhibit 1. Bridgepoint Education Two-Year vs. Three-Year CDRs (FY2005-FY2007)

2-Year CDRs FY2005 FY2006 FY2007
Ashford University University of the Rockies
4.1% 0.0% 4.1% 0.0% 13.3% 0.0%

8.8% 5.5% 6.1% 0.0% 17.4% 0.0%
FY2005
115% N.A.
%Cha nge FY2006

49% N.A.
FY2007
31% N.A.
N.A.- Not applicable. Source: Company reports and BMO Capital Markets
In the press release, the company stated that it expects its three-year CDR.s to be in compliance
when the three-year rates apply .in 2012, owing to "the investments we have made and the organizational changes we have instituted." Whi le there may be other for-profit providers that could have schools at risk of breaking the 30% threshold, we hope these schools will not be at risk of breaking that tltreshold for three consecutive years, at which time Title IV eligibility could be lost.
Page2
December 8. 2009
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14$111, 22.8% 21 .4%

1$,$% 19.8% 19.8%
!27% 1'$2%
28.0% 26.7% 26.6% 16.2% 162%
3< ...
175% 23.4% 22.0%
74 610 30.,. 151%

30.9% 29.6%
2H10 28710
33.7% 32.3%
.....
26 5.. 373%
145% 23.3% 21.7%
25$11
32500 I~'~ 28.1% 2ii.7%
25.4 % 2&,. % 26.6%
14.~
3< 3..
174. 23.8% 22.2%
21,0% 21 .0% 21.0%
307.. 1SOI1o 31.3% 29.8%

28,8% 28.8% 28.8%
,.. ...
.w.
254% 281% 139% 34.1% 32.5%
265%
372%
144'23.8% 2U% 20.8% 20.8% 20.8%
2$"'
32 4 ~
159'1>
28.6% 28.9%
!U!l!t
t ,S%
9.6% 9A% ~ 10.2%
!U!lk
Netrnergin
Pel"untlge Cl'lange: Revenv lnsiJud:IOnaf COS!$ ..-.cJ StMCH ~ebno and prornot.onel
GenetaJeM&dmlt'lrStr&tNt Adj. ESITOA Adj. oper. lnc. ('bef. stock.Ond comp,J
lUti.
16.1%
1SI,3% 19.3% 19.6% ~ U .6%

1<1$,1%
111~ 117~
!!a
12,&'%
!U!lk
10.3% 10.4%
1,,0% 15.3%. 15.3%
.2.Q!k
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}.jlk
20......
......
1.7%
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8 .2%
ll.J
12.1 ~ 164.~
;u.u.
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J..m
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~
20.6% 20.6% 20.5%
28,4%
.ull
31.2%
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.La
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31.6%
.w.
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31.6%
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16.3%
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12U'% t<10
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8,100
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~YtJaroveryeor change
ch~rgu)
246,0%
246.0% 258.6% 180.3% N,A
118-8% a33.n; 233.1"4

172.5% 198JS% 146.0% N.A.
1Tt.3%
739.1%. 870.8% 704.1% 20.~
nt.""
371.6% 38t.2Yo
388.7% 91.9% 96.7% .2.-4% 681,4%
2$2.0%
21)).$%
20SI.e%
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-&1.3%
24$,to/. 233.2%
233.2'1. 232.0% 156.6% 4)5,8% 19,500
20.1%
15$2.;0%
14,800
181.6% 226.0% 244.8% 1.16.5% 2AI.4% 1l6.3% 151 .9% 67.1% N.A. 134.1 ~
63,2% fiU% 62-t% 587ft $28% Sl 111. 62 3% 506,.. $6,6% 41.1% 66.7% 47,1% $$,0% 48,2% 29U% 25-45.5% 291.3% 2486.4 % 316.8% 2072.1% 36.t % 32.8%
2001. 7001.
424* 45,0% 44,8% 46.6% -46.6% 46.2% 46.2% 42.A%
3$,6% 380% 381% 37"" 41.7%
47,8'%
473tt.
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8.4%
47,7~
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27.611
31.5%
26.8% 26.8% 26,8%

U.$%
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12.0%
!.Ullo
1$.6%
!.Ullo
1$,1%
!.l.Zll>
11-t%
21.6%
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$4&10 $4 400
32.0% J20% 316%

3119b 3!,8% 32.t%
2t,3% 703..
30.7...
215%
271%
789..
28.9b
3G.1%
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,.,...
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30210 ,...,.
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30.610
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3-5..1~
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30,079 703..
Q4 .7~
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~ ye.ar-over)'ear Cf\angtt
8.84l 19$610 10.509

18-46,.. $1,424
12,600 30,547 $2,268
2'U07
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Bridgepoint Education ( BPI) Quarterly Cash Flow Statement (2008-2011 E)
~
~
W ~OM. .o.cepc per Share oab!l}

1Q08
2008
~Qos
3Q08
S8.7
4Q08 S5.7 4.7 (1.2) (0.0) 1.9 0.0
Cash tlows from operating acclvtdes Net incomaf(loss) , .....,. . (' bod dtbe$
Depreciation a.nd amortizlllion Deferred income taxes
l2!?!
$26.A
13.4 2,5 (3.3 ) 1.8
.!Q22A
$3.9 4.5
2009E ~ ~ 51.3 4.6 1.4 (11.8) 32.0 0.0 J.JI 44.2 (4.8) (1.5) (16.3) 3!>.4 (0.0)
$22.4 6.8 1.7 0.7 1.9 (0.0)
2010
!92!
$14.2 6.6 1.7 (1.4) 1.9 (6.6)
~
$41.8 22.5 5.9 {12.6) 35.9 4.0
106.1
l!ill
S27A 9.0 2.2 (14.0) 2.0 (9.0)
~
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~
S96~4
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$22.3 9.9 3.1 (7.7) 2.2 (9.9)
Zii
S36.6 11.9 3.4 (17.9) 2.2 (11.9)
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0.0
S8.0 3 .6 (0.1) (3.9) 0.1 0.0 16.5 (1.8)
3.6
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(0.1)
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~
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(3.0) 11.0
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Net Change In eash and cam tqufvafents

Cash and Cash E~ivalents, BeginningofPEf'lod
..
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0.0 (2.2) 15.7 213.9 ~
Wl
u.il
!JIJil. 1.3
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a&
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(2.1)
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27.1 160.8
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(8.6)
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lliJ.
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44.0 13.0
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(17.5)
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BMO Capital Markets
BRIDGEPOINT ED INC (BPI)

Quarterly Price (US$) 30 Target Price(US$) Share Price(US$) 30
25
25
20
15
10
fn
1)0P BPI Relative to S&P 500 BPI Relative to Diversified Consumer Services
20
15
10
BPI Relative to S&P 500 BPI Relative to Diversified Consumer Serv1 ces 150 140 130 120 110 100 1980 150 140 130 120 110
180 160 140 120 100 80 2007
180 160
1985
1990
1995
2000
2005
100
~ A' \~
+.t'
2008 2009
140 120 100 80
D
-
EPS (4 Qtr Trailing) - (US$) Price I Eamings
0.01
1980
1985
1990
-0.01
1995
2000
2005
:
[
....
BPI Relative to S&P 500 YIY (%) BPI Relative to Diversified Consumer Services YIY (%)
2007
2008
2009
1 :
BPI- Rating as of 15-Apr-09 Date 26-May-09
=NR
Share Price $12.10
Rating Change NR to OP
Last Daily Data Point: December 7, 2009
Page 5
December 8. 2009
BMO Capital Markets Important Disclosures
Analyst's Cettification I, Jeffrey M. Silber. hereby certify that the views expressed in this report accurately renee! my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets Corp, BMO Nesbitt Bums, and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and convincing clients to act on them, performance of recommendations, accuracy of earnings estimates, and service to clients. Company Specific Disclos ure BMO Capital Markets Corp. has provided advice for a fee with respect to this company within the past 12 months: No BMO Capital Markets Corp. has undertaken an underwriting liability with respect to this company withi n the past 12 months: Yes BMO Capital Markets Corp. has provided investment banking services with respect to the company within the past 12 months: Yes BMO Capital Ma rkets Corp. or its a!liliates owns J% or more of any class of common equity securities of the company: No BMO Capital Markets Corp. or its afllliates makes a market in the security: No BMO Capital Ma rkets Corp. or its affiliates managed or co-managed a public offering of securities of the company in the past 12 months: Yes BMO Capital Markets Corp. or its aftlliates received compensation for investment banking services from the company in the past \2 months: Yes BMO Capital Markets Corp. or its afJiliates or its oflicers own warrants or options: No Company is a client (or was a client) ofBMO Capital Markets Corp. or an affi liate withi n the past 12 months: Yes, for investment banking services Employee, oflicer, or director ofBMO Capital Markets Corp. is a member oft he Board of Directors or an advisor or officer of this company: No A member of the Board ofDirectors of Bank of Montreal is also a member of the Board of Directors or is an officer of this company: No Analyst and/or associate who prepared this report is a member of the Board of Directors of this company or an advisor or oflicer of this company: No A household member of the research analyst and/or associate who prepared this report is a member of the Boa.rd of Di rectors of this company or an advisor or officer of this company: No Analyst or associate who prepared this report or member of household of analyst or associate owns shares: No Analyst or associate who prepared this report or member of household of analyst or associate owns warrants/options: No BMO Capital Markets Corp. or its aftlliates expects to receive or intends to seek compensation for investment banking services from the company in the next three months: No Analyst received compensation from the company in the past year: No BMO Capital Ma rkets Corp. or its alliliates received compensation for products or services other than Investment Banking Services from the company in the past 12 months: No Methodology and Risks to Our Pl'icc Ta1get Methodology: PE, EVIEBTIDA, DCF Risks: Increased government regulation, intensifying competition Breakdown of Ratin g Distribution and Banking C lients
(As of September 30 , 2009) Buy % of total BMO Capital Markets Corp . coverage within rating category 29 . 1% % of stocks within rating category for which the firm provided banking services over the past 12 months 12 . 8% Hold 64 . 1% 9 . 8% Sell 6 . 8% 0 . 0% Unrated 0 . 0% 0 . 0%
BMO Capital Markets Corp. Rating System OP =Outperform: We believe the stock' s total return, including dividends, will exceed the S&P 500's return by more than 15%. Mkt = Markl't Pcrfotm : We believe the stock's total return will generally match tl1at of the S&P 500. Und = Undetpcrform: We believe the stock's total return wi II fall short of the S&P 500's return by more than 15%. NR = Not rated. (R) =Restricted: Dissemination of research is currently restricted. In addition. apart from our stock ratings. we apply the Speculative investment (S) postscript to those companies that have de minimis revenue and whose enterprise l'alue appears to be contingent upon unprovable assumptions (e.g. . the future approval of a drug or the successful completion of an oil well). SECTOR RATINGS OUTPERFORM- We believe the sector will outperform the S&P 500 Index. MARKET PERFORM - We believe the sector's retum wi ll generally match that of the S&P 500. UNDERPERFORM- We believe the sector will underpertonn the S&P 500 Index. Pdot BMO Capital Markets Corp. Rating System (ptio to June 19, 2006) Our rating system prior to June 19. 2006. compared a stock's expected performance with that of an index of comparable companies over a 9-15 month horizon. Our sector ratings were based on the expected performance of the sector compared with that of a broader market index over the same time period. Additionally, before June 19, 2006, we did not use the (S)-Speculative postscript. PRIOR STOCK RATINGS OUTPERFORM- We believe the stock's total return, including dividends, will exceed the group average by over 15%. NEUTRAL- We believe the stock's total return will generally match the group average.
Page 6
December 8, 2009
BMO Capital Markets
Bridgepoint Educatio n
UND ERPERFORM- We believe the stock's total return v fall short of the group average by more than 15%. vill PRI OR SECTOR RAT I NGS POSITIVE- We believe the sector will outperform the S&P 500 Index. NEGATlVE- We believe the sector wi llunderperform the S&P 500 Index. Other Important Disclosu1 es For more specific information, please refer to http://research-us.bmocapitalmarkets.com. For Important Disclosures on the stocks discussed in this report. please go to http://research us.bmocm.com/Company_Disclosure_Public.asp, or write to Editorial Department, BMO Capital Markets. 3 Times Square, New York, NY 10036. Dissemination of Research BMO Capital Markets Equity Research is avai lable via our web site http://research-us.bmocapitalmarkets.com. Please contact yo ur investment advisor or institutional salesperson for more information. Institutional clients may also receive our research via FIRST CALL Research Direct and Reuters. All of our research is made widely available at the same time to all BMO Capital Markets Corp. client groups entitled to our research. Conflict Statement A general description of how BMO Financial Group identifies and manages conflicts of interest is contained in our public facing policy for managing conllicts of interest in connection with investment research. which is available at http://research-us.bmocapitalmarkets.com/Conllict_Statement_Public.asp. Ge ner a l Disclaime The information and opinions in this report were prepared by BMO Capital Markets Corp. BMO Capital Markets Corp. is an affiliate ofBMO Nesbitt B urns Inc. and BMO Nesbil1 Bums Ltee!Ltd. in Canada (collectively " BMO Nesbitt B urns"). and BMO Capital Markets Ltd in the U nited Kingdom. This information is not intended to be used as the primary basis of investment decisions, and because of individual client objectives it should not be construed as advice designed to meet the particular investment needs of any investor. Tllis material is tor information purposes only and is not an olicr or solicitation with respect to the purchase or sale of any security. The reader should assume that BMO Capital Markets Corp., BMO Nesbitt Burns, BMO Capital Markets Ltd., or their affiliates may have a conflict of interest and should not rely solel y on this report in evaluating whether or not to buy or sell securities of issuers discussed herein. The opinions, estimates, and projections contained in this report are those of BMO Capital Markets Corp. as of the date of this report and are subject to change without notice. BMO Capital Markets Corp. endeavors to ensure that the contents have been compiled or derived from so urces that we believe are reliable and contain information and opinions that are accurate and complete. .However. .BMO Capital Markets Corp. makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein, and accepts no liability whatsoever for any loss arising from any use or, or reliance on, this report or its contents. Infom1ation may be available to BMO Capital Markets Corp. , 13MO Nesbitt .Burns, BMO Capital Markets Ltd., ()r its affi liates that is not reflected in this report. This report is not to be construed as an offer or solicitation to buy or sell any security. BMO Capital Markets Corp., BMO Nesbitt Burns, BMO Capital Markets Ltd., or their a!liliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. .BMO Capital Markets Corp., BMO Nesbitt Bums, and BMO Capital Markets Ltd. are subsidiaries of Bank of Montreal. Additional Matters To Canadian Residents: BMO Nesbitt Burns Inc. and BMO Nesbit1 Burns Ltee!Ltd., affiliates of BMO Capital Markets Corp .. furnish this report to Canadian residents and accept responsibility for the contents herein subject to the terms set out above. Any Canadian person wishing to etfect transactions in any of the securities included in this report should do so through BMO Nesbitt B urns Inc. and/or BMO Nesbitt Burns LteefLtd. This research is not prepared subject to Canadian disclosure requirements applicable to BMO Nesbitt Burns Inc. To UK residents: The contents hereof arc intended solely for the usc of: and may only be issued or passed on to, (i) persons who have professional experience in matters relating to investments falling within article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the " Order") or (ii) high net worth entities falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as " relevant persons"). The contents hereof are not intended for the use of, and may not be issued or passed on to, retail clients.
ADDITION AL INFORMATION IS AVAILABLE UPON REQUEST BMO Financial Group (NYSE, TSX: BMO) is an integrated financial services provider offering a range of retail banking, wealth management, and investment and corporate banking products. BMO serves Canadian retail clients through BMO Bank of Montreal and BMO Nesbitt Bums. In the United States, retail clients are served through Harris N.A. Investment and corporate banking services are provided in Canada and the US through BMO Capital Markets. BMO Capital Markets is a trade name used by the Bank of Montreal investment banking group, which includes Bank of Montreal, BMO Nesbitt Burns Inc., and BMO Nesbitt Burns Ltee/Ltd. in Canada and BMO Capital Markets Corp. ln the US. BMO Capital Markets Corp. ls a member of SIPC. BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltee/Ltd. are members of CIPF. "Nesbitt Burns" is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under license. "BMO Capital Markets" is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license. COPYRIGHT 2009 BMO CAPITAL MARKETS CORP.
A member ofBMO
Financial Group
Page 7
December 8, 2009
W
Tuesday, December 8, 2009
BMO
Capital Markets
U.S.
Lincoln Educational Services (Outperform)

(LI NC-NASDAQ)
Enters New Credit Agreement

Flash:
Last night, LJNC released an 8K disclosing that it had entered into a new $115 million credt agreement etTective December 1, 2009, and maturing on December 1, 2010. Our View:
* *
*
Tile agreement includes a $5 million swing line and a $25 million letter of credit sub limit, ani replaces the previous $100 million agreement, which was due to expire Febntary 15, 20 l 0. Under the Credit Agreement, the company may increase the aggregate amount available by up to $60 million upon satisfaction ofcertain conditions. The faci lity wi ll bear interest of either an adjusted interest rate based on LIBOR, or a "base rate" (the highest of the prime rate, the federa11i.mds rate plus 0.50%, or a daily rate equal to one-month of the euro doUar rate plus 1.0%) plus an applicable margin of I .50%-3.25% base:! upon changes in LINC' s consolidated leverage ratio and whether the company has chosen the euro dollar rate or the base rate option. Interest on the previous agreement was adj usted to LIB OR p lus 1.0%-1.75% or a base rate. Outstanding letters of credit as of December I, 2009, were roughly $5.6 million and wi ll be treated as letters of credit under the new agreement. LINC's total debt as of the end of 3Q09 was $37.4 million. We view the new facility as prudent liquidity management and maintain our OUTPERFORM rating.
* * *
' company: Price/Rating/Target: Sector Name: Analyst: Email: Associate: Email:
Lincoln Educational Services (LI NC) $20. 72/0utperform/$30.00 Education Jeffrey M. Silber 212-885-4063 jeff. silber@bmo.com Paul Condra 212-885-4176 pau I. condra@bmo.com
Please refer to pages 2 to 5 for Disclosure Statements, including the Analyst's Certification.
Flash
BMO Capital Markets
LINCOLN EDL SVCS CORP (LINC)

Quarterly Price (US$) 35 24 22 20 18 20 16 15 14 12 10 LING Relatwe to S&P 500 LING Relative to Diversified Consumer Services 140 120 100 80 60 1980 1985
<E-
Target Price(US$) Share Price(US$)
35 30 25 20 15 10
30 25
10
1)0P
5 LING Relative to s&P 500 LING Relative to Diversified Consumer Services
:~::
'
140 120
300 250 200 100 150 80 100
300
60
1990 1995 2000 50 LING Relative to s&P 500 Y/Y (%) LING Relative to Diversified Consumer Services Y/Y (%)
D
-
~[
1980 1985
EPS (4 Qtr Trailing)- (US$) Price I Earnings
2007
2008
.~l-200
2009
200
LING - Rating as of 27 -Dec-06 Date 12-Jan-09
=Mkt
Share Price $11.47
Rating Change Mkt to OP
Last Daily Data Point: December 7. 2009
Flash Page 2
Flash Important Disclosures
BMO Capital Markets
Analyst's Certification I, Jeffrey M. Silber, hereby certifY that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. l also certifY that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report. Analysts who prepnred this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets Corp, BMO Nesbitt Burns, and their aftiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and convincing clients to act on them, performance of recommendations, accuracy of earnings estimates, and service to clients. Compa ny Specific Disclosure BMO Capital Markets Corp. has provided ndvice for a fee with respect to this company within the past 12 months: No BMO Capi tal Markets Corp. has undertaken an underwriting liab ility with respect to this company within the past l2 months: Yes BMO Capital Markets Corp. has provided investment banking services with respect to the company within the past 12 months: Yes BMO Capital Markets Corp. or its affiliates owns I% or more of any class of common equity securities of the company: No BMO Capital Markets Corp. or its affiliates makes a market in the security: Yes BMO Capital Markets Corp. or its affi liates managed or co-managed a public offering of securities of the company in the past 12 months: Yes BMO Capital Markets Corp. or its affil iates received compensation for investment banking services from the company in the past 12 months: Yes BMO Capital Markets Corp. or its affilia tes or its officers own warrants or options: No Company is a client (or was a client) ofBMO Capital Markets Corp. or an affi liate witb.io the past 12 months: Yes, for investment banking services and non-securities services Employee, officer, or d irector of BMO Capital Markets Corp. is a member of the Board of Directors or an advisor or officer of this company: No A member of the Board of Directors of Bank of Montreal is also a member of the Board of Directors or is an officer of this company: No Analyst and/or associate who prepared th is report is a member of the Board of Directors of this company or an advisor or office r of this company: No A household member of the research analyst amVor associate who prepared this report is a member of the Board of Directors of this company or an advisor or ofticer of this company: No Analyst or associate who prepared U1is report or member of household of analyst or associate o'"'11S shares: No Analyst or associate who prepared U1is report or member of household of analyst or associate OI\>1\S warrants/options: No BMO Capital Ma rkets Corp. or its affi liates expects to receive or intends to seek compensation for in vestment banking services from the company in the next three months : No Analyst rece ived compensation from the company in the past year: No BMO Capital Markets Corp. or its affiliates received compensation for products or services other than investment Banking Services from the company in the past 12 months : Yes Methodology and Risks to Our Price T a rget Methodology: Average offorward looking PIE, forward looking EV/EBITDA and Discounted Cash Flow Risks: Worse than expected enrollment trends, weakness in automotive worker environment, New England Institute expansion Breakdown of R:ttin g Distribution a nd Banking C lients
(As of September 30, 2009 ) Buy Hold Sell Unrated % of t ota l BM Capi tal Markets Corp . coverage withi n O rati ng category 29 . 1% 64 . 1 % 6 . 8% 0 . 0% % of stocks withi n rating cat egor y fo r which the Fi rm provi ded banki ng servi ces over the past 12 months 12 . 8% 9 . 8% 0.0% 0 . 0% BMO C:tpital Markets Corp. Rating System OP = Out1>erform: We believe the stock's total return, includi ng dividends. will exceed the S&P 500's return by more th an 15%. Mkt = Market Perform : We believe the stock's total return will generally match that of the S&P 500. Und = Underperform : We believe the stock 's total return will fa ll short of the S&P 500's return by more than 15%. NR =Not rated. (R) = Restricted: Dissemination of research is currently restricted. In addition, apart from our stock ratings, we apply the Speculative investment (!:>) postscript to those companies that have de minimis revenue and whose ente1prise value appears to be contingent upon unprovable assumptions (e.g. , the future approval of a drug or the successful completion ofan oil well). SECTOR RA T lNGS OUTPERFORM - We believe the sector 1vi ll outperform the S&P 500 Index. MARKET PERFORM- We believe the sector's return will generall y match that of the S&P 500. UN DERPERFORM - We believe the sector wi ll underperform the S&P 500 Index.
Flash Page 3
Flash
BMO Capital Markets
Prior BMO Cap itnl Mar kets Cor p. Ra ting System (prior to June 19, 2006) Our rating system prior to June 19, 2006, compared a stocks expected performance with that of an index of comparable companies over a 9-15 month horizon. Our sector ratings were based on the expected perfonnance of the sector compared with that of a broader market index over the same time period. Additionally, before June 19, 2006, we did not use the (S)-Speculative postscript P R IOR ST OCK RATI NGS OUTPERFORM- We believe the stock"s total return, including dividends, will exceed the group average by over 15%. N~EUTRA L - We believe the stock's total return will generally match the group average. UNDERPER FORM- We believe the stock"s total return will fall short of the group average by more than 15%. PRIOR SECTOR RA TlNGS POS ITI VE- We believe the sector will outperform the S&P 500 Index~ NEGATI VE- We believe the sector will underperform the S&P 500 Index~ O t her Impo r ta nt D isclosures Our analysts use various valuation methodologies including discounted cash flow, price/earnings (P/E), enterprise value/EBLTOA, and P/E to growth rate, among others. Risks to our price targets include failure to achjevc financial results, product risk, regulatory risk, general market conditions, and the risk of a change in economic conditions. For more specific information, please refer to http://research-us~ bmocapitalmarkets~com~ For Important Disclosures on the stocks discussed in this report, please go to http://research-us.bmocm.com/Company_Disclosure_Public.asp, or write to Editorial Department, BMO Capital Markets, 3 Times Square, New York, NY 10036. Disseminatio n of Research BMO Capital Markets Eq uity Research is available via our web s ite http://research-us~bmocm~com~ Please contact yo ur investment advisor or institutional salesperson for more information. Institutional clients may also receive our research via FIRST CALL Research Direct and Reuters~
All of ow research is made widely avajJable at the same time to all BMO Capital Markets Corp. client groups entitled to our research.
Conflict Statem ent A general description of how BMO Financial Group identifies and manages con11icts of interest is contained in our public facing policy for managing conflicts of interest in connection with investment research, which is available at http://researchus~bmocapi ta !markets~ com/Conflict_ Statement_ Pub Iic~asp~ Ge ner a l Disclaimer The information and opinions in this report were prepared by BMO Capital Markets Corp. BMO Capital Markets Corp. is an affiliate ofBMO Nesbitt Bums Inc. and BMO Nesbitt Bums Ltee/Lld~ in Canada (collectively '"BMO Nesbitt Bums'"), and BMO Capital Markets Ltd in the United Kingdom~ This information is not intended to be used as the primary basis of investmen t decisions, and because of individual client objectives it should not be construed as advice designed to meet the particular investment needs of any investor. This material is for information purposes only and is not an offer or solicitation with respect to the purchase or sale of any security. The reader should assume that BMO Capital Markets Corp~ , BMO Nesbitt Burns, BMO Capital Markets Ltd., or their affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein. The opinions, estimates, and projections contaLned in this report are those of BMO Capital Markets Corp. as of the date of this report and are subject to change without notice. BMO Capital Markets Corp. endeavors to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete~ However, BMO Capital Markets Corp~ makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein, and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents~ Information may be available to BMO Capital Markets Corp~ , BMO Nesbitt Burns, BMO Capital Markets Ltd~ , or its amliates that is not reflected in this report. This report is not to be construed as ::~n offer or solicitation to buy or sell any security~ BMO Capital Markets Corp., BMO Nesbitt Bums, BMO Capital Markets Ltd., or their affiliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO Capital Markets Corp., BMO Nesbitt Bums, and BMO Capital Markets Ltd. are subsidiaries of Bank of Montreal. Add itiona l Matter s To Canadian Residents: BMO Nesbitt Bums lnc. and BMO Nesbitt Bums Ltce/Ltd., affiliates of BMO Capital Markets Corp., furnish this report to Canadian residents and accept responsibility for the contents herein subject to the terms set out above~ Any Canadian person wishing to effect transactions in any of the securities included in this report should do so through BMO Nesbitt Bums Inc. and/or BMO Nesbitt Bums Ltee/Ltd. Thjs research is not prepared subject to Canadian disclosure requirements applicable to BMO Nesbitt Bums Lnc. To UK residents: The contents hereof are intended solely for the use of, and may only be issued or passed on to, (i) persons who have professional experience in matters relating to investments falling within article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order'') or (ii) high net worth entities fa lling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as "relevant persons"'). The contents hereof are not intended for the use of, and may not be issued or passed on to. retail clients~
Flash Page 4
Flash
BMO Capital Markets
AD DITI ONAL INFORMATION IS AVAILABLE UPON REQUEST BMO Financial Group (NYSE, TSX: BMO) is an integrated financial services provider offering a range of retail banking, wealth management, and investment and corporate banking products. BMO serves Canadian retail clients through BMO Bank of Montreal and BMO Nesbitt Burns. In the United States. retail clients are served through Harris N.A. Investment and corporate banking services are provided in Canada and the US through BMO Capital Markets. BMO Capital Markets is a trade name used by the Bank of Montreal investment banking group, which includes Bank of Montreal, BMO Nesbitt Burns Inc., and BMO Nesbitt Burns Ltee/Ltd. in Canada and BMO Capital Markets Corp. in the US. BMO Capital Markets Corp. is a member of SIP C. BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltee/Ltd. are members of CIPF. "Nesbitt Burns" is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under license. ''BMO Capital Markets" is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license. COPYRIGHT 2009 BMO C APITAL MARKETS CORP.
A member of B M O
Finan cial Group
Flash Page 5
BMO
Capital Markets
I U.S.
Education
December 10, 2009

(UTI-NYSE)
Stock Rating : Outperform Industry Rating: Outperform
Jeffrey M. Silber
212-885-4063
jeff.silber@bmo.com
Paul Condra
212-885-4176
paul.condra@bmo.com
UTI Releases Three -Year CDRs, Below Regulatory Limits

Event
On Wednesday after the close, UTI released its unofficial three-year cohort default rates (CDRs). For its three reporting schools, three-year CDRs for the FY2005. FY2006. and FY2007 cohorts ranged from 11.9%-17.5%. 14.1%18.8%, and 13.5cYo-14.1%, respectively. This compares wiU1 two-year CDRs of 4.7%-7%, 6.5%-8%, and 6.2%-6.8%, respectively.
Securities Info
Price (9-Dec) 52-VIA< High/low MktCap (mm) Shs 0/S (mm, BASIC) Options 0/S (mm) $18.57 $21/$9
$443
23.8 na
Target Price Dividend Yield Float (mm) ADVol (25-day, OOOs)
$25
as
19.5
138
Price Performance
WIViFSAL 'reQIHICAL IIISl DfC { tll'I}
Impact
On Monday, December 7, these rates were provided to the institutions for infonnational purposes only: they will be released to the public on Monday, December 14. We believe UTI released this data, as it was not as bad as some may have anticipated, with three-year rates well below the regulatory threshold of 30%. Additionally, current (FY2007) three-year rates did not exceed the 15% threshold, above which Title IV disbursements are delayed. As t11ree-year rates trickle in (rates for all schools will be released tlus Monday), we believe that, in general, they may not be as frighteningly large as some were expecting. Still. we would not be surprised to see some schools approach and/or surpass regulatory thresholds
::I,,,, tltillllllilI~~ ~ ~~~~~!J~~ ~~~~~~~~~~~~~~~~~~.l~llli I: --~

dol! I :
2005 2005 2007 2005
l&i
20
2009
te~a Pbm
Oecemb8' 0. 2C09:
(FY-Sep.) EPSGAAP PiE Rrst Call Cons. FCF P/FCF EBITDA ($mm) EVIEB11DA Rev . ($mm) EVIRev Quarterly EPS 2009A 2010E 2008A $0,32 2009A $0.48 2010E $0.89 20.9x
~11E
$1 .21 15.3x
$(188
$0.13 $34 $344 1Q $0.09 $024 $0.84 $41 $367 2Q $0.00 $0.14 $1.51 12.3x $61 6.5x $424 0.9x 3Q $008 $0.12
$1.15
$1.93 9.6x $76 5.2x
Forecasts
We maintain our current estimates.
$484
0.8x 4Q $0.32 $0.39 nm na 4.5x
Valuation
UTI closed last night at roughly l9.4x our CY2010 EPS estimate. a premium to the peer group median of roughly 16.4x.
Balance Sheet Data (06/30/09) -$47 NEt Debt ($mm) Total Debt ($mm) $0 NEt Debt/Cap. nm
T ctaiDebtiEBITDA EBITDA/IntExp Prioe/ Bod<
Recommendation
We maintain our OUTPERFORM rating.
Nctes: All values in US$. Souroe: BMO Capital l\llarkets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
BMO Capital Markets
ABOUT THREE-YEAR RATES

On Monday, December 7, 2009, the Department of Education (ED) published three-year CDRs for FY2005, FY2006, and FY2007 (for example, the trial FY2005 CDRs measures students who entered repayment on their loan between October 1, 2004, ru1d September 30, 2005, and subsequently defaulted on or before September 30, 2007). The unofficial data was only made available to the schools for informational purposes as three-year rates will eventually replace the current two-year rates. The ED will make the three-year CDRs public on Monday, December 14, 2009, on the Federal Student Aid Data Center: http://www.fsadatacenter.ed.gov/. The three-year rates will become official in 2012, when FY2009 CDRs are published. ln 2012 and 2013, two-year rates will be published concurrently with three-year rates until 2014, when on ly three-year rates will be published as this wi ll rullOtmt to three sets of official data (FY2009, FY201 0 ru1d FY2011 ). For more detail on CDRs, see our note published September 15, 2009. On Wednesday, after the close, UTI released its unofficial three-year CDRs for its three reporting schools for the FY2005, FY2006, and FY2007 student cohorts. As shown in Exhibit l, whiJe the three-year CDRs were considerably higher thru1 two-year CDRs for each school, three-year rates were still well below the revised 30% threshold. Additionally, current year (FY2007) three-year rates were below the 15% threshold, above which Title IV disbursements are delayed (this was revised up from 10% under two-year rates). We have included the threeyear rates for the other schools that have disclosed them.
Exhibit 1. Two-Year vs. Three-Year CDRs for Select Postsecondary Institutions (FY2005-FY2007)
2-Year CDRs FY2005 FY2006 FY2007 3-Year CDRs FY2005 FY2006 FY2007 8.8% 5.5% 21 .1% 11 .9% 15.0% 17.5% 6.1% 0.0% 24.4% 14.1% 17.3% 18.8% 17.4% 0.0% 25.7% 13.5% 14.1% 13.7% FY2005 115% N.A 142% 153% 114% 224% %Change FY2006 49% N.A 98% 117% 125% 203% FY2007 31% N.A. 92% 108% 107% 71%
LOPE
Ashford University University of the Rockies LINC Weighted average UTI Arizona Phoenix Texas 4.1% 0.0% 8.7% 4.7% 7.0% 5.4% 4.1% 0.0% 12.3% 6.5% 7 .7% 6.2% 13.3% 0.0% 13.4% 6.5% 6.8% 8.0%
N.A. - Not applicable. Source: Company reports and BMO Capital Markets
So far only Lincoln (LTNC) has announced that some of its schools have exceeded the 30% threshold, with one in FY2005, two in FY2006, and three in FY2007 having done so. Additionally, one school exceeded tl1e 40% threshold (above which a school may become immediately ineligible to participate in Title IV) in FY2007. While there may be other for-profit providers that could have schools at risk of breaking the 30% threshold, we hope these schools will not be at risk of breaking tl1at threshold for three consecutive years, at which time Title IV eligibiJjty could be lost.
Page2
December 10. 2009
BMO Capital Markets

Other companies mentioned (priced as of the close on December 9, 2009) :
Grand Canyon (LOPE. $19.26. OUTPERFORM) Lincoln (LINC. $20.37. OUTPERFORM)
Page 3
December 10. 2009
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Universal Technical Institute (UTI) Quarterly In come Statement (FY08-FY11 E)

(Millions. except pet-share data}
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FY2009
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$0.21 24.4 $15.2 15.0% 19.1% 53.3% 38.5% 12.9% 8.3% 7.1% 7.3% ~ 4.4% 14.3% 13.2% 11.0% 25.8% 49.8% 49.0% 49.0% 47.5% 4.284 11 .6% 19,665 12.0% $5,999 2.0% $772 12.3%
sts.s
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~
Rt tum on Equity (trailing 12-month basis)

Margin/% of Revenues Educational services and facilities Selling, gentral and admin.
Adju$ted EBITDA margin Opel'ating margin (exc st ock-bast'd comp.) .l. Operating margin (incl. stock-based comp.} Pretax margin Tax rate Net margin
Percentage Change
&A%
5.1% 5.3%
~
3A%
3.5%
~
7.2% 0.6% 4.5% -0.7% .S.O% 11.6% -4.7% -6.2%
2.2% -3.8% 2.4% 9.0% -49.3% -75.9% .S8.8% -68.9% .S6.8% 2,829 6.2% 15,092 7.9% $5,841 4 .5% 5527 -44.9%
tu.l.
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0.7% 2.7% -0.6% -0.4% 24.9% 128.5% 190. 7% 141.7% 57.8%
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tu.l.
-0.1% 1.1% 4.3% 3.7% -30.2% 108.9% 102.6% 104.2% 104A% 3,381 19.5% 15,457 2.4% $5,768 1.3% 5360 -31.8%
2.6% 0.1% 3.4% 13.2% 38.6% -61.4% .S5.1% -64.5% -61.7% 3,319 6.2% 16,323 1.5% 55,521 1.6% $573 -37.7%
2. 2% 8.9% 2. 1% 6.5%
7.6% 17.6% 4.9% 2.7% 190.1% 2146.6% 1214.1% 1276.8% 1334.3%
3.2% 6.7% 3.7%
5.6% 16.0% 12.7% 6.7% 71.1% 166.0% 160,9% 154.5% 168.8% 3,786 14, 1% 18.569 13.8% $5,632 2.0% 5862 50.4%
3.4% 15.8% 13.7% 4.3% 11 7.2% 2839.9% 7187.7% 4427.3% 4490.8% 3,840 13.6% 17,555 13.6% 55,881 2.0% $688 91.3%
2.9% 15.7% 14.7% 13.1% 37.8% 58.0% 59,1% 52.5% 50. 7% 3,316 12.6% 16,809 13.5% $6,049 2.0% 5669 21.4%
8.2% 15.3% 12.9% 14.9% 23.2% 25.1% 23.5% 23.7% 22.5%
5.9% 14.5% 13.4% 14.8% 14.6% 20.5% 2M % 2D.4% 19.2% 4.243 12. 1% 20,853 12.3% $5,744 2.0% $879 2.0%
4.3% 13.9% 12.9% 8.9% 33.1% 72.6% 70.9% 70.9% 69.2% 3,684 11.1 % 18,778 11.7% $6,170 2.0% $798 19.2%
9.4% 13.4% 12.2% 8.7% 22.9% 30.8% 30. 7% 30.7% 29.4%
6.1% 14.0% 12.9% 10.8% 23.2% 36.6% 36.3% 36.3% 35.0%
Rtvenuu
Educational services and facilities SeiHng, general and admin. Adju ted EBITDA
Op ~radng Into me Pretax income
Net Income EPS (excluding one-time charges) Operating MetriC$

N'NI Stud~nts (sta.rts)
CW. yec.r-over-yee~r change Avet.1ge Srudents '4 ye;Jr~over..year change Revenues ptr Average Student (SOOO's) ~ ye~r..over-year cha. ge n EBITDA per Averoge Student (SOOO 'l % yt:ar. over-year change
1.3%
3,126 11.5% 16,576
-5.3% 0.6% 9.3% .S7.9% -125.1% 111.9% -118.8% 120.5% 2,225 0.5% 13,452 8. 1% $5,995 3.0% 5319 -65.1%
&A%
21.7% 74.3% 37.7% 42.8% 49.6%
90A%
307.6% 515.9% 365.6% 377.9% 2.946 32.4% 14,813 10. 1% $5.931 1.1% 5551 72.9%
47.2%
-52.3%
4 .0%
55,432 4.7% $9 19 -2.1%
6,939 15,f19 4.9% 2.1% 14,669 14,941 5.0% 5.8% $5,761 $22,988 2.4% 3.1% 5419 52,251 -33, 2% -20.9%
7,985 17,631 15. 1% 166% 16.905 15,854 6.1 % 15. 1% 55,888 $23,128 0.6% 2.2% 51,055 52,580 152.1% 14.7%
8,989 19,932 12.6% 13.0% 19,102 18,009 13.0% 13.6% $6,006 $23,557 1.9% 2.0% $1 ,150 $3.404 9.0% 31.9%
22,151 9,940 10,6% 11 .1% 21 ,228 20, 131 11 . 1% 11.8% 56,126 $24,026 2.0% 2.0% $1,272 53,751 10.S% 10.2%
N.M. Not Meanlngf!JI. NA. NOI Available. SOUr(t : BMO Capilli M.alii:ttS nCI corportlt rtports.
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llil12
$5.9 5.2 1.9 1.3 13.2
fZ!;UQ
S3.5 5.2 2.0 1.3
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BMO Capital Markets
UNIVERSAL TECHNICAL INST INC (UTI)

Quarterly Price (US$) 30 45 40 35 30 25 20 15 10 Target Price(US$) Share Price(US$)
30
45
40
35
30
25
25
20
20
25 20 15 10
15
15
10
10
120 100 80 60 40
UTI Relative to S&P 500 UTI Relative to Diversified Consumer Serv1ces
120 100
150
150
100
80
60
40
1985 1990 1995 2000
50
" p-:.:~I -f\1 " \,~ ... ' ~ ,'... :1. . .. . r -.,, V'ii'1 ,_. ..., t-: 1.:-\ ...,. " . ''41 ' , .,,.,..,'
100
50
E__ ~[ ~~:';:-'-'-~~~~';:-'--'-'arllllDhr.J
1980
2007
2008
2009
~~ l"'o
-202ooo
I
1-.
"" """"""' o.-.., Co~~ "''"~

- -- - - =------1 - ----=1 1 2007 2008
UTI Relative to S&P 500 YfY (%)
1980
1985
1990
1995
2000
2005
;-.".====::: '
2009
YIY (%l
~
l.200
UTI - Rating as of 29-Dec-06 =Und. Date 9-May-07 25-Nov-08 Rating Change Und.to Mkt Mkt to OP Share Price $25.66 $15.00
1 2
Page6
December 10. 2009
BMO Capital Markets
GRAND CANYON ED INC (LOPE)

Quarterly Price (US$) 25 20 18 16 15 14 12 10 10 20 20 Ta rget Price(US$) Share Price(US$) 25
~
I I
I I
15
10
LOPE Relative to S&P 500 LOPE Re lative to Diversified Consumer Services 140 130 120 110 100 90 1980 1985 1990 1995 2000 2005 140 130 120 110 100 90
200 180 160 140 120 100
LOPE Relative to S&P 500 LOPE Relative to Diversified Consumer Services
200 180 160 140 120 100
..,....
0.5 [
'
D
-
EPS (4 Qtr Trailing)- (US$) Price 1 Earnings
80 ~~--20 0~~~~~~~~~ ~7 2008--~~~~~~~~~~ 00 2009 LOPE Re lative to S&P 500 Y/Y (%) LOPE Relative to Diversified Consumer Services Y/Y (%)
~]
:0
5: [
1980
1985
1990
1995
2000
2005
~~~~~1~~~-L~~~~I~~~~~~~~I~~~] ~
2007 2008 2009
LOPE- Rating as of 20-Nov-08 =NR Date 30-Dec-08 Rating Change NR to OP Share Price $18.00
Page 7
December 10, 2009
BMO Capital Markets

Quarterly Price (US$) 35 Target Price(US$) Share Prioe(US$)
35
LINC Relative to S&P 500 LINC Relative to Diversified Consumer Services
300 140 250 200 100 150 80 100 60 50

1
U NC Relative to S&P 500 U NC Relative to Diversified Consumer Services
300 250
140
120 100
80 60
1980 1985 1990 1995 2000
. ~ . I:~ f. .
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2007
2008
2009
50
~f
1980
LINC Relative to S&P 500 YfY (%) UNC Relative to Diversified Consumer Services YfY (%)
1985
'
1990
'
_ ::r
1995
2000
2007
: 1 : 1~ ] -200
2008 2009
200
U NC - Rating as of 29-0ec-06 = Mkt Date 12-Jan-09 Rating Change Mkt to OP Share Price $11.47
Page 8
December 10, 2009
Analyst's Ccttification I, Jeffrey M. Silber. hereby certify that the views expressed in this report accurately renee! my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets Corp, BMO Nesbitt Bums, and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and convincing clients to act on them, performance of recommendations, accuracy of earnings estimates, and service to clients. Company Specific Disclos ure for UTI BMO Capital Markets Corp. has provided advice for a fee with respect to this company within the past 12 months: No BMO Capital Markets Corp. has undertaken an underwriting liability with respect to this company withi n the past 12 months: No BMO Capital Markets Corp. has provided investment banking services with respect to the company within the past 12 months: No BMO Capital Ma rkets Corp. or its a!li liates owns J% or more of any class of common equity securities of the company: No BMO Capital Markets Corp. or its afllliates makes a market in the security: No BMO Capital Ma rkets Corp. or its affi liates managed or co-managed a public offering of securities of the company in the past 12 months: No BMO Capital Markets Corp. or its aftlliates received compensation for in vestment banking services from the company in the past \2 months: No BMO Capital Markets Corp. or its afJiliates or its officers own warrants or options: No Company is a client (or was a client) ofBMO Capital Markets Corp. or an affiliate within the past 12 months: No Employee, ofJicer, or director ofBMO Capital Markets Corp. is a member oft he Board of Directors or an advisor or officer of this company: No A member of the Board ofDirectors of Bank of Montreal is also a member of the Board of Directors or is an officer of this company: No Analyst and/or associate who prepared this report is a member of the Board of Directors of this company or an advisor or officer of this company: No A household member of the research analyst and/or associate who prepared this report is a member of the Boa.rd of Directors of this company or an advisor or officer of this company: No Analyst or associate who prepared this report or member of household of ana lyst or associate owns shares: No Analyst or associate who prepared this report or member of household of analyst or associate owns warrants/options: No BMO Capital Markets Corp. or its aftlliates expects to receive or intends to seek compensation for investment banking services from the company in the next three months: No Analyst received compensation from the company in the past year: No BMO Capital Ma rkets Corp. or its alliliates received compensation for products or services other than Investment Banking Services from the company in the past 12 months: No Methodology and Risks to Our Pl'ice Ta1gct Methodology: Average of forward looking PIE, forward looking EVIEBITDA and Discounted Cash Flow Risks: Worse than expected enrollment trends, weakness in automotive worker environment, risk of buyout Company Specific Disclosure for LOPE BMO Capital Ma rkets Corp. has provided advice for a fee with respect to this company within the past 12 months: No BMO Capital Markets Corp. has undertaken an underwriting liabi lity with respect to this company within the past 12 months: Yes BMO Capital Markets Corp. has provided investment banking services with respect to the company within the past 12 months: Yes BMO Capital Markets Corp. or its affi liates owns l % or more of any class of common equity securities of the company: No BMO Capital Markets Corp. or its atJiliates makes a market in the security: Yes BMO Capita l Markets Corp. or its aniliates managed or co-managed a public offering of securities of the company in the past 12 months: Yes BMO Capital Markets Corp. or its affiliates received compensation for in vestment banking services from the company in the past 12 months: Yes BMO Capital Ma.rkets Corp. or its a!Tiliates or its officers own warrants or options: No Company is a client (or was a client) ofBMO Capital Markets Corp. or an affi liate within the past 12 months: Yes, for investment banking services Employee, ofJicer. or director ofBMO Capital Markets Corp. is a member of the Board of Directors or an advisor or officer of this company: No A member of the Board ofDirectors ofBank of Montreal is also a member of the Board of Directors or is an officer of this company: No Analyst and/or associate who prepared this report is a member of the Board of Directors of this company or an advisor or oflicer of this company: No A household member of the research anal yst and/or associate who prepared this report is a member of the Board of Directors of th is company or an advisor or officer of this company: No Analyst or associate vvho prepared this report or member of household of analyst or associate owns shares: No Analyst or associate who prepared this report or member of household of analyst or associate owns warrants/options: No BMO Capital Markets Corp. or its aiTiliates expects to receive or intends to seek compensation for investment banking services from the company in the next th ree months: No Analyst received compensation from the company in the past year: No BMO Capital Ma rkets Corp. or its affiliates received compensation for products or services other than Investment Banking Services from the company in the past 12 months: No Methodology an d Risks to Out Pl'ice Target Methodology: Average of discounted cash flow. PIE multiple. and EV to EBITDA multiple Risks: Increased competition, worsening student lending environment, increased regulation, litigation and lawsuits, material weakness
Page 9
December 10, 2009
BMO Capital Markets
Company S[X'cific Disclosun~ fot LI NC BMO Capital Markets Corp. has provided advice for a fee with respect to this company within the past 12 months: No BMO Capital Markets Corp. has undertaken an underwriting liability with respect to this company within the past 12 months: Yes BMO Capital Markets Corp. has provided investment banking services with respect to the company within the past 12 months: Yes BMO Capital Markets Corp. or its affiliates owns 1% or more of any class of common equity securities of the company: No BMO Capital Markets Corp. or its aiTiliates makes a market in the security: Yes BMO Capital Markets Corp. or its afJiliates managed or co-managed a public offering of securities of the company in the past 12 months: Yes BMO Capital Markets Corp. or its affiliates received compensation for investment banking services from the company in the past 12 months: Yes BMO Capital Markets Corp. or its afJiliates or its officers own warrants or options: No Company is a client (or was a client) ofBMO Capital Markets Corp. or an affiliate within the past 12 months: Yes, for investment banking services and non-securities services Employee, officer. or director ofBMO Capital Markets Corp. is a member of the Board of Directors or an advisor or officer of this company: No A member of the Board ofDirectors ofBank of Montreal is also a member of the Board of Directors or is an officer of this company: No Analyst and/or associate who prepared this report is a member of the Board ofDirectors of this company or an advisor or officer of this company: No A household member of the research analyst and/or associate who prepared this report is a member of the Board of Directors of this company or an advisor or officer of this company: No Anal yst or associate who prepared this report or member of household of analyst or associate owns shares: No Analyst or associate who prepared this report or member of household of analyst or associate owns warrants/options: No BMO Capital Markets Corp. or its alliliates expects to receive or intends to seek compensation for investment banking services from the company in the next three months: No Analyst received compensation from the company in the past yea r: No BMO Capital Markets Corp. or its affiliates received compensation for products or services other than [nvestment Banking Services from the company in the past 12 months: Yes Methodology and Risks to OuJ' Pl"ice Tuget Methodology: Average of forward looking PIE, forward looking EV/EBITDA and Discounted Cash Flow Risks: Worse than expected enrollment trends, weakness in automotive worker environment, New England Institute expansion Breakdown of Ratin g Distribution and Banking C lients
{As of September 30 , 2009) Buy % of total BMO Capital Markets Corp . coverage within rating category 29 . H % of stocks within rating category for which the firm provided banking services over the past 12 months 12 . 8% Hold
64 . 1% 9 . 6%
Sell
6 . 8'!s 0 . 0%
Unrated
0 . 0% 0 . 0%
BMO Otpital Markets Cotp. Rating System OP = Outpel'f'orm : We believe the stock's total return. including dividends, \vi ii exceed the S&P 500's return by more than 15%. Mkt =Market Perform: We believe the stock's total return will generally match that of the S&P 500. Und = Undetperf'orm: We believe the stock's total return wi ll fall sho.rt o f the S&P 500's return by more than 15%. NR = Not rated. (R) = Restricted: Dissemination of research is currently restricted. ln addition. apart from our slOck ratings. we apply the Speculative investmelll (S) postscript to those companies that have de minimis revenue and whose enterprise value appears to be contingemuponunprovable assumptions (e.g.. thefitture approval of a drug or the succesiful completion of an oil well). SECTOR RATINGS OUTPERFORM- We believe the sector will outperform the S&P 500 Index. MARKET PERFORM - We believe the sector's return will generally match thai of the S&P 500. UNDERPERFORM- We believe the sector willunderperform the S&P 500 Index. Prior BMO Capital Markets Corp. Rating System (prior to June 19, 2006) Our rating system prior to June 19,2006, compared a stock's expected performance with that of an index of comparable companies over a 9- I 5 month horizon. Our sector ratings were based on the expected perfonnance of the sector compared with that of a broader market index over the same time period. Additionally, before June 19,2006, we did not use the ($)-Speculative postscript. PRIOR STOCK RATINGS OUTPERFORM- We believe the stock's total return, including dividends, will exceed the group average by over 15%. NEUTRAL- We believe the stock's total return will generally match the group average. UN DERPERFORM- We believe the stock's total return will fall short of !he group average by more than I 5%. PRIOR SECTOR RATINGS POSITIVE- We believe the sector will outperform the S&P 500 Index. NEGA TlVE- We believe the sector wi llunderperform the S&P 500 Index. Other Important Disclosures For more specific information. please refer to http://research-us.bmocapitalmarkets.com. For Important D isclos ures on the stocks discussed in this report, please go to http://research-us.bmocm.com/Company_Disclosure_Public.asp, or write to Editorial Department, BMO Capital Markets, 3 Times Square, New York, NY 10036.
Page 10
December 10, 2009
BMO Capital Markets
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December 10, 2009
From: Rob MacArthur <rmacarthur@altresearch com> To: Rob MacArthur CC: Date: 12/10/20094:19:44PM Subject: comments from the street re the hearings
Reactions from the Street analysts. The jerk who made these comments should probably frred for stupidity.
From Trace who' s in DC.
Much friendlier room for for-profit sector today. Morning discussion centered on whether or not you could eliminate rules entirely without massive confusion and lawsuits for all schools (not just for-profits). Consensus emerged that replacing safe harbors with no guidance whatsoever was unworkable. Department asked for blue sky ideas and this was deemed impractical as well. a point was made (effectively) that you could not just say what was forbidden because that inadvertently implied that everything else was allowed. So instead you need to say explicitly what is allowed.- result-the Chair named a working committee (including for-profit rep) that will convene at 8AM tomorrow morning and review each of the 12 safe harbors to find which elements are central, and where there is agreement and disagreement and the group will discuss again tomorrow with an eye toward providing clarity but eliminating loopholes so that the Department has very clear guidance for drafting new rules before the third session
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Industry Overview
Equity I United States I Education & Training Serv1ces 09 December 2009

Significant opposition to DOE 's proposal a positive
Gainful employment proposals were discussed at today's negotiated rulemaking (neg-reg) sessions. Neg-reg is the process the Dep't. of Education uses to update regul ation. The group was overwhelmingly opposed to the DOE's proposals to tie tuition to salaries or impose a maximum debt servicing-starting salary. This issue is not over but today was positive for for-profits & drove stocks up. We continue to like the group given attractive fundamentals but neg-reg is creating volatility & could lead to some potential changes in operations. We highlight Buy-rated DeVry, Capella, & Strayer as high-quality less countercyclical stories.
Sara Gubins Research Analyst MLPF&S sara gubins@baml.com Kevin C. Doherty Research Analyst +1 646 855 1961
+1 646 855 5607
MLPF& S
kev1n.doherly@baml.com David Chu Research Analyst +1 646 855 2589
MLPF&S
dav1d.j.chu@baml.com
Range of objections to gainful employment proposals

Only -3 of 15 negotiators seemed to be in favor of the DOE's proposals. The discussion was heated, & objections included whether this was in the DOE's purview (vs. Congress), that it would represent price controls, would be complicated to implement & might not fairly measure benefits of a program (both monetary & non-monetary). Members objected to not having draft regulation to review & not having enough time to consider the issue. Even those who liked the concept thought the DOE's proposals would be hard to implement.
Table 1: BofAML ratin s vs. consensus %breakdown No. of BofAML Rating opinions Buy Neutral Sell Neutral 24 67% 25% 8% Neutral 17 41% 41% 18% 62% 25% 13% coco Buy 16 18 CPI.A Buy 56% 44% 0% ov Buy 22 55% 45% 0% Buy 15 47% 53% 0% EDMC ESI Buy 21 62% 38% 0% Neutral LINC 9 56% 44% 0% 18 61% 39% 0% STRA Buy UTI Underperform 10 30% 20% 50% Ticker APOL CECO
Soun:c: Bloom berg
Topic could apply to a ll for-profit institutions

Most programs at for-profits must lead to gainful employment in a recognized occupation to access federal financial aid. Today the DOE said its gainful employment proposal would apply to all for-profit programs except liberal arts programs & would include non-degree programs at non-profits/public schools. As proposed, this could effectively create price caps on some programs & create 90/10 issues as for-profits can't receive >90% of rev. from federal financial aid.
Positive discussion today, but issue not over

This week is the 2"d of 3 rounds of neg-reg. The DOE will take feedback, revise regulatory language ahead of the 3rd session (Jan. 25-29, 201 0), when the committee will vote on proposed regulation. Today was positive as the group opposed tying tuition to salary/debt, but the discussion is not over.
Next up: incentive compensation tomorrow

Enrollment advisors cannot be paid a bonus based on enrollment. There are 12 safe harbors that clarify conditions under which payments are covered. The DOE proposes eliminating all safe harbors, which could require schools to change compensation plans & potentially raise costs -we view this as more of a nearterm issue than a change to long-term fundamentals. For example, eliminating the ability to raise advisor salaries 2x/yr is a potential change that would impact some schools. It also raises some questions about whether schools could pay lead aggregators on a cost-per-lead basis (parti cularly important fo r online). If not, schools & web inquiry providers could find a different pricing strategy, but it could be challenging.
Merrill Lynch 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 of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 4 to 6. Analyst Certification on Page 3. 10894374
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09 December 2009
Neg-reg background & process

The Department of Education has formed a committee to develop proposed regulations to maintain or improve the "program integrity" of Title IV student aid programs. After a series of three public hearings in June to gather input before the negotiated rulemaking (neg-reg) sessions, the DOE released an initial negotiated agenda and formed committees. The formal committee sessions began in November, with three monthly meetings lasting until early 2010. The sessions are open to the public. Regarding the process for negotiated rulemaking, a committee is formed representing various interests in the sector. The committee meets the first time to discuss the topics, the second time to review draft regulation by the Department of Education and the third time to vote on the draft regulation by the DOE. If 100% of the committee does not vote for all of the proposed regulations, authority falls to the DOE who drafts the final regulation, subject to a public comment period.
Changes would apply July 20 11 Any changes would not take effect until July 2011 , and we believe schools would have time to comply with changes. Not creating new law We believe the DOE is broadly focused on outcomes and accountability, and it is important to note that the end goal of the neg-reg process is to interpret current statute, not to create new legislation.
Table 2: Companies Mentioned Company Ticker

Apollo Group Capella Career Educa tion Corinthian Coli DeVry Education Mgml ITT Education Lincoln Strayer UTI APOL CPLA CECO
Recent Px
54.67 71 .88 26.25 13.79 54.29 20.72 87.37 20.55 197.93 18.58
Q-R-Q
B-2-9 C-1-9 C-2-9 C-1-9 8-1-7 C-1-9 C-1-9 C-2-9 B-1-7 C-3-9
Rating
Neutral Buy Neutral Buy Buy Buy Buy Neutral Buy Underperform
coco
DV EOMC ESI UNC STRA UTI
Source: BolA Merrill lynch Global Research
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09 December 2009
We, Sara Gubins and Kevin C. Doherty, hereby certify that the views each of us has expressed in this research report accurately reflect each of our respective personal views about the subject securities and issuers. We also certify that no part of our respective compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.
Capella Education Corinthian Colleges Inc Corporate Executive Board DeVry Inc Ecolab Inc Education Management Corporation Grand Canyon Education ITI Educational Services K12 Slrayer Education Inc.
BofAML ticker
CPLA
Bloomberg symbol
CPLAUS
Analyst
Sara Gubins Sara Gubins David Ridley.Lane Sara Gubins David Ridley-Lane Sara Gubins Sara Gubins Sara Gubins Sara Gubins Kevin C. Doherty Sara Gubins Sara Gubins Kevin C. Doherty Kevin C. Doherty Kevin C. Doherty SaraGubms Sara Gubins Sara Gubms Sara Gubins Kevin C. Doherty Sara Gubins
coco
EXBD DV ECL EDMC LOPE ESI LRN STRA APOL CECO CBG FDS JLL LINC MAN RECN RHI UTI MPS
coco us
EXBDUS DVUS ECLUS EDMCUS LOPE US ESIUS LRNUS STRA US APOLUS CECOUS CBGUS FDS US JLLUS LINC US MANUS RECNUS RHI US UTI US MPSUS
NEUTRAL
Apollo Group Career Education CB Richard Ellis Group Inc FactSet Research Systems Inc. Jones Lang LaSalle Inc Lincoln Educational Serv1ces Corp Manpower
UNDERPERFORM
Resources Connection Robert Half International Universal Technical Institute
RSTR
MPSGroup
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Bank of America~ Merrill Lynch 09 December 2009
Investment Rating Distribution: Education & Training Services Group (as of 12 Nov 2009) Coverage Universe Count Percent lnv. Banking Relationships Count Percent Buy 13 72.22% Buy 7 53.85% Neutral 4 22.22% Neutral 2 50.00"k Sell 5.56% Sell 100.00% Investment Rating Distribution: Global Group (as of 12 Nov 2009) Coverage Universe Count Percent lnv. Banking Relationships Percent Count Buy 1629 50.37% Buy 842 57.51% Neutral 821 25.39% Neutral 455 62.33% Sell 784 24.24% 49.31% Sell 357 * Com panies in respect of which MLPF&Sor an affiliate has received oompensation for investment banking services within the past 12 months. For purposes of this distribution, a stock rated Underperformis included as a Sell. FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RA T/NGS, indicators of potential price fluctuation, are: A- Low, B- Medium and C- High. INVESTMENT RATINGS reflect the analyst's assessment of a stock's: (Q absolute total return potential and (iQ attractiveness for investment relative to other stocks within its Coverage Cluster(defined below). There are three investment ratings: 1 -Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a stock and the firm's guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst's view of the potential price appreciation (depreciation). Investment rating Buy
~~
;:: ~
Ratings dispersion guidelines for coverage cluster* :5 70"k

:5 ~
Underperform N/A <: 20"k Ratings disperstons may vary from time to time where BofAML Research beheves it better reflects the investment prospects of stocks in a Coverage Cluster.
Price charts for the securities referenced in this research report are available at http://www.ml.com/research/pricecharts.asp, or caii1-888-ML-CHART to have them mailed.
MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report: Apollo Group, Capella Education, Career Education. Corinthian Coli, DeVry, Education Mgm~ ITT, Lincoln, Universal Tech. MLPF&S or an affiliate was a manager of a public offering of securities of this company w~hin the last 12 months: Education Mgmt. The company is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgm~ ITT, Lincoln, Strayer, Universal Tech. MLPF&S or an affiliate has received compensation from the company for non-investment banking services or products within the past 12 months: ITT, Strayer. The company is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: Apollo Group, Career Education, Corinthian Coli, DeVry, ITT, Strayer, Universal Tech. MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months: Apollo Group, Career Education, Corinthian Coli, DeVry, Education Mgmt, ITT, Lincoln, Strayer, Universal Tech. MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company or an affiliate of the company within the next three months: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, ITT, Strayer, Universal Tech. MLPF&S together with its affiliates beneficially owns one percent or more of the common stock of this company. If this report was issued on or after the 10th day of the month, it reflects the ownership position on the last day of the previous month. Reports issued before the 1Oth day of a month reflect the ownership position at the end of the second month preceding the date of the report: Apollo Group, Capella Education, Career Education, DeVry, ITT, Universal Tech. MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the company on a principal basis: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, ITT, Lincoln, Strayer, Universal Tech. The company is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: Apollo Group, Career Education, Corinthian Coli, DeVry, ITT, Strayer. The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall prof~ability of Bank of America Corporation, including profits derived from investment banking revenues.
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09 December 2009

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09 December 2009
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December 10, 2009
Education Services
Neg-Reg Day Three: Gainful Employment
Action
No change in thesis. We continue to recommend the post-secondary stocks which we feel have less risk and the best opportunity for growth independent of the macroenvironment, namely Strayer, Capella , and American Public. The ERP implementation at DeVry and the informal SEC inquiry at Apollo keep us on the sidelines of those two stocks.
Summary
Neg-reg day three. Day three of the second negotiated rulemaking session focused on gainful employment, ability-to-benefit (ATB) students, and definition of a credit hour. Not much incremental news on ATB or definition of a credit hour. Gainful employment. The discussion was very heated with little consensus on the inclusion of cost/earnings or debt/income models. Importantly, the Department of Education (DOE) language related to gainful employment would impact ALL for-profit schools (degree granting and vocational programs). but only non-degree granting programs at not-for-profit schools. - We question how the DOE will define gainful employment at schools like Strayer or Capella where most students are already employed when they go back to school. We think more debate will be required. Opposition calls it price fixing, consumer advocate in support. For-profit representative Elaine Neely, as well as several not-for-profit representatives, expressed concern about the idea of effectively "price fixing" and questioned the DOE's authority in making this level of interpretation out of the existing HEA language. Not surprisingly, consumer advocate Margaret Reiter was strongly in favor of proposed changes. Consensus seems unlikely. It seems highly unlikely, in our opinion. that the committee will come to a consensus on the topic of gainful employment. Ultimately, the DOE can choose to include the language it wants despite strong objections from the committee. However, there are still legal arguments that could keep it from passing including if the DOE has the authority to pass the regulation. Neg-reg running behind. Various representatives expressed concern that the neg-reg process is "very behind" as the DOE has not even presented clear regulatory language as it relates to gainful employment to be debated (yesterday's session was extended and today's will be as well). Our concern is the process could linger on beyond the third session scheduled for late January and continue to be an overhang on the space.
Education Services
December 10, 2009
Details
American Public (APEI- $32.88): Our $44 price target is based on 20x our NTM+1 EPS estimate, which assumes no expansion from current levels. Year-to-date, APEI has traded 18x-35x forward earnings with an average of 26x. Strayer (STRA - $202.50) : Our $260 price target is based on 23x our NTM+1 EPS estimate adjusted for interest income and $6.78/share of cash. Historically, Strayer has traded 19x-44x forward earnings, with an average of 29x. Capella (CPLA - $73.05): Our $96 price target is based on 25x our NTM+1 EPS estimate. Historically, Capella has traded between 17x-46x forward earnings, with an average of 28x. DeVry (DV - $57.23): Our $62 price target is based on 15x our NTM+1 EPS estimate, which assumes no expansion from current levels. Historically, DV has traded 13x-36x forward earnings, with an average of 24x. Apollo (APOL- $55.34): Our $60 price target is based on 10x our NTM+1 EPS estimate, which assumes no multiple expansion from current levels. Historically, APOL has traded 1Ox-46x forward earnings.
Company Specific Risks

APE I Competition. The post-secondary education market is highly competitive. While the American Public University System is well known within the military, the company is likely to encounter greater competition as it moves into the civilian markets. Competition is in the form of other for-profit higher education companies such as Strayer and University of Phoenix, as well as traditional non-profit two-year and four-year colleges and universities. particularly University of Maryland University College. Regulatory and accreditation risks. Providers of post-secondary education are subject to regulatory requirements as dictated by the Higher Education Act of 1965. Higher education institutions participating in Title IV funding are required to be accredited by an association recognized by the U.S. Department of Education. While American Public has not been subject to regulatory or accreditation issues in the past, any change in accreditation status, and resulting loss of Title IV eligibility, could have a significant effect on the company's reputation and ability to attract students. Dependence on the military. In 2008, approximately 65% of company revenues were derived from the Department of Defense (DoD) tuition assistance program . Additionally, we believe the company derives a significant portion of its revenues from the Department of Veterans Affairs in the form of G.l. Bill Benefits. Decreases in reimbursement levels related to DoD tuition assistance program or the G.l. Bill would negatively impact American Public Education. Further; inefficiencies in implementing the new G.l. Bill and Yellow Ribbon program including delayed disbursements from the VA could hurt cash flow. Shift to civilians adds incremental cost. Given increased competition and lower referral rates within the civilian market, student acquisition costs are generally higher for civilians than military personnel. Therefore, we expect selling and promotional costs to increase as a percentage of revenue.
Education Services
December 10, 2009
STRA Competition. The post-secondary education market is highly competitive. While Strayer is well known in the region in which it currently operates, the company is likely to encounter greater competition as it moves further away from the Mid-Atlantic States. Competition is in the form of other for-profit higher education companies such as University of Phoenix and DeVry, as well as traditional non-profit two-year and four-year colleges and universities. Online programs are becoming increasingly competitive, with more competitive offerings coming from both for-profit and non-profit schools.
Regulatory and accreditation risks. Providers of post-secondary education are subject to regulatory requirements as dictated by the Higher Education Act of 1965. Higher education institutions participating in Title IV funding are required to be accredited by an association recognized by the U.S. Department of Education. While Strayer has not been subject to regulatory or accreditation issues in the past, any change in accreditation status, and resulting loss of Title IV eligibility, could have a significant effect on the company's reputation and ability to attract students. Opening increased number of campuses. Between 2003 and 2005, Strayer opened five campuses per year. In 2006 and 2007 , management opened eight campuses, and nine in 2008. Management opened 11 campuses in 2009 and plans to open 13 in 2010. Operating margins could be at risk if Strayer is not as successful in executing the openings of the new campuses. Private loans. Comments by the SLM Corp (Sallie Mae) and other lenders have sparked investor concern over availability of student loans and the impact on for-profit post-secondary schools. We believe Strayer is relatively insulted from problems in the private lending market as only 3% of revenue is derived from third-party loans. CPLA Competition. The post-secondary education market is highly competitive. Competition is in the form of other for-profit higher education companies such as University of Phoenix, Strayer, and DeVry, as well as traditional non-profit colleges and universities. Online programs are becoming increasingly competitive, with competitive offerings coming from for-profit and non-profit schools. Regulatory and accreditation risks. Providers of post-secondary education are subject to regulatory requirements as dictated by the Higher Education Act of 1965. Higher education institutions participating in Title IV funding are required to be accredited by an association recognized by the U.S. Department of Education . Any change in accreditation status, and resulting loss of Title IV eligibility, could have a significant effect on the company's reputation and ability to attract students. Ability of graduates to obtain professional licensure. Some graduates seek professional licensure in their field of study following graduation. Some states have refused to license students who graduate from certain programs at Capella University citing that the program did not meet one or more of the state's specific licensure requirements (e.g., insufficient number of residency hours, lack of a state-approved clinical program). The inability of graduates to obtain professional licensure in certain states could tarnish Capella's reputation and potentially expose the company to lawsuits by the students. Growing the number of bachelor's programs. Part of Capella's growth strategy is to add more bachelor's programs over the next few years, which we believe adds some risk to the story. As compared to master's and doctoral students, bachelor's students generally have lower show rates, higher loan default rates, and are less likely to complete their degree. In addition, on an annual basis, bachelor's programs cost less than master's or PhD programs.
Education Services
December 10, 2009
Private loans. The SLM Corp (Sallie Mae) and other lenders have limited the amount of private loan money available to sub-prime students. We believe Capella is fairly insulated from problems in the private lending market as less than 1% of enrollment and revenue is derived from third-party loans. DV Low capacity utilization at DeVry campuses. After the tech boom subsided, many of the large campuses have experienced low capacity utilization which has weighed on operating margins over the last two years. While DeVry has been decreasing the size of or selling some of the larger campuses, if enrollment slowed , operating margins could come under pressure once again. Dependence on technology. Despite the company's efforts to diversify program offerings, DeVry University's curriculum remains heavily weighted in technology. If the tech market suffers a downturn, as seen in 2001-2003, enrollment growth could be at risk. Nursing growth uncertain. Part of DeVry's growth strategy includes expanding its nursing program into DeVry schools. In addition to the usual accreditation approval, the expansion also requires the approval of state nursing boards, which have historically been opposed to rapid growth of nursing programs. Competition. The post-secondary education market is highly competitive. Competition is in the form of other for-profit higher education companies such as ITT, University of Phoenix, and Strayer, as well as traditional non-profit two-year and four-year colleges and universities. Online programs are becoming increasingly competitive, with more competitive offerings coming from both for-profit and non-profit schools. Regulatory and accreditation risks. Providers of post-secondary education are subject to regulatory requirements as dictated by the Higher Education Act of 1965. Higher education institutions participating in Title IV funding are required to be accredited by an association recognized by the U.S. Department of Education. While DeVry is not currently subject to regulatory or accreditation issues, any change in accreditation status, and resulting loss of Title IV eligibility, could have a significant effect on the company's reputation and ability to attract students. Private loans. Comments by Sallie Mae and other lenders have sparked investor concern over availability of student loans and the impact on for-profit post-secondary schools. We believe DeVry is fairly insulated from problems in the private lending market as only 5% of revenue is derived from third-party loans and we believe very few of its students are high risk (i.e., sub-prime) . APOL International market. One of Apollo's growth strategies is to penetrate the international market. Entrance into new markets adds a number of increased risks related to local accreditation laws and regulation, political and economic instability, and currency. Regulatory and accreditation risks. Providers of post-secondary education are subject to regulatory requirements as dictated by the Higher Education Act of 1965. Higher education institutions participating in Title IV funding are required to be accredited by an association recognized by the U.S. Department of Education . Any change in accreditation status, and resulting loss of Title IV eligibility, could have a significant effect on the company's reputation and ability to attract students. Private loans. Comments by the SLM Corp (Sallie Mae) have sparked investor concern over availability of student loans and the potential impact on for-profit post-secondary schools. Apollo is relatively insulated from problems in the private lending market as only 3% of revenue is derived from third-party loans.
4
Education Services
December 10, 2009
Competition. The post-secondary education market is highly competitive. While Apollo is a leading provider of post-secondary education and University of Phoenix is a well-known brand, there is no guarantee that it will maintain its position in the marketplace. Competition is in the form of other for-profit higher education companies such as Strayer and DeVry, as well as traditional non-profit two-year and four-year colleges and universities. Online programs are becoming increasingly competitive, with more competitive offerings coming from both for-profit and non-profit schools. Dual-class shares and ownership structure. Founder John Sperling controls over 50% of voting Class B shares and his son, Peter Sperling, almost all of the remaining shares.
Education Services
December 10, 2009

Rating and Price Target History for: American Public Education, Inc. (A PEl) as of 12-09-2009
108/13109
0:$46
56
48 40 32 24
01 2007 02 03 2008 01 02 03 2009 01 02 03
16
Rating and Price Target History for: Capella Education Company (CPLA) as of 12-09-2009
2009
Rating and Price Target History for: DeVry Inc. (DV) as of 12-09-2009
Education Services
December 10, 2009
Rating and Price Target History for: Strayer Education, Inc. (STRA) as of 12-09-2009
1 Robert W. Baird & Co. maintains a trading market in the securities of APEI , CPLA, DV and STRA. 10 Robert W. Baird & Co. and/or its affiliates have been compensated by Strayer Education, Inc. for non-investment banking-securities related services in the past 12 months.
Robert W. Baird & Co. and/or its affiliates expect to receive or intend to seek investment banking related compensation from the company or companies mentioned in this report within the next three months. Investment Ratings: Outperform (0) - Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Neutral (N) - Expected to perform in line with the broader U.S. equity market over the next 12 months. Underperform (U)- Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis on safety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue and earnings. A - Average Risk - Growth situations for investors seeking capital appreciation with an emphasis on safety. Company characteristics may include: moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and earnings. H- Higher Risk- Higher-growth situations appropriate for investors seeking capital appreciation with the acceptance of risk. Company characteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and price volatility. S - Speculative Risk - High-growth situations appropriate only for investors willing to accept a high degree of volatility and risk. Company characteristics may include: unpredictable earnings, small capitalization. aggressive growth strategies, rapidly changing market dynamics, high leverage, extreme price volatility and unknown competitive challenges. Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a time horizon of 12 months but there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined by a subjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may be used to determine the value of a security including, but not limited to, discounted cash flow, earnings multiples, peer group comparisons, and sum of the parts. Overall market risk, interest rate risk. and general economic risks impact all securities. Specific information regarding the price target and recommendation is provided in the text of our most recent research report. Distribution of Investment Ratings. As of November 30, 2009, Baird U.S. Equity Research covered 603 companies, with 41% rated Outperform/Buy, 57% rated Neutral/Hold and 2% rated Underperform/Sell. Within these rating categories, 9% of Outperform/Buy-rated , and 6% of Neutral/Hold-rated, and 8% of Underperform/Sell-rated companies have compensated Baird for investment banking services in the past 12 months and/or Baird managed or co-managed a public offering of securities for these companies in the past 12 months. Analyst Compensation. Analyst compensation is based on: 1) The correlation between the analyst's recommendations and stock price performance; 2) Ratings and direct feedback from our investing clients, our sales force and from independent rating services; and 3) The analyst's productivity, including the quality of the analyst's research and the analyst's contribution to the growth and development of our overall research effort. This compensation criteria and actual compensation is reviewed and approved on an annual basis by Baird's Research Oversight Committee.Analyst compensation is derived from all revenue sources of the firm , including revenues from investment banking. Baird does not compensate research analysts based on specific investment banking
7
Education Services
December 10, 2009
transactions.A complete listing of all companies covered by Baird U.S. Equity Research and applicable research disclosures can be accessed at http://www. rwbai rd. com/research-insights/research/coverage/research-disclosure. as px . You can also call 1-800-792-2473 or write: Robert W. Baird & Co., Equ ity Research, 24th Floor, 777 E. Wisconsin Avenue, Milwaukee, WI 53202. Analyst Certification The senior research analyst(s) certifies that the views expressed in this research report and/or financial model accurately reflect such senior analyst's personal views about the subject securities or issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report. Disclaimers Baird prohibits analysts from owning stock in companies they cover. This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST The Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices used to measure and report performance of various sectors of the stock market; direct investment in indices is not available. Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the United States Securities and Exchange Commission, FINRA, and various other self-regulatory organizations and those laws and regulations may differ from Australian laws. This report has been prepared in accordance with the laws and regulations governing United States broker-dealers and not Australian laws. Copyright 2009 Robert W. Baird & Co. Incorporated Other Disclosures UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W. Baird Limited holds an ISO passport. This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the Financial Services and Markets Act 2000 (financial promotion) order 2001 being persons who are investment professionals and may not be distributed to private clients. Issued in the United Kingdom by Robert W. Baird Limited , which has offices at Mint House 77 Mansell Street, London, E1 8AF, and is a company authorized and regulated by the Financial Services Authority. For the purposes of the Financial Services Authority requirements, this investment research report is classified as objective. Robert W. Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license. RWBL is regulated by the Financial Services Authority ("FSA") under UK laws and those laws may differ from Australian laws. This document has been prepared in accordance with FSA requirements and not Australian laws.
BMO
Capital Markets
I U.S.
Education
Decem ber 8, 2009
(BPI-NYSE)
Stock Rating: Outperform Industry Rating: Outperform
Jeffrey M. Silber
212-885-4063
jeff.silber@bmo.com
P aul Condra
212-885-4176
paul.condra@bmo.com
Three-Year CDRs Up, But Not That Bad

Secu rities Info
Event
On Tuesday after the close, BPI released its unofficial three-year cohort default rates (CDRs). For Ashford University, three-year CDRs for the FY2005. FY2006. and FY2007 cohorts were 8.8%. 6.1%. and 17.4%. Tll.is compares with two-year CDRs of 4.1 %, 4. 1%, and 13.3%.
$14.59 Price (8-Dec) 52-VIA< High/low $22/$10 MktCap (mm) $781 Shs 0 /S (mm, BASIC) 53.5 Options 0/S (mm) na
Target Price Dividend Yield FloatO'S(mm) ADVol (25-day, OOOs)
$23 17.0 513
Price Performance
BIUDGDi'OINT ED DC {BPI)
22
20
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~
1\
160 150 140 130 120
Impact
On Monday. these rates were provided to ll1e institutions for infonnational purposes onJy; they will be released to the public on Monday, December 14. We believe BPI released tll.is data, as it was not as bad as anticipated: given the jump in BPI's FY2007 two-year CDRs to 13.3%, we believe some were expecting three-year FY2007 CDRs would be considerably higher than the 17.4% reported. Wll.ile we note this data may be somewhat skewed by the fact that BPI's population was relatively small in FY2007, we are still encouraged and believe three-year rates for other providers may not be as frighteningly large as some expected. Still, the roughly 31% increase in the 2007 three-year rate is ll.igher than the 20% increase in the Title TV eligibility threshold (to 30% from 25%).
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(FYDec.) EPS Pro Forma Pi E Rrst Call Cons. EPSGAAP FCF P/ FCF EBITDA ($mm) EVBITDA Rev . ($mm) EV/Rev Quarterly EPS 2008A 2009E 2008A $0,50 $0.45 $1.00
:l~,~-.~~~~---.,...J: 2009E $1 .17 12.5x 2010E $1.58 9.2x
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$1.90
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Forecasts
We are maintaining our current estimates.
$38
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$863
0.7x 4Q na $0.24
Valuation
BPI closed at roughly 9.2x our 2010 EPS estimate, a premium to the peer group median of roughly l5.8x.
Recommendation
We maintain our OUTPERFO RM rating and expect tJ1e stock to react positively to tll.is news.
Baance Sheet Data (09130/09) -$156 NEt Debt ($m m) T daiDebtiEBITDA O .Ox Total Debt ($mm) $1 EBITDA/In!Exp na NEt Debt/Cap. Prioe/ Bock 7.3x nm 37 DSO Ndes: All values in US$. Souroe: BMO Capital Markets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
BMO Capital Markets
About Three-Year Rates

On Monday, December 7, 2009, the Department of Education (ED) published three-year CDRs for FY2005, FY2006 and FY2007 (for example, the trial FY2005 CDR.s measures students who entered repayment on their loan between October 1, 2004, and September 30, 2005, and subsequently defaulted on or before September 30, 2007). The tmofficial data was only made available to the schools for informational purposes as three-year rates will eventually replace the current two-year rates. The ED will make the three-year CDRs public on Monday, December L4, 2009, on the Federal Student Aid Data Center: http://www.fsadatacenter.ed.gov/. The three-year year rates wi ll become official in 2012, when FY2009 CDRs are published. In 2012 and 2013, two-year rates will be published concurrently with three-year rates tmtil 2014, when only three-year rates will be published as this will amount to three sets of official data (FY2009, FY2010, and FY20ll). For more detail on CDR.s see our note published September 15, 2009. On Tuesday, after the close, BPI released its unofficial three-year CDRs for Ashford University (roughly 99% of total enrollment) and the University of the Rockies for the FY2005, FY2006, and FY2007 student cohorts. As shown in Exhibit 1, while the three-year CDRs were higher than the respective two-year CDRs for both schools, the dilierence - especially for the FY2007 CDR at Ashford University - was not nearly as bad as anticipated, given the jump in Ashford's two-year FY2007 rate to 13.3% from 4.1%.
Exhibit 1. Bridgepoint Education Two-Year vs. Three-Year CDRs (FY2005-FY2007)

Ashford University University of the Rockies
4.1% 0.0% 4.1% 0.0% 13.3% 0.0%

8.8% 5.5% 6.1% 0.0% 17.4% 0.0%
FY2005
115% N.A.
%Cha nge FY2006

49% N.A.
FY2007
31% N.A.
N.A.- Not applicable. Source: Company reports and BMO Capital Markets
In the press release, the company stated that it expects its three-year CDR.s to be in compliance
when the three-year rates apply .in 2012, owing to "the investments we have made and the organizational changes we have instituted." Whi le there may be other for-profit providers that could have schools at risk of breaking the 30% threshold, we hope these schools will not be at risk of breaking that tltreshold for three consecutive years, at which time Title IV eligibility could be lost.
Page2
December 8. 2009
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$$1,6 50.6%
1069 tH 1
$8CU
47.1%
..,..
018
46.3%
$0.42 107
8 18
$U.S.3 -46,3%
66.1%
~HI;
69.0%
5A.3%
Marglnl% ofRevenun:
lnstructona4cosh ~servic.s MII>I\O;Eibno and promotoonl Gener.,t encf &dmnslretyt Adj. EBITOA Ml.rgln Adj. oper. mergln (bef. ttock.Oued eomp.) Stock-bes+.:l ~omPertStt>OI1 Operwtlng rn~tTgln (!).tore one-dme cnargee) Opetttlng m.rgln Pl"etU MII"IJin
T~r-6
33211. 38710 18 S11. 10.6% Sl.6 %
75 510 3&810 15001.

23.1% 21.9% 2-IJ% 21.9% 21.8%
212% 3<001. t8611o

20.3% 19.3%
30100 38<10
2*810
~11,.
18001.
11.6% 12.6%
3<5"
176,.. 22.9% 21.6% 2U% 8.5% 8.6% i.ll'.
73 510 .10800 tS:>!lo

31.7% 30.6%
75 510
78300
33.3% 32 ....
lei%
'"'"'
}.jlk
14$111, 22.8% 21 .4%

1$,$% 19.8% 19.8%
!27% 1'$2%
28.0% 26.7% 26.6% 16.2% 162%
3< ...
175% 23.4% 22.0%
74 610 30.,. 151%

30.9% 29.6%
2H10 28710
33.7% 32.3%
.....
26 5.. 373%
145% 23.3% 21.7%
25$11
32500 I~'~ 28.1% 2ii.7%
25.4 % 2&,. % 26.6%
14.~
3< 3..
174. 23.8% 22.2%
21,0% 21 .0% 21.0%
307.. 1SOI1o 31.3% 29.8%

28,8% 28.8% 28.8%
,.. ...
.w.
254% 281% 139% 34.1% 32.5%
265%
372%
144'23.8% 2U% 20.8% 20.8% 20.8%
2$"'
32 4 ~
159'1>
28.6% 28.9%
!U!l!t
t ,S%
9.6% 9A% ~ 10.2%
!U!lk
Netrnergin
Pel"untlge Cl'lange: Revenv lnsiJud:IOnaf COS!$ ..-.cJ StMCH ~ebno and prornot.onel
GenetaJeM&dmlt'lrStr&tNt Adj. ESITOA Adj. oper. lnc. ('bef. stock.Ond comp,J
lUti.
16.1%
1SI,3% 19.3% 19.6% ~ U .6%

1<1$,1%
111~ 117~
!!a
12,&'%
!U!lk
10.3% 10.4%
1,,0% 15.3%. 15.3%
.2.Q!k
!U!l!t
}.jlk
20......
......
1.7%
1.l.a
8 .2%
ll.J
12.1 ~ 164.~
;u.u.
1.1%
U%
116.4'4 100"--
30.& % 30.6% 30.6% ~ 11.5%
J..m
..1.b
~
20.6% 20.6% 20.5%
28,4%
.ull
31.2%
31.2% 31.2%
lJ.!l
28.4 % 28.-4%
20.A% 20.4 % 20.5%
.La
.ll!i
.1.l!.
31.6%
.w.
.lJ.lk
31.6%
UJ.!1
11.6%
~ -t.3%
104,6%
Wll.
11.8%
il..ll:.
16.3%
il..ll:.
43,4%
11.1%
Wll.
11.1%
l2J.lj,
183,3% 200,7% l-\S.I._. 11 ~3~ 1399'9tt 11-4$11. 144 ~ t49~~ $62,4% 12t2A%
687.2% 681.2% 587.2% 615.5% 672.9% NA
12U'% t<10
l315tlt
122.1%
111.3'4
N~
1$.4%
50~
t7f.Got.
$76.6% 976.6% 902.7% n32% N.A,
8,100
146~
a)2.t"
231l"-
..,. .,.
iiOS,.
ll$1~ 14.8-G~ 481~3%
9-l21111o
IOS3-
lOA..864tlt
1125,. 201,4%
t10%
60Q.. 111% 2At.O%
7\5tlt
603,. 247,0'4
7010
3$3~
245,0%
Operwtlng lncom (turor on-tlrne OpeMing Income Pl"etlx IncoMe Net Income Elming per share Oper.lno Metrlca: New studinlenrotll\tlll
~YtJaroveryeor change
ch~rgu)
246,0%
246.0% 258.6% 180.3% N,A
118-8% a33.n; 233.1"4

172.5% 198JS% 146.0% N.A.
1Tt.3%
739.1%. 870.8% 704.1% 20.~
nt.""
371.6% 38t.2Yo
388.7% 91.9% 96.7% .2.-4% 681,4%
2$2.0%
21)).$%
20SI.e%
11$,0% -83.5% <83.0%
-&1.3%
24$,to/. 233.2%
233.2'1. 232.0% 156.6% 4)5,8% 19,500
20.1%
15$2.;0%
14,800
181.6% 226.0% 244.8% 1.16.5% 2AI.4% 1l6.3% 151 .9% 67.1% N.A. 134.1 ~
63,2% fiU% 62-t% 587ft $28% Sl 111. 62 3% 506,.. $6,6% 41.1% 66.7% 47,1% $$,0% 48,2% 29U% 25-45.5% 291.3% 2486.4 % 316.8% 2072.1% 36.t % 32.8%
2001. 7001.
424* 45,0% 44,8% 46.6% -46.6% 46.2% 46.2% 42.A%
3$,6% 380% 381% 37"" 41.7%
47,8'%
473tt.
47SY..
8.4%
47,7~
= .....
27.611
31.5%
26.8% 26.8% 26,8%

U.$%
i.J..l
12.0%
!.Ullo
1$.6%
!.Ullo
1$,1%
!.l.Zll>
11-t%
21.6%
S.U%
$4&10 $4 400
32.0% J20% 316%

3119b 3!,8% 32.t%
2t,3% 703..
30.7...
215%
271%
789..
28.9b
3G.1%
V .S%
~%
).4%
42,8% 42.8%
42.9% -41.4% 40.0% 12.328
,.,...
266.. 2t.t %
30210 ,...,.
32.$% 31,f% .32.7%
.32.7".4 32.6% 32.6%
30.610
2U%
41,1%
132~1%
V .t %
37.9% 37.6% 37.6%
3S.t %
33.9% 33.7% 33.7% 32.4%
30.t%
30.9% 30.7% 30.7%
u .e%
1.32.1% 132.1%
29.8% 29.6% 29.6%
3-5..1~
1JJJm
~t.)IO
$10.~ 0$~
31$,3%
2t. %
30,079 703..
Q4 .7~
28.2'4
14,5-19
.31.2%
EndongS!udrti
~ ye.ar-over)'ear Cf\angtt
8.84l 19$610 10.509

18-46,.. $1,424
12,600 30,547 $2,268
2'U07
160 ...
137""
l.i02~ 14~
1053tlt
......
3S','nS 1421K
ReYenun per 8\l&raoe st.roenl

,.ytM-4\Ier)'881"ctlii'IOEI AdJ Q1loer profit Ptl' everog9 stvoent
1itYtJar-overYt* thenge
HM .NotMoeanlnQIUI H~ .Nc>t ......611&1ie SOue BMOC.apldl~~atldc~erepocu
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$2,226
95~
26,MS
110000 42,02S
1154 .. $2,29t SS,.
.......
60:100
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155.1~
~1 5~
$9,882
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1773 .. 0 111ft
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5<810 5<.894
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9,764
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53210
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,... ,
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Bridgepoint Education ( BPI) Quarterly Cash Flow Statement (2008-2011 E)
~
~
W ~OM. .o.cepc per Share oab!l}

1Q08
2008
~Qos
3Q08
S8.7
4Q08 S5.7 4.7 (1.2) (0.0) 1.9 0.0
Cash tlows from operating acclvtdes Net incomaf(loss) , .....,. . (' bod dtbe$
Depreciation a.nd amortizlllion Deferred income taxes
l2!?!
$26.A
13.4 2,5 (3.3 ) 1.8
.!Q22A
$3.9 4.5
2009E ~ ~ 51.3 4.6 1.4 (11.8) 32.0 0.0 J.JI 44.2 (4.8) (1.5) (16.3) 3!>.4 (0.0)
$22.4 6.8 1.7 0.7 1.9 (0.0)
2010
!92!
$14.2 6.6 1.7 (1.4) 1.9 (6.6)
~
$41.8 22.5 5.9 {12.6) 35.9 4.0
106.1
l!ill
S27A 9.0 2.2 (14.0) 2.0 (9.0)
~
S32.7 9.7 2.5 (6.7) 2.1 (9.7) ~ 45.9 (9.8) 0.0
~
S96~4
.19.!!
$22.3 9.9 3.1 (7.7) 2.2 (9.9)
Zii
S36.6 11.9 3.4 (17.9) 2.2 (11.9)
201 1E
@!
!!ill
$26.1 11.7 4.1 20.8 2.3 (11.7) (tzl 48.8 (11 .9) 0.0
( 11 .~)
l2ill.
$127.7 46.0
14.4
0
0
:s:
::;:
~
0:1
54.0 1.7 1.1
Stoekbutd comptnution
Othef non-ope.rafing itemsJnon--c-as.h charges Changes in operating assets and liabilties Net cash (U$ed ln)lprovlded by operating ac:tlvitin
0.0
S8.0 3 .6 (0.1) (3.9) 0.1 0.0 16.5 (1.8)
3.6
2.7 0.7 (0,1) 0.0
1.1
(0.1) 0.0 10.6
JIJI
.a.!l
tZ4l
8.2
(4.2)
~ ( 1.6)
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u 3U
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(IU)
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$16.2 7.3 2.0 (2.6) 2.0 (7.3 ) ~ 23.0 (7.6) 0.0
.w. 30.7
520.1 9.2 2.8 15.7 2.1 (9.2)
35;2 9.5 (7.6) 8.2 (35.2)
lUl
3U (9,3) 0.0
(~.3)
;uJ!
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.w.
38.3
(10.1) 0.0 (10.1) 28.2 0.0
u 30.0
$42.7 12.6 3.8 (1.7) 2.3 {12.6)
(7.4) 9.1
(46.0)
"0
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58.2
(12.8) 0.0 (12.8)
175,3
:lU
CMh nows from Investing activities Clpfttl tXptnditurH hq.~isitions of businesses, net ether investing activities
:s: I
~
(15.8) 0.0
Net cuh (used ln)fprovlded by lnveitlng acdvttle~ Fmeashnow
0.0
JIJI
(2.5)
Wl
(12.A) 30.0 12.2
Ul
l1Zl
(16.6) 55.3 (5.1)
!JIJil.
(7.2)
25.1
LlJIJII.
(4.8) 0.0 ~ {39.1) 3U (0. 1) (0.7) (0.5)

~
(7.4) 0.0
!JIJil.
(7.5) (17.0) 1.5 (0.5)
(74.3) (1.6) ~ (10.1)
(9.1) 0.0
(12.1) 0.0 (12.1)

18.0
(46.9)
o.o
... :II:"
....
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!JIJil.
(7.5) 15.6 0.0
!JIJil.
(~. 1 )
!JIJil.
(9.9)
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!JIJil.
(35.9) 102.7 (0.3)
!JIJil.
!JIJil.
!JIJil.
JIJI
(46-V) 128.4
(0.0)
!JIJil
6.8 0.0 0.0 6.8
14.6
(3.0)
4.0 (14.3) ~ 11s.n {12.1) 25.1
81.0
1.3
21 .6 0.0
36.0 0.0
29.5 (0.3)
45.3
0.0 (2.3) 43.0 229.6
36.9 (0.0)
(2.4)
Cnh tlows from ftnanc:lng acdvttJn

lncreasesl(decreases) in debt lne-rtuts/(d4CfNSU) in t~ity Net cash (us;ed ln)lprovlded by nnandng actlvltln
(0.1)
JIJI
~
,0.2
(3.0) 11.0
16.15
i.i
Wl
49. 1
~
(5.15)
a&
(2.4)
22.6
Net Change In eash and cam tqufvafents

Cash and Cash E~ivalents, BeginningofPEf'lod
..
~
0.0 (2.2) 15.7 213.9 ~
Wl
u.il
!JIJil. 1.3
3 7."
a&
(2.0) 13.5 93.9 ~
a.o.l
(2.0) 19.5 107A
lUI
(2.1)
lUI
(2.5)
27.1 160.8
!l:l
(8.6)
94.0
!Ul
(2.l)
26.1 187.9
WI
t.Ul
t.Ul
(iJl
(9.1)
119.3
O.h ondC..h E"'lvllont$. Endor~riod

""~
Pl .
MW~el'SMldCorpGI.il!ct@O-f!S
lliJ.
.ill m.J.
44.0 13.0
lli.Q
ill.Q
1.!
56.5
32.7 79.1
(17.5)
33.9
126.9
34.5
272.7 ~
m.1
illU
.1.!.L!
m.
.1J.1d
56.5 m.
lliU lli2&
1!U.
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ru
ruu
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2.
BMO Capital Markets
BRIDGEPOINT ED INC (BPI)

Quarterly Price (US$) 30 Target Price(US$) Share Price(US$) 30
25
25
20
15
10
fn
1)0P BPI Relative to S&P 500 BPI Relative to Diversified Consumer Services
20
15
10
BPI Relative to S&P 500 BPI Relative to Diversified Consumer Serv1 ces 150 140 130 120 110 100 1980 150 140 130 120 110
180 160 140 120 100 80 2007
180 160
1985
1990
1995
2000
2005
100
~ A' \~
+.t'
2008 2009
140 120 100 80
D
-
0.01
1980
1985
1990
-0.01
1995
2000
2005
:
[
....
BPI Relative to S&P 500 YIY (%) BPI Relative to Diversified Consumer Services YIY (%)
2007
2008
2009
1 :
BPI- Rating as of 15-Apr-09 Date 26-May-09
=NR
Share Price $12.10
Rating Change NR to OP
Page 5
December 8. 2009
Analyst's Cettification I, Jeffrey M. Silber. hereby certify that the views expressed in this report accurately renee! my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets Corp, BMO Nesbitt Bums, and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and convincing clients to act on them, performance of recommendations, accuracy of earnings estimates, and service to clients. Company Specific Disclos ure BMO Capital Markets Corp. has provided advice for a fee with respect to this company within the past 12 months: No BMO Capital Markets Corp. has undertaken an underwriting liability with respect to this company withi n the past 12 months: Yes BMO Capital Markets Corp. has provided investment banking services with respect to the company within the past 12 months: Yes BMO Capital Ma rkets Corp. or its a!liliates owns J% or more of any class of common equity securities of the company: No BMO Capital Markets Corp. or its afllliates makes a market in the security: No BMO Capital Ma rkets Corp. or its affiliates managed or co-managed a public offering of securities of the company in the past 12 months: Yes BMO Capital Markets Corp. or its aftlliates received compensation for investment banking services from the company in the past \2 months: Yes BMO Capital Markets Corp. or its afJiliates or its oflicers own warrants or options: No Company is a client (or was a client) ofBMO Capital Markets Corp. or an affi liate withi n the past 12 months: Yes, for investment banking services Employee, oflicer, or director ofBMO Capital Markets Corp. is a member oft he Board of Directors or an advisor or officer of this company: No A member of the Board ofDirectors of Bank of Montreal is also a member of the Board of Directors or is an officer of this company: No Analyst and/or associate who prepared this report is a member of the Board of Directors of this company or an advisor or oflicer of this company: No A household member of the research analyst and/or associate who prepared this report is a member of the Boa.rd of Di rectors of this company or an advisor or officer of this company: No Analyst or associate who prepared this report or member of household of analyst or associate owns shares: No Analyst or associate who prepared this report or member of household of analyst or associate owns warrants/options: No BMO Capital Markets Corp. or its aftlliates expects to receive or intends to seek compensation for investment banking services from the company in the next three months: No Analyst received compensation from the company in the past year: No BMO Capital Ma rkets Corp. or its alliliates received compensation for products or services other than Investment Banking Services from the company in the past 12 months: No Methodology and Risks to Our Pl'icc Ta1get Methodology: PE, EVIEBTIDA, DCF Risks: Increased government regulation, intensifying competition Breakdown of Ratin g Distribution and Banking C lients
(As of September 30 , 2009) Buy % of total BMO Capital Markets Corp . coverage within rating category 29 . 1% % of stocks within rating category for which the firm provided banking services over the past 12 months 12 . 8% Hold 64 . 1% 9 . 8% Sell 6 . 8% 0 . 0% Unrated 0 . 0% 0 . 0%
BMO Capital Markets Corp. Rating System OP =Outperform: We believe the stock' s total return, including dividends, will exceed the S&P 500's return by more than 15%. Mkt = Markl't Pcrfotm : We believe the stock's total return will generally match tl1at of the S&P 500. Und = Undetpcrform: We believe the stock's total return wi II fall short of the S&P 500's return by more than 15%. NR = Not rated. (R) =Restricted: Dissemination of research is currently restricted. In addition. apart from our stock ratings. we apply the Speculative investment (S) postscript to those companies that have de minimis revenue and whose enterprise l'alue appears to be contingent upon unprovable assumptions (e.g. . the future approval of a drug or the successful completion of an oil well). SECTOR RATINGS OUTPERFORM- We believe the sector will outperform the S&P 500 Index. MARKET PERFORM - We believe the sector's retum wi ll generally match that of the S&P 500. UNDERPERFORM- We believe the sector will underpertonn the S&P 500 Index. Pdot BMO Capital Markets Corp. Rating System (ptio to June 19, 2006) Our rating system prior to June 19. 2006. compared a stock's expected performance with that of an index of comparable companies over a 9-15 month horizon. Our sector ratings were based on the expected performance of the sector compared with that of a broader market index over the same time period. Additionally, before June 19, 2006, we did not use the (S)-Speculative postscript. PRIOR STOCK RATINGS OUTPERFORM- We believe the stock's total return, including dividends, will exceed the group average by over 15%. NEUTRAL- We believe the stock's total return will generally match the group average.
Page 6
December 8, 2009
BMO Capital Markets
Bridgepoint Educatio n
UND ERPERFORM- We believe the stock's total return v fall short of the group average by more than 15%. vill PRI OR SECTOR RAT I NGS POSITIVE- We believe the sector will outperform the S&P 500 Index. NEGATlVE- We believe the sector wi llunderperform the S&P 500 Index. Other Important Disclosu1 es For more specific information, please refer to http://research-us.bmocapitalmarkets.com. For Important Disclosures on the stocks discussed in this report. please go to http://research us.bmocm.com/Company_Disclosure_Public.asp, or write to Editorial Department, BMO Capital Markets. 3 Times Square, New York, NY 10036. Dissemination of Research BMO Capital Markets Equity Research is avai lable via our web site http://research-us.bmocapitalmarkets.com. Please contact yo ur investment advisor or institutional salesperson for more information. Institutional clients may also receive our research via FIRST CALL Research Direct and Reuters. All of our research is made widely available at the same time to all BMO Capital Markets Corp. client groups entitled to our research. Conflict Statement A general description of how BMO Financial Group identifies and manages conflicts of interest is contained in our public facing policy for managing conllicts of interest in connection with investment research. which is available at http://research-us.bmocapitalmarkets.com/Conllict_Statement_Public.asp. Ge ner a l Disclaime The information and opinions in this report were prepared by BMO Capital Markets Corp. BMO Capital Markets Corp. is an affiliate ofBMO Nesbitt B urns Inc. and BMO Nesbil1 Bums Ltee!Ltd. in Canada (collectively " BMO Nesbitt B urns"). and BMO Capital Markets Ltd in the U nited Kingdom. This information is not intended to be used as the primary basis of investment decisions, and because of individual client objectives it should not be construed as advice designed to meet the particular investment needs of any investor. Tllis material is tor information purposes only and is not an olicr or solicitation with respect to the purchase or sale of any security. The reader should assume that BMO Capital Markets Corp., BMO Nesbitt Burns, BMO Capital Markets Ltd., or their affiliates may have a conflict of interest and should not rely solel y on this report in evaluating whether or not to buy or sell securities of issuers discussed herein. The opinions, estimates, and projections contained in this report are those of BMO Capital Markets Corp. as of the date of this report and are subject to change without notice. BMO Capital Markets Corp. endeavors to ensure that the contents have been compiled or derived from so urces that we believe are reliable and contain information and opinions that are accurate and complete. .However. .BMO Capital Markets Corp. makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein, and accepts no liability whatsoever for any loss arising from any use or, or reliance on, this report or its contents. Infom1ation may be available to BMO Capital Markets Corp. , 13MO Nesbitt .Burns, BMO Capital Markets Ltd., ()r its affi liates that is not reflected in this report. This report is not to be construed as an offer or solicitation to buy or sell any security. BMO Capital Markets Corp., BMO Nesbitt Burns, BMO Capital Markets Ltd., or their a!liliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. .BMO Capital Markets Corp., BMO Nesbitt Bums, and BMO Capital Markets Ltd. are subsidiaries of Bank of Montreal. Additional Matters To Canadian Residents: BMO Nesbitt Burns Inc. and BMO Nesbit1 Burns Ltee!Ltd., affiliates of BMO Capital Markets Corp .. furnish this report to Canadian residents and accept responsibility for the contents herein subject to the terms set out above. Any Canadian person wishing to etfect transactions in any of the securities included in this report should do so through BMO Nesbitt B urns Inc. and/or BMO Nesbitt Burns LteefLtd. This research is not prepared subject to Canadian disclosure requirements applicable to BMO Nesbitt Burns Inc. To UK residents: The contents hereof arc intended solely for the usc of: and may only be issued or passed on to, (i) persons who have professional experience in matters relating to investments falling within article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the " Order") or (ii) high net worth entities falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as " relevant persons"). The contents hereof are not intended for the use of, and may not be issued or passed on to, retail clients.
ADDITION AL INFORMATION IS AVAILABLE UPON REQUEST BMO Financial Group (NYSE, TSX: BMO) is an integrated financial services provider offering a range of retail banking, wealth management, and investment and corporate banking products. BMO serves Canadian retail clients through BMO Bank of Montreal and BMO Nesbitt Bums. In the United States, retail clients are served through Harris N.A. Investment and corporate banking services are provided in Canada and the US through BMO Capital Markets. BMO Capital Markets is a trade name used by the Bank of Montreal investment banking group, which includes Bank of Montreal, BMO Nesbitt Burns Inc., and BMO Nesbitt Burns Ltee/Ltd. in Canada and BMO Capital Markets Corp. ln the US. BMO Capital Markets Corp. ls a member of SIPC. BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltee/Ltd. are members of CIPF. "Nesbitt Burns" is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under license. "BMO Capital Markets" is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license. COPYRIGHT 2009 BMO CAPITAL MARKETS CORP.
A member ofBMO
Financial Group
Page 7
December 8, 2009
W
Tuesday, December 8, 2009
BMO
Capital Markets
U.S.
Lincoln Educational Services (Outperform)

(LI NC-NASDAQ)
Enters New Credit Agreement

Flash:
Last night, LJNC released an 8K disclosing that it had entered into a new $115 million credt agreement etTective December 1, 2009, and maturing on December 1, 2010. Our View:
* *
*
Tile agreement includes a $5 million swing line and a $25 million letter of credit sub limit, ani replaces the previous $100 million agreement, which was due to expire Febntary 15, 20 l 0. Under the Credit Agreement, the company may increase the aggregate amount available by up to $60 million upon satisfaction ofcertain conditions. The faci lity wi ll bear interest of either an adjusted interest rate based on LIBOR, or a "base rate" (the highest of the prime rate, the federa11i.mds rate plus 0.50%, or a daily rate equal to one-month of the euro doUar rate plus 1.0%) plus an applicable margin of I .50%-3.25% base:! upon changes in LINC' s consolidated leverage ratio and whether the company has chosen the euro dollar rate or the base rate option. Interest on the previous agreement was adj usted to LIB OR p lus 1.0%-1.75% or a base rate. Outstanding letters of credit as of December I, 2009, were roughly $5.6 million and wi ll be treated as letters of credit under the new agreement. LINC's total debt as of the end of 3Q09 was $37.4 million. We view the new facility as prudent liquidity management and maintain our OUTPERFORM rating.
* * *
' company: Price/Rating/Target: Sector Name: Analyst: Email: Associate: Email:
Lincoln Educational Services (LI NC) $20. 72/0utperform/$30.00 Education Jeffrey M. Silber 212-885-4063 jeff. silber@bmo.com Paul Condra 212-885-4176 pau I. condra@bmo.com
Please refer to pages 2 to 5 for Disclosure Statements, including the Analyst's Certification.
Flash
BMO Capital Markets

Quarterly Price (US$) 35 24 22 20 18 20 16 15 14 12 10 LING Relatwe to S&P 500 LING Relative to Diversified Consumer Services 140 120 100 80 60 1980 1985
<E-
Target Price(US$) Share Price(US$)
35 30 25 20 15 10
30 25
10
1)0P
5 LING Relative to s&P 500 LING Relative to Diversified Consumer Services
:~::
'
140 120
300 250 200 100 150 80 100
300
60
1990 1995 2000 50 LING Relative to s&P 500 Y/Y (%) LING Relative to Diversified Consumer Services Y/Y (%)
D
-
~[
1980 1985
EPS (4 Qtr Trailing)- (US$) Price I Earnings
2007
2008
.~l-200
2009
200
LING - Rating as of 27 -Dec-06 Date 12-Jan-09
=Mkt
Share Price $11.47
Rating Change Mkt to OP
Last Daily Data Point: December 7. 2009
Flash Page 2
Flash Important Disclosures
BMO Capital Markets
Analyst's Certification I, Jeffrey M. Silber, hereby certifY that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. l also certifY that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report. Analysts who prepnred this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets Corp, BMO Nesbitt Burns, and their aftiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and convincing clients to act on them, performance of recommendations, accuracy of earnings estimates, and service to clients. Compa ny Specific Disclosure BMO Capital Markets Corp. has provided ndvice for a fee with respect to this company within the past 12 months: No BMO Capi tal Markets Corp. has undertaken an underwriting liab ility with respect to this company within the past l2 months: Yes BMO Capital Markets Corp. has provided investment banking services with respect to the company within the past 12 months: Yes BMO Capital Markets Corp. or its affiliates owns I% or more of any class of common equity securities of the company: No BMO Capital Markets Corp. or its affiliates makes a market in the security: Yes BMO Capital Markets Corp. or its affi liates managed or co-managed a public offering of securities of the company in the past 12 months: Yes BMO Capital Markets Corp. or its affil iates received compensation for investment banking services from the company in the past 12 months: Yes BMO Capital Markets Corp. or its affilia tes or its officers own warrants or options: No Company is a client (or was a client) ofBMO Capital Markets Corp. or an affi liate witb.io the past 12 months: Yes, for investment banking services and non-securities services Employee, officer, or d irector of BMO Capital Markets Corp. is a member of the Board of Directors or an advisor or officer of this company: No A member of the Board of Directors of Bank of Montreal is also a member of the Board of Directors or is an officer of this company: No Analyst and/or associate who prepared th is report is a member of the Board of Directors of this company or an advisor or office r of this company: No A household member of the research analyst amVor associate who prepared this report is a member of the Board of Directors of this company or an advisor or ofticer of this company: No Analyst or associate who prepared U1is report or member of household of analyst or associate o'"'11S shares: No Analyst or associate who prepared U1is report or member of household of analyst or associate OI\>1\S warrants/options: No BMO Capital Ma rkets Corp. or its affi liates expects to receive or intends to seek compensation for in vestment banking services from the company in the next three months : No Analyst rece ived compensation from the company in the past year: No BMO Capital Markets Corp. or its affiliates received compensation for products or services other than investment Banking Services from the company in the past 12 months : Yes Methodology and Risks to Our Price T a rget Methodology: Average offorward looking PIE, forward looking EV/EBITDA and Discounted Cash Flow Risks: Worse than expected enrollment trends, weakness in automotive worker environment, New England Institute expansion Breakdown of R:ttin g Distribution a nd Banking C lients
(As of September 30, 2009 ) Buy Hold Sell Unrated % of t ota l BM Capi tal Markets Corp . coverage withi n O rati ng category 29 . 1% 64 . 1 % 6 . 8% 0 . 0% % of stocks withi n rating cat egor y fo r which the Fi rm provi ded banki ng servi ces over the past 12 months 12 . 8% 9 . 8% 0.0% 0 . 0% BMO C:tpital Markets Corp. Rating System OP = Out1>erform: We believe the stock's total return, includi ng dividends. will exceed the S&P 500's return by more th an 15%. Mkt = Market Perform : We believe the stock's total return will generally match that of the S&P 500. Und = Underperform : We believe the stock 's total return will fa ll short of the S&P 500's return by more than 15%. NR =Not rated. (R) = Restricted: Dissemination of research is currently restricted. In addition, apart from our stock ratings, we apply the Speculative investment (!:>) postscript to those companies that have de minimis revenue and whose ente1prise value appears to be contingent upon unprovable assumptions (e.g. , the future approval of a drug or the successful completion ofan oil well). SECTOR RA T lNGS OUTPERFORM - We believe the sector 1vi ll outperform the S&P 500 Index. MARKET PERFORM- We believe the sector's return will generall y match that of the S&P 500. UN DERPERFORM - We believe the sector wi ll underperform the S&P 500 Index.
Flash Page 3
Flash
BMO Capital Markets
Prior BMO Cap itnl Mar kets Cor p. Ra ting System (prior to June 19, 2006) Our rating system prior to June 19, 2006, compared a stocks expected performance with that of an index of comparable companies over a 9-15 month horizon. Our sector ratings were based on the expected perfonnance of the sector compared with that of a broader market index over the same time period. Additionally, before June 19, 2006, we did not use the (S)-Speculative postscript P R IOR ST OCK RATI NGS OUTPERFORM- We believe the stock"s total return, including dividends, will exceed the group average by over 15%. N~EUTRA L - We believe the stock's total return will generally match the group average. UNDERPER FORM- We believe the stock"s total return will fall short of the group average by more than 15%. PRIOR SECTOR RA TlNGS POS ITI VE- We believe the sector will outperform the S&P 500 Index~ NEGATI VE- We believe the sector will underperform the S&P 500 Index~ O t her Impo r ta nt D isclosures Our analysts use various valuation methodologies including discounted cash flow, price/earnings (P/E), enterprise value/EBLTOA, and P/E to growth rate, among others. Risks to our price targets include failure to achjevc financial results, product risk, regulatory risk, general market conditions, and the risk of a change in economic conditions. For more specific information, please refer to http://research-us~ bmocapitalmarkets~com~ For Important Disclosures on the stocks discussed in this report, please go to http://research-us.bmocm.com/Company_Disclosure_Public.asp, or write to Editorial Department, BMO Capital Markets, 3 Times Square, New York, NY 10036. Disseminatio n of Research BMO Capital Markets Eq uity Research is available via our web s ite http://research-us~bmocm~com~ Please contact yo ur investment advisor or institutional salesperson for more information. Institutional clients may also receive our research via FIRST CALL Research Direct and Reuters~
All of ow research is made widely avajJable at the same time to all BMO Capital Markets Corp. client groups entitled to our research.
Conflict Statem ent A general description of how BMO Financial Group identifies and manages con11icts of interest is contained in our public facing policy for managing conflicts of interest in connection with investment research, which is available at http://researchus~bmocapi ta !markets~ com/Conflict_ Statement_ Pub Iic~asp~ Ge ner a l Disclaimer The information and opinions in this report were prepared by BMO Capital Markets Corp. BMO Capital Markets Corp. is an affiliate ofBMO Nesbitt Bums Inc. and BMO Nesbitt Bums Ltee/Lld~ in Canada (collectively '"BMO Nesbitt Bums'"), and BMO Capital Markets Ltd in the United Kingdom~ This information is not intended to be used as the primary basis of investmen t decisions, and because of individual client objectives it should not be construed as advice designed to meet the particular investment needs of any investor. This material is for information purposes only and is not an offer or solicitation with respect to the purchase or sale of any security. The reader should assume that BMO Capital Markets Corp~ , BMO Nesbitt Burns, BMO Capital Markets Ltd., or their affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein. The opinions, estimates, and projections contaLned in this report are those of BMO Capital Markets Corp. as of the date of this report and are subject to change without notice. BMO Capital Markets Corp. endeavors to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete~ However, BMO Capital Markets Corp~ makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions contained herein, and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents~ Information may be available to BMO Capital Markets Corp~ , BMO Nesbitt Burns, BMO Capital Markets Ltd~ , or its amliates that is not reflected in this report. This report is not to be construed as ::~n offer or solicitation to buy or sell any security~ BMO Capital Markets Corp., BMO Nesbitt Bums, BMO Capital Markets Ltd., or their affiliates will buy from or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO Capital Markets Corp., BMO Nesbitt Bums, and BMO Capital Markets Ltd. are subsidiaries of Bank of Montreal. Add itiona l Matter s To Canadian Residents: BMO Nesbitt Bums lnc. and BMO Nesbitt Bums Ltce/Ltd., affiliates of BMO Capital Markets Corp., furnish this report to Canadian residents and accept responsibility for the contents herein subject to the terms set out above~ Any Canadian person wishing to effect transactions in any of the securities included in this report should do so through BMO Nesbitt Bums Inc. and/or BMO Nesbitt Bums Ltee/Ltd. Thjs research is not prepared subject to Canadian disclosure requirements applicable to BMO Nesbitt Bums Lnc. To UK residents: The contents hereof are intended solely for the use of, and may only be issued or passed on to, (i) persons who have professional experience in matters relating to investments falling within article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order'') or (ii) high net worth entities fa lling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as "relevant persons"'). The contents hereof are not intended for the use of, and may not be issued or passed on to. retail clients~
Flash Page 4
Flash
BMO Capital Markets
AD DITI ONAL INFORMATION IS AVAILABLE UPON REQUEST BMO Financial Group (NYSE, TSX: BMO) is an integrated financial services provider offering a range of retail banking, wealth management, and investment and corporate banking products. BMO serves Canadian retail clients through BMO Bank of Montreal and BMO Nesbitt Burns. In the United States. retail clients are served through Harris N.A. Investment and corporate banking services are provided in Canada and the US through BMO Capital Markets. BMO Capital Markets is a trade name used by the Bank of Montreal investment banking group, which includes Bank of Montreal, BMO Nesbitt Burns Inc., and BMO Nesbitt Burns Ltee/Ltd. in Canada and BMO Capital Markets Corp. in the US. BMO Capital Markets Corp. is a member of SIP C. BMO Nesbitt Burns Inc. and BMO Nesbitt Burns Ltee/Ltd. are members of CIPF. "Nesbitt Burns" is a registered trademark of BMO Nesbitt Burns Corporation Limited, used under license. ''BMO Capital Markets" is a trademark of Bank of Montreal, used under license. "BMO (M-Bar roundel symbol)" is a registered trademark of Bank of Montreal, used under license. COPYRIGHT 2009 BMO C APITAL MARKETS CORP.
A member of B M O
Finan cial Group
Flash Page 5
BMO
Capital Markets
I U.S.
Education
December 10, 2009

(UTI-NYSE)
Stock Rating : Outperform Industry Rating: Outperform
Jeffrey M. Silber
212-885-4063
jeff.silber@bmo.com
Paul Condra
212-885-4176
paul.condra@bmo.com
UTI Releases Three -Year CDRs, Below Regulatory Limits

Event
On Wednesday after the close, UTI released its unofficial three-year cohort default rates (CDRs). For its three reporting schools, three-year CDRs for the FY2005. FY2006. and FY2007 cohorts ranged from 11.9%-17.5%. 14.1%18.8%, and 13.5cYo-14.1%, respectively. This compares wiU1 two-year CDRs of 4.7%-7%, 6.5%-8%, and 6.2%-6.8%, respectively.
Securities Info
Price (9-Dec) 52-VIA< High/low MktCap (mm) Shs 0/S (mm, BASIC) Options 0/S (mm) $18.57 $21/$9
$443
23.8 na
Target Price Dividend Yield Float (mm) ADVol (25-day, OOOs)
$25
as
19.5
138
Price Performance
WIViFSAL 'reQIHICAL IIISl DfC { tll'I}
Impact
On Monday, December 7, these rates were provided to the institutions for infonnational purposes only: they will be released to the public on Monday, December 14. We believe UTI released this data, as it was not as bad as some may have anticipated, with three-year rates well below the regulatory threshold of 30%. Additionally, current (FY2007) three-year rates did not exceed the 15% threshold, above which Title IV disbursements are delayed. As t11ree-year rates trickle in (rates for all schools will be released tlus Monday), we believe that, in general, they may not be as frighteningly large as some were expecting. Still. we would not be surprised to see some schools approach and/or surpass regulatory thresholds
::I,,,, tltillllllilI~~ ~ ~~~~~!J~~ ~~~~~~~~~~~~~~~~~~.l~llli I: --~

dol! I :
2005 2005 2007 2005
l&i
20
2009
te~a Pbm
Oecemb8' 0. 2C09:
(FY-Sep.) EPSGAAP PiE Rrst Call Cons. FCF P/FCF EBITDA ($mm) EVIEB11DA Rev . ($mm) EVIRev Quarterly EPS 2009A 2010E 2008A $0,32 2009A $0.48 2010E $0.89 20.9x
~11E
$1 .21 15.3x
$(188
$0.13 $34 $344 1Q $0.09 $024 $0.84 $41 $367 2Q $0.00 $0.14 $1.51 12.3x $61 6.5x $424 0.9x 3Q $008 $0.12
$1.15
$1.93 9.6x $76 5.2x
Forecasts
We maintain our current estimates.
$484
0.8x 4Q $0.32 $0.39 nm na 4.5x
Valuation
UTI closed last night at roughly l9.4x our CY2010 EPS estimate. a premium to the peer group median of roughly 16.4x.
Balance Sheet Data (06/30/09) -$47 NEt Debt ($mm) Total Debt ($mm) $0 NEt Debt/Cap. nm
T ctaiDebtiEBITDA EBITDA/IntExp Prioe/ Bod<
Recommendation
We maintain our OUTPERFORM rating.
Nctes: All values in US$. Souroe: BMO Capital l\llarkets estimates, Bloomberg, FactSet, Global Insight, Reuters, and Thomson Financial.
BMO Capital Markets
ABOUT THREE-YEAR RATES

On Monday, December 7, 2009, the Department of Education (ED) published three-year CDRs for FY2005, FY2006, and FY2007 (for example, the trial FY2005 CDRs measures students who entered repayment on their loan between October 1, 2004, ru1d September 30, 2005, and subsequently defaulted on or before September 30, 2007). The unofficial data was only made available to the schools for informational purposes as three-year rates will eventually replace the current two-year rates. The ED will make the three-year CDRs public on Monday, December 14, 2009, on the Federal Student Aid Data Center: http://www.fsadatacenter.ed.gov/. The three-year rates will become official in 2012, when FY2009 CDRs are published. ln 2012 and 2013, two-year rates will be published concurrently with three-year rates until 2014, when on ly three-year rates will be published as this wi ll rullOtmt to three sets of official data (FY2009, FY201 0 ru1d FY2011 ). For more detail on CDRs, see our note published September 15, 2009. On Wednesday, after the close, UTI released its unofficial three-year CDRs for its three reporting schools for the FY2005, FY2006, and FY2007 student cohorts. As shown in Exhibit l, whiJe the three-year CDRs were considerably higher thru1 two-year CDRs for each school, three-year rates were still well below the revised 30% threshold. Additionally, current year (FY2007) three-year rates were below the 15% threshold, above which Title IV disbursements are delayed (this was revised up from 10% under two-year rates). We have included the threeyear rates for the other schools that have disclosed them.
Exhibit 1. Two-Year vs. Three-Year CDRs for Select Postsecondary Institutions (FY2005-FY2007)
2-Year CDRs FY2005 FY2006 FY2007 3-Year CDRs FY2005 FY2006 FY2007 8.8% 5.5% 21 .1% 11 .9% 15.0% 17.5% 6.1% 0.0% 24.4% 14.1% 17.3% 18.8% 17.4% 0.0% 25.7% 13.5% 14.1% 13.7% FY2005 115% N.A 142% 153% 114% 224% %Change FY2006 49% N.A 98% 117% 125% 203% FY2007 31% N.A. 92% 108% 107% 71%
LOPE
Ashford University University of the Rockies LINC Weighted average UTI Arizona Phoenix Texas 4.1% 0.0% 8.7% 4.7% 7.0% 5.4% 4.1% 0.0% 12.3% 6.5% 7 .7% 6.2% 13.3% 0.0% 13.4% 6.5% 6.8% 8.0%
N.A. - Not applicable. Source: Company reports and BMO Capital Markets
So far only Lincoln (LTNC) has announced that some of its schools have exceeded the 30% threshold, with one in FY2005, two in FY2006, and three in FY2007 having done so. Additionally, one school exceeded tl1e 40% threshold (above which a school may become immediately ineligible to participate in Title IV) in FY2007. While there may be other for-profit providers that could have schools at risk of breaking the 30% threshold, we hope these schools will not be at risk of breaking tl1at threshold for three consecutive years, at which time Title IV eligibiJjty could be lost.
Page2
December 10. 2009
BMO Capital Markets

Other companies mentioned (priced as of the close on December 9, 2009) :
Grand Canyon (LOPE. $19.26. OUTPERFORM) Lincoln (LINC. $20.37. OUTPERFORM)
Page 3
December 10. 2009
'i:1 !:)>
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Universal Technical Institute (UTI) Quarterly In come Statement (FY08-FY11 E)

(Millions. except pet-share data}
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FY2009
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$90.0 46.0
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$0.32 24.1 $17.8 29.7% 10.9% 49.6% 37.0% 17.9% 13A% 12.3% 12.7%
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EPS (exc-luding one-time charges) Diluted shtnes outs.tanding Adjusted EBITOA (excludes stock-based tomp.) Retum on Equity (ROE)
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$0.02 25. 1 $6.1 2. 1% 7.1% 55.6% 42.3% 7.3% 2.0% 0.6% 1.1%
$0.32 25.8 $33.6 7.1% 54.2% 41 .2% 9.8% 4.7% 3.1% 4.1%
$0.09 25.5 $9.4 8.4% 3.4% 52.8 % 41.7% 10,4% 5.5% 4.0% 4.1%
~
$0.08 24.0 $8.2 8 .0% 4.6% 53.7% 41.8% 9.3% 4.4%
$0.14 24.2 $12.1 12. 1% 17.8% 53.8% 39.6% 11.7% 6.6% 5.4% 5.6%
~
$0.12 24.2 $11.3 10.0% 18. 3% 53.2% 40.9% 11.1% 5.9% 4.6% 4.8%
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sts.s
20.6% 51 .1% 37.8% 15.6% 11.1% 9.9% 10.1%
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Margin/% of Revenues Educational services and facilities Selling, gentral and admin.
Adju$ted EBITDA margin Opel'ating margin (exc st ock-bast'd comp.) .l. Operating margin (incl. stock-based comp.} Pretax margin Tax rate Net margin
Percentage Change
&A%
5.1% 5.3%
~
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3.5%
~
7.2% 0.6% 4.5% -0.7% .S.O% 11.6% -4.7% -6.2%
2.2% -3.8% 2.4% 9.0% -49.3% -75.9% .S8.8% -68.9% .S6.8% 2,829 6.2% 15,092 7.9% $5,841 4 .5% 5527 -44.9%
tu.l.
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0.7% 2.7% -0.6% -0.4% 24.9% 128.5% 190. 7% 141.7% 57.8%
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tu.l.
-0.1% 1.1% 4.3% 3.7% -30.2% 108.9% 102.6% 104.2% 104A% 3,381 19.5% 15,457 2.4% $5,768 1.3% 5360 -31.8%
2.6% 0.1% 3.4% 13.2% 38.6% -61.4% .S5.1% -64.5% -61.7% 3,319 6.2% 16,323 1.5% 55,521 1.6% $573 -37.7%
2. 2% 8.9% 2. 1% 6.5%
7.6% 17.6% 4.9% 2.7% 190.1% 2146.6% 1214.1% 1276.8% 1334.3%
3.2% 6.7% 3.7%
5.6% 16.0% 12.7% 6.7% 71.1% 166.0% 160,9% 154.5% 168.8% 3,786 14, 1% 18.569 13.8% $5,632 2.0% 5862 50.4%
3.4% 15.8% 13.7% 4.3% 11 7.2% 2839.9% 7187.7% 4427.3% 4490.8% 3,840 13.6% 17,555 13.6% 55,881 2.0% $688 91.3%
2.9% 15.7% 14.7% 13.1% 37.8% 58.0% 59,1% 52.5% 50. 7% 3,316 12.6% 16,809 13.5% $6,049 2.0% 5669 21.4%
8.2% 15.3% 12.9% 14.9% 23.2% 25.1% 23.5% 23.7% 22.5%
5.9% 14.5% 13.4% 14.8% 14.6% 20.5% 2M % 2D.4% 19.2% 4.243 12. 1% 20,853 12.3% $5,744 2.0% $879 2.0%
4.3% 13.9% 12.9% 8.9% 33.1% 72.6% 70.9% 70.9% 69.2% 3,684 11.1 % 18,778 11.7% $6,170 2.0% $798 19.2%
9.4% 13.4% 12.2% 8.7% 22.9% 30.8% 30. 7% 30.7% 29.4%
6.1% 14.0% 12.9% 10.8% 23.2% 36.6% 36.3% 36.3% 35.0%
Rtvenuu
Educational services and facilities SeiHng, general and admin. Adju ted EBITDA
Op ~radng Into me Pretax income
Net Income EPS (excluding one-time charges) Operating MetriC$

N'NI Stud~nts (sta.rts)
CW. yec.r-over-yee~r change Avet.1ge Srudents '4 ye;Jr~over..year change Revenues ptr Average Student (SOOO's) ~ ye~r..over-year cha. ge n EBITDA per Averoge Student (SOOO 'l % yt:ar. over-year change
1.3%
3,126 11.5% 16,576
-5.3% 0.6% 9.3% .S7.9% -125.1% 111.9% -118.8% 120.5% 2,225 0.5% 13,452 8. 1% $5,995 3.0% 5319 -65.1%
&A%
21.7% 74.3% 37.7% 42.8% 49.6%
90A%
307.6% 515.9% 365.6% 377.9% 2.946 32.4% 14,813 10. 1% $5.931 1.1% 5551 72.9%
47.2%
-52.3%
4 .0%
55,432 4.7% $9 19 -2.1%
6,939 15,f19 4.9% 2.1% 14,669 14,941 5.0% 5.8% $5,761 $22,988 2.4% 3.1% 5419 52,251 -33, 2% -20.9%
7,985 17,631 15. 1% 166% 16.905 15,854 6.1 % 15. 1% 55,888 $23,128 0.6% 2.2% 51,055 52,580 152.1% 14.7%
8,989 19,932 12.6% 13.0% 19,102 18,009 13.0% 13.6% $6,006 $23,557 1.9% 2.0% $1 ,150 $3.404 9.0% 31.9%
22,151 9,940 10,6% 11 .1% 21 ,228 20, 131 11 . 1% 11.8% 56,126 $24,026 2.0% 2.0% $1,272 53,751 10.S% 10.2%
N.M. Not Meanlngf!JI. NA. NOI Available. SOUr(t : BMO Capilli M.alii:ttS nCI corportlt rtports.
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llil12
$5.9 5.2 1.9 1.3 13.2
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BMO Capital Markets
UNIVERSAL TECHNICAL INST INC (UTI)

Quarterly Price (US$) 30 45 40 35 30 25 20 15 10 Target Price(US$) Share Price(US$)
30
45
40
35
30
25
25
20
20
25 20 15 10
15
15
10
10
120 100 80 60 40
120 100
150
150
100
80
60
40
1985 1990 1995 2000
50
" p-:.:~I -f\1 " \,~ ... ' ~ ,'... :1. . .. . r -.,, V'ii'1 ,_. ..., t-: 1.:-\ ...,. " . ''41 ' , .,,.,..,'
100
50
E__ ~[ ~~:';:-'-'-~~~~';:-'--'-'arllllDhr.J
1980
2007
2008
2009
~~ l"'o
-202ooo
I
1-.
"" """"""' o.-.., Co~~ "''"~

- -- - - =------1 - ----=1 1 2007 2008
UTI Relative to S&P 500 YfY (%)
1980
1985
1990
1995
2000
2005
;-.".====::: '
2009
YIY (%l
~
l.200
UTI - Rating as of 29-Dec-06 =Und. Date 9-May-07 25-Nov-08 Rating Change Und.to Mkt Mkt to OP Share Price $25.66 $15.00
1 2
Page6
December 10. 2009
BMO Capital Markets
GRAND CANYON ED INC (LOPE)

Quarterly Price (US$) 25 20 18 16 15 14 12 10 10 20 20 Ta rget Price(US$) Share Price(US$) 25
~
I I
I I
15
10
LOPE Relative to S&P 500 LOPE Re lative to Diversified Consumer Services 140 130 120 110 100 90 1980 1985 1990 1995 2000 2005 140 130 120 110 100 90
200 180 160 140 120 100
LOPE Relative to S&P 500 LOPE Relative to Diversified Consumer Services
200 180 160 140 120 100
..,....
0.5 [
'
D
-
80 ~~--20 0~~~~~~~~~ ~7 2008--~~~~~~~~~~ 00 2009 LOPE Re lative to S&P 500 Y/Y (%) LOPE Relative to Diversified Consumer Services Y/Y (%)
~]
:0
5: [
1980
1985
1990
1995
2000
2005
~~~~~1~~~-L~~~~I~~~~~~~~I~~~] ~
2007 2008 2009
LOPE- Rating as of 20-Nov-08 =NR Date 30-Dec-08 Rating Change NR to OP Share Price $18.00
Page 7
December 10, 2009
BMO Capital Markets

Quarterly Price (US$) 35 Target Price(US$) Share Prioe(US$)
35
LINC Relative to S&P 500 LINC Relative to Diversified Consumer Services
300 140 250 200 100 150 80 100 60 50

1
U NC Relative to S&P 500 U NC Relative to Diversified Consumer Services
300 250
140
120 100
80 60
1980 1985 1990 1995 2000
. ~ . I:~ f. .
'\
.":'
'
120
''\.
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200 150 100
. . ...
I
"'"
2007
2008
2009
50
~f
1980
LINC Relative to S&P 500 YfY (%) UNC Relative to Diversified Consumer Services YfY (%)
1985
'
1990
'
_ ::r
1995
2000
2007
: 1 : 1~ ] -200
2008 2009
200
U NC - Rating as of 29-0ec-06 = Mkt Date 12-Jan-09 Rating Change Mkt to OP Share Price $11.47
Page 8
December 10, 2009
Analyst's Ccttification I, Jeffrey M. Silber. hereby certify that the views expressed in this report accurately renee! my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets Corp, BMO Nesbitt Bums, and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and convincing clients to act on them, performance of recommendations, accuracy of earnings estimates, and service to clients. Company Specific Disclos ure for UTI BMO Capital Markets Corp. has provided advice for a fee with respect to this company within the past 12 months: No BMO Capital Markets Corp. has undertaken an underwriting liability with respect to this company withi n the past 12 months: No BMO Capital Markets Corp. has provided investment banking services with respect to the company within the past 12 months: No BMO Capital Ma rkets Corp. or its a!li liates owns J% or more of any class of common equity securities of the company: No BMO Capital Markets Corp. or its afllliates makes a market in the security: No BMO Capital Ma rkets Corp. or its affi liates managed or co-managed a public offering of securities of the company in the past 12 months: No BMO Capital Markets Corp. or its aftlliates received compensation for in vestment banking services from the company in the past \2 months: No BMO Capital Markets Corp. or its afJiliates or its officers own warrants or options: No Company is a client (or was a client) ofBMO Capital Markets Corp. or an affiliate within the past 12 months: No Employee, ofJicer, or director ofBMO Capital Markets Corp. is a member oft he Board of Directors or an advisor or officer of this company: No A member of the Board ofDirectors of Bank of Montreal is also a member of the Board of Directors or is an officer of this company: No Analyst and/or associate who prepared this report is a member of the Board of Directors of this company or an advisor or officer of this company: No A household member of the research analyst and/or associate who prepared this report is a member of the Boa.rd of Directors of this company or an advisor or officer of this company: No Analyst or associate who prepared this report or member of household of ana lyst or associate owns shares: No Analyst or associate who prepared this report or member of household of analyst or associate owns warrants/options: No BMO Capital Markets Corp. or its aftlliates expects to receive or intends to seek compensation for investment banking services from the company in the next three months: No Analyst received compensation from the company in the past year: No BMO Capital Ma rkets Corp. or its alliliates received compensation for products or services other than Investment Banking Services from the company in the past 12 months: No Methodology and Risks to Our Pl'ice Ta1gct Methodology: Average of forward looking PIE, forward looking EVIEBITDA and Discounted Cash Flow Risks: Worse than expected enrollment trends, weakness in automotive worker environment, risk of buyout Company Specific Disclosure for LOPE BMO Capital Ma rkets Corp. has provided advice for a fee with respect to this company within the past 12 months: No BMO Capital Markets Corp. has undertaken an underwriting liabi lity with respect to this company within the past 12 months: Yes BMO Capital Markets Corp. has provided investment banking services with respect to the company within the past 12 months: Yes BMO Capital Markets Corp. or its affi liates owns l % or more of any class of common equity securities of the company: No BMO Capital Markets Corp. or its atJiliates makes a market in the security: Yes BMO Capita l Markets Corp. or its aniliates managed or co-managed a public offering of securities of the company in the past 12 months: Yes BMO Capital Markets Corp. or its affiliates received compensation for in vestment banking services from the company in the past 12 months: Yes BMO Capital Ma.rkets Corp. or its a!Tiliates or its officers own warrants or options: No Company is a client (or was a client) ofBMO Capital Markets Corp. or an affi liate within the past 12 months: Yes, for investment banking services Employee, ofJicer. or director ofBMO Capital Markets Corp. is a member of the Board of Directors or an advisor or officer of this company: No A member of the Board ofDirectors ofBank of Montreal is also a member of the Board of Directors or is an officer of this company: No Analyst and/or associate who prepared this report is a member of the Board of Directors of this company or an advisor or oflicer of this company: No A household member of the research anal yst and/or associate who prepared this report is a member of the Board of Directors of th is company or an advisor or officer of this company: No Analyst or associate vvho prepared this report or member of household of analyst or associate owns shares: No Analyst or associate who prepared this report or member of household of analyst or associate owns warrants/options: No BMO Capital Markets Corp. or its aiTiliates expects to receive or intends to seek compensation for investment banking services from the company in the next th ree months: No Analyst received compensation from the company in the past year: No BMO Capital Ma rkets Corp. or its affiliates received compensation for products or services other than Investment Banking Services from the company in the past 12 months: No Methodology an d Risks to Out Pl'ice Target Methodology: Average of discounted cash flow. PIE multiple. and EV to EBITDA multiple Risks: Increased competition, worsening student lending environment, increased regulation, litigation and lawsuits, material weakness
Page 9
December 10, 2009
BMO Capital Markets
Company S[X'cific Disclosun~ fot LI NC BMO Capital Markets Corp. has provided advice for a fee with respect to this company within the past 12 months: No BMO Capital Markets Corp. has undertaken an underwriting liability with respect to this company within the past 12 months: Yes BMO Capital Markets Corp. has provided investment banking services with respect to the company within the past 12 months: Yes BMO Capital Markets Corp. or its affiliates owns 1% or more of any class of common equity securities of the company: No BMO Capital Markets Corp. or its aiTiliates makes a market in the security: Yes BMO Capital Markets Corp. or its afJiliates managed or co-managed a public offering of securities of the company in the past 12 months: Yes BMO Capital Markets Corp. or its affiliates received compensation for investment banking services from the company in the past 12 months: Yes BMO Capital Markets Corp. or its afJiliates or its officers own warrants or options: No Company is a client (or was a client) ofBMO Capital Markets Corp. or an affiliate within the past 12 months: Yes, for investment banking services and non-securities services Employee, officer. or director ofBMO Capital Markets Corp. is a member of the Board of Directors or an advisor or officer of this company: No A member of the Board ofDirectors ofBank of Montreal is also a member of the Board of Directors or is an officer of this company: No Analyst and/or associate who prepared this report is a member of the Board ofDirectors of this company or an advisor or officer of this company: No A household member of the research analyst and/or associate who prepared this report is a member of the Board of Directors of this company or an advisor or officer of this company: No Anal yst or associate who prepared this report or member of household of analyst or associate owns shares: No Analyst or associate who prepared this report or member of household of analyst or associate owns warrants/options: No BMO Capital Markets Corp. or its alliliates expects to receive or intends to seek compensation for investment banking services from the company in the next three months: No Analyst received compensation from the company in the past yea r: No BMO Capital Markets Corp. or its affiliates received compensation for products or services other than [nvestment Banking Services from the company in the past 12 months: Yes Methodology and Risks to OuJ' Pl"ice Tuget Methodology: Average of forward looking PIE, forward looking EV/EBITDA and Discounted Cash Flow Risks: Worse than expected enrollment trends, weakness in automotive worker environment, New England Institute expansion Breakdown of Ratin g Distribution and Banking C lients
{As of September 30 , 2009) Buy % of total BMO Capital Markets Corp . coverage within rating category 29 . H % of stocks within rating category for which the firm provided banking services over the past 12 months 12 . 8% Hold
64 . 1% 9 . 6%
Sell
6 . 8'!s 0 . 0%
Unrated
0 . 0% 0 . 0%
BMO Otpital Markets Cotp. Rating System OP = Outpel'f'orm : We believe the stock's total return. including dividends, \vi ii exceed the S&P 500's return by more than 15%. Mkt =Market Perform: We believe the stock's total return will generally match that of the S&P 500. Und = Undetperf'orm: We believe the stock's total return wi ll fall sho.rt o f the S&P 500's return by more than 15%. NR = Not rated. (R) = Restricted: Dissemination of research is currently restricted. ln addition. apart from our slOck ratings. we apply the Speculative investmelll (S) postscript to those companies that have de minimis revenue and whose enterprise value appears to be contingemuponunprovable assumptions (e.g.. thefitture approval of a drug or the succesiful completion of an oil well). SECTOR RATINGS OUTPERFORM- We believe the sector will outperform the S&P 500 Index. MARKET PERFORM - We believe the sector's return will generally match thai of the S&P 500. UNDERPERFORM- We believe the sector willunderperform the S&P 500 Index. Prior BMO Capital Markets Corp. Rating System (prior to June 19, 2006) Our rating system prior to June 19,2006, compared a stock's expected performance with that of an index of comparable companies over a 9- I 5 month horizon. Our sector ratings were based on the expected perfonnance of the sector compared with that of a broader market index over the same time period. Additionally, before June 19,2006, we did not use the ($)-Speculative postscript. PRIOR STOCK RATINGS OUTPERFORM- We believe the stock's total return, including dividends, will exceed the group average by over 15%. NEUTRAL- We believe the stock's total return will generally match the group average. UN DERPERFORM- We believe the stock's total return will fall short of !he group average by more than I 5%. PRIOR SECTOR RATINGS POSITIVE- We believe the sector will outperform the S&P 500 Index. NEGA TlVE- We believe the sector wi llunderperform the S&P 500 Index. Other Important Disclosures For more specific information. please refer to http://research-us.bmocapitalmarkets.com. For Important D isclos ures on the stocks discussed in this report, please go to http://research-us.bmocm.com/Company_Disclosure_Public.asp, or write to Editorial Department, BMO Capital Markets, 3 Times Square, New York, NY 10036.
Page 10
December 10, 2009
BMO Capital Markets
Dissemination of Research BMO Capital Markets E quity Research is available via our web site http://research-us.bmocapitalmarkets.com. Please contact your investment advisor or institutional salesperson for more information. Institutional clients may also receive our research via FIRST CALL Research Direct and Reuters. All of our research is made widely available at the same time to all BMO Capital Markets Corp. client groups entitled to our research. Conflict Statement A general description of how BMO Financial Group identilies and manages conOicts of interest is contained in our public facing policy for managing conflicts of interest in connection with investment research, which is available at http://research-us.bmocapitalmarkets.com/Conflict_ Statement_ Public.asp. Gener a l Disclitimer The information and opinions in this report were prepared by BMO Capital Markets Corp. BMO Capital Markets Corp. is an affiliate ofBMO Nesbitt B urns Jnc. and BMO Nesbitt Burns LteefLtd. in Canada (collectively "BMO Nesbitt B urns"). and BMO Capital Markets Ltd in the U nited Kingdom. Tbjs information is not intended to be used as the primary basis of investment decisions, and because of individual client objectives it should not be construed as advice designed to meet the particular investment needs of any investor. This material is for information purposes only and is not an otTer or solicitation with respect to the purchase or sale of any security. The reader should assume that BMO Capital Markets Corp., BMO Nesbitt Burns, BMO Capital Markets Ltd., or their affiliates may have a conflict of interest and should not rely solely on this report in evaluating whether or not to buy or sell securities of issuers discussed herein. The opinions. estimates, and projections contained in this report are those of BMO Capital Markets Corp. as of the date of this report and are subject to change without notice. BMO Capital Markets Corp. endeavors to ensure that the contents have been compiled or derived from sources that we believe are reliable and contain information and opinions that are accurate and complete. H.owever, BMO Capital Markets Corp. makes no representation or warranty, express or implied, in respect thereof. takes no responsibility for any errors and omissions contained herein, and accepts no liability whatsoever for any loss arising from any use of, or reliance on, this report or its contents. Information may be available to BMO Capital Markets Corp., BMO Nesbitt Burns, BMO Capital Markets Ltd., or its affiliates that is not retlected in this report. This report is not to be construed as an offer or solicitation to buy or sell any security. BMO Capital Markets Corp., BMO Nesbitt Burns, BMO Capital Markets Ltd., or their affiliates will buy fiom or sell to customers the securities of issuers mentioned in this report on a principal basis. BMO Capital Markets Corp., BMO Nesbitt Bums, and BMO Capital Markets Ltd. are subsidiaries of Bank of Montreal. Additional Matte1 s To Canadian Residents: BMO Nesbit1 Bums Inc. and BMO Nesbitt Burns L tee!Ltd., affiliates ofBMO Capital Markets Corp., furnish tltis report to Canadian residents and accept responsibility for the contents herein subject to the terms set out above. Any Canadian person wishing to effect transactions in any of the securities included in this report should do so through BMO Nesbitt Burns Inc. and/or BMO Nesbitt Burns Ltee/Ltd. This research is not prepared subject to Canadian disclosure requirements applicable to BMO Nesbitt Burns Inc. To UK residents: The contents hereof are intended solely for ll1e use of, and may only be issued or passed on to. (i) persons who have professional experience in matters relating to investments falling within article 19(5) of the FiJlancial Services and Markets Act 2000 (Fina ncial Promotion) Order 2005 (the " Order") or (ii) high net worth entities falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as " relevant persons"). The contents hereof are not intended for the use of, and may not be issued or passed on to, retail clients.
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Page ll
December 10, 2009
From: Macias, Wendy To: Kolotos John Finley, Steve Kerrigan. Brian Bergeron, David CC: Date: 8/26/2009 9:52:40 AM Sub,ject: Conrinthian eamings call transcript
Mention of next neg reg session, 90/10, overall financial health, etc.
Corinthian Colleges, lnc. F4Q09 (Qtr End 06/30/09) Eam1ngs Call ...
From: To:
Robert MacArthur <nnacarthur@altresearch com> Woodward, Jennifer 8/30/2010 4:05:58 PM
CC:
Date: Subject:
Devry
Graduation Rates
DV Location (2eV[Y Institute of Technology & Keller Graduate School of Management-New York (2eV!:Y Universit:t-Arizona (2eV[Y Universit:t-California (2eV[Y Universit:t-Colorado (2eV[Y Universit:t-Cor12orate Office ~eV[Y Universit:t-Fiorida ~eV[Y Universit:t-Geor.gia j2eV[Y Universit:t-lllinois j2eV[Y Universit:t-lndiana p eV[Y Universit:t-Ma[Yiand DevrY Universit:t-Michigan DeV[Y Universit:t-Minnesota DeV[Y Universit:t-Missouri DeV[Y Universit:t-Nevada DeV!:Y Universit:t-New Jerse:t DeV[Y Universi~-North Carolina DeV[Y Universit:t-Ohio DeV[Y Universit:t-Oklahoma DeV[Y Universit:t-Oregon DeV[Y Universit:t-Penns:tlvania DeV!:Y Universit:t-Tennessee DeV[Y Universit:t-Texas DeV[Y Universit:t-Utah DeV!:Y Universit:t-Vir.ginia DeV[Y Universit:t-Washington DeV[Y Universit:t-Wisconsin Ross Medical Education Center-Saint Clair, Ml Ross Medical Education Center-Lansing , Ml Ross Medical Education Center-Madison Heights. Ml Ross Medical Education Center-Flint Ml Ross Medical Education Center-Decatur, GA Ross Medical Education Center-Saint Clair1 Ml Ross Medical Education Center-Saint Clair, Ml Ross Medical Education Center-Saginaw 1 Ml Ross Medical Education Center-Brighton, Ml Ross Medical Education Center-Ann Arbor1 Ml Ross Medical Education Center-Port Huron, Ml Ross Medical Education Center-Roosevelt Park1 Ml Ross Medical Education Center-Grand Ra!2ids, Ml Ross Medical Education Center-Redford , Ml
2005 2005 2 yr(or 2006 2006 2 yr(or 2007 2007 2 yr (or Bachelor's less) programs Bachelor's less) programs Bachelor's less) programs
29% 35% 39% 24% 43% 35% 33% 43% 42% 28% 48% 45% 20% 35% 31% 31% 25% 24% 34% 27% 33% 30% 30% 29% 25% 29%
31% 34%
33% 35%
23% 36% 41%
29% 28% 38%
35% 37% 35%
33% 43% 37%
45%
34% 44%
39%
48% 35%
38%
40%
32%
34%
26%
37%
30%
26%
26% 31% 28%
29% 0% 32%
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03042501 APOLLO COLLEGE -SPOKANE 021 00608 APOLLO COLLEGE - WESTSIDE 02335200 APOLLO COLLEGE OF MEDICAL & DENTAL CAREERS 02100607 APOLLO COLLEGE-TUCSON 00638500 CHAMBERLAIN COLLEGE OF NURSING 01072719 DEVRY COLLEGE OF NEW YORK 00922800 DEVRY COLLEGE OF TECHNOLOGY 00245500 DEVRY INSTITUTE OF TECHNOLOGY 00309900 DEVRY INSTITUTE OF TECHNOLOGY 00832200 DEVRY INSTITUTE OF TECHNOLOGY 00922400 DEVRY INSTITUTE OF TECHNOLOGY 01013900 DEVRY INSTITUTE OF TECHNOLOGY 02296600 DEVRY INSTITUTE OF TECHNOLOGY 02296602 DEVRY INSTITUTE OF TECHNOLOGY02296604 DEVRY INSTITUTE OF TECHNOLOGY - ARLINGTON 02296606 DEVRY INSTITUTE OF TECHNOLOGY -COLORADO SPRINGS 02296605 DEVRY INSTITUTE OF TECHNOLOGY - DENVER 02296603 DEVRY INSTITUTE OF TECHNOLOGY- FEDERAL WAY 02332903 DEVRY INSTITUTE OF TECHNOLOGY - IRVINE 00832203 DEVRY INSTITUTE OF TECHNOLOGY - MESA 00309901 DEVRY INSTITUTE OF TECHNOLOGY - NEW YORK 00832201 DEVRY INSTITUTE OF TECHNOLOGY -FREMONT 02332900 DEVRY INSTITUTE OF TECHNOLOGY-POMONA 01072700 DEVRY UNIVERSITY 01072708 DEVRY UNIVERSITY - IRVINE 01072715 DEVRY UNIVERSITY -ADDISON 01072725 DEVRY UNIVERSITY - ARLINGTON 01072741 DEVRY UNIVERSITY- CALGARY 01072701 DEVRY UNIVERSITY - CHICAGO LOOP 01072710 DEVRY UNIVERSITY- COLORADO SPRINGS 01072720 DEVRY UNIVERSITY - COLUMBUS 01072714 DEVRY UNIVERSITY - DECATUR 01072723 DEVRY UNIVERSITY - FEDERAL WAY 01072722 DEVRY UNIVERSITY- FORT WASHINGTON 01072704 DEVRY UNIVERSITY - FREMONT 01072754 DEVRY UNIVERSITY- HOUSTON 01072724 DEVRY UNIVERSITY - IRVING 01072717 DEVRY UNIVERSITY- KANSAS CITY 01072703 DEVRY UNIVERSITY - MESA 01072712 DEVRY UNIVERSITY - MIRAMAR 01072711 DEVRY UNIVERSITY - ORLANDO 01072702 DEVRY UNIVERSITY - PHOENIX 01072706 DEVRY UNIVERSITY - POMONA 01072716 DEVRY UNIVERSITY - TINLEY PARK 01072709 DEVRY UNIVERSITY- WESTMINSTER 01072718 DEVRY UNIVERSITY- NEW JERSEY 02246300 ROSS INSTITUTE OF MEDICAL AND DENTAL TECHNOLOGY 02099700 ROSS MEDICAL EDUCATION CENTER 02180100 ROSS MEDICAL EDUCATION CENTER 02307000 ROSS MEDICAL EDUCATION CENTER 02339700 ROSS MEDICAL EDUCATION CENTER 02533600 ROSS MEDICAL EDUCATION CENTER 03391300 ROSS MEDICAL EDUCATION CENTER 02099703 ROSS MEDICAL EDUCATION CENTER-ROOSEVELT PARK 02246000 ROSS UNIVERSITY SCHOOL OF MEDICINE 02277900 ROSS UNIVERSITY SCHOOL OF VETERINARY MEDICINE 0097 4800 WESTERN CAREER COLLEGE 03069300 WESTERN CAREER COLLEGE 0097 4806 WESTERN CAREER COLLEGE- ANTIOCHNVALNUT CREEK 0097 4804 WESTERN CAREER COLLEGE - CITRUS HEIGHTS 0097 4808 WESTERN CAREER COLLEGE- EMERYVILLE
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1,746 1'112 1,525 903 2,887 217 118 30 246 284 174 77 121 37 20 25 67 4
723 436 526 450 1,031 140 49
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$5,075,799 $5,111,610
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$$8,944,131 $ 11 ,932,353 $1,904,668 $ 1,032,636 $697,733 $ 2,685,072 $2,629,132 $ 1,428,321 $ 732,397 $858,874 $198,636 $ 117,722 $ 138,527 $417,032 $ 19,847 $ 8,375 110 78 277 3,899 1 3,929 412 $ 1,467,523 $ 1 ,232,557 $ 5 ,821 ,416 $ 5 ,732 $ 13,862,395 $88,771 $70,227 $ 3,506,029 $ 93,233,611 $ 24,512,924 $ 25,028,003 $ 38,970,781 $ 7 ,899 $24,775,541 $ 37,497,731
$$2,963,1 48 $ 5 ,808,725 $1,169,150 $367,940 $124,112 $ 1 ,222,670 $652,450 $ 547,354 $ 178,025 $243,875 $71 ,799 $70,565 $ 40,771 $225,234 $ 10,092 $ 7,797 $715,732 $ 582,070 $ 2 ,388,988 $ 3,982 $ 5 ,173,408 $50,682 $40,234 $ 1 ,440,493 $ 23,373,935 $ 8,612,627 $ 7,270,045 $ 14,586,586 $ 3,954 $8,020,517 $ 12,074,664 4
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Total enrollmentFall2007
12-month unduplicated headcount 2007
Percentage receiving student loan aid- 06/07
Percentage receiving student loan aid- 04/05
Percentage receiving student loan aid - 03/04
New York
~a liforni a ~ol orado
1rizona
1,262 1,60E 6,18 1,081
1,432 1,538 6,00!'1 1,079
1,515 1,753 6,043 1,079
1,806' 2,098 7,849 1,362
2,588 2,717 10,796 1,906
2,646 2,946 10,837 1,970
2,7 19 3,121 11,7 45 1,829
3, 194' 3,855 12,870 1,749
87 92 92 82
84 92 89 81
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2,832 4,379 13,990 348 96
3,317 5,291 14,407 273 97
5,59 8,151 31,275 868 20S
5,270 8,146 26,93 1 727 213
4,893 8,051 23,073 463 155
4,322 8,596 24,158 312 210
86 88 87 7C 86
84 83 81 100
7~ 8~
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:>eorgia
llinois
~a ryland
ndiana
~i chigan ~innesota ~i ssouri
81 10(
92 77 80 5089
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172 1,544 123 1,504 193 3,303 13 167 1,162
26 1,945 113 2,007 192 3,949
432 2,595 31 1 2,302 707 6,046 117 202 2,597
341 2,719 265 2,423 758 5,730 51 162 2,151
88 2,952 122 2,795 292 5,830
3,521 46 3,763 209 5,746
8C 97
91 3
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8!'1 72 94 100 100 93
Jew Jersey
8E
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>hio
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60 1,041
103 1,553
42 1,261
90
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3,22C 36 674 95!'1 304 47,81~
3,008
3,430
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51 ,662
FY07
Ticker OPEID Name Address City State Zip
FY06
FY05
DV DV DV DV DV DV DV DV DV DV DV DV DV
22180 Apollo College 30425 Apollo College 21006 Apollo College 6385 Chamberlain College of Nursing 10727 DeVry University 22463 Ross Institute of Medical and Dental Technology 21801 Ross Medical Education Center 20997 Ross Medical Education Center 23397 Ross Medical Education Center 25336 Ross Medical Education Center 22779 Ross University School of Veterinary Medicine 22460 Ross University, School of Medicine 9748 Western Career College
1122 North Liberty Street 2004 Lloyd Center, 3rd Floor 8503 North 27th Avenue 6150 Oakland Avenue 3300 North Campbell 11590 Century Boulevard 29429 John R. Road G-3630 Miller Road, Suite D 811 0 Murphy Drive 4106 W. Saginaw Highway RUSVM Campus Portsmouth Campus 8909 Folsom Boulevard
Boise Portland Phoenix StLouis Chicago Cincinnati Madison Heights Flint Brighton Lansing West Farm Portsmouth Sacramento
ID OR 97232 AZ 85015 MO 63139 IL 60618 OH 45246 Ml 48071 Ml 48507 Ml 48116 Ml 48917
Default Default Default Rate Rate Rate 83704 1.7 3.7 5.7
6.7 8.li 2.S 9.C 4.li 6.2 6.C 3.4 4.4 O.C 0.2 10.2
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CA 95826
5.3 4.5 0.5 6.6 2.9 3.0 2.1 1.7 4.4 0.1 0.0 10.3
From:
To: CC:
Date: Subject:
rob@altresearch <nnacarthur@altresearch com> rob@altresearch

6/18/2009 11:20:10 AM Draft of my APOL speech I intend to make in Philadelphia Monday assuming I am allowed to make it
Robert MacArthur Alternative Research Service, Inc. Rmacarthur@altresearch.com 203-244-5174 This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleacling. The infom1ation upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The finn does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.
Ladies and Gentlemen: My name is Rob MacArthur. I am a research consultant in tl1e investment industry. I have been following the for-profit education sector for over a decade. Over the many years I have watched the cat and mouse game between the Department of Education and the industry. Sadly, despite claims of being heavily regulated this industry has been largely unregulated under the Bush Administration. With a former APOL lobbyist at the helm of Post-Secondary Education, enforcement was lax despite numerous inspector general reports urging better enforcement. This disservice to tax payers has enriched the managements of the for-profit industry and left in its wake tl1ousands of students who bought into the hopes of a finer future only to be overrun with student debt. I personally have no investment in the industry. I am here before you today to bring to your attention an issue which has received some press but has yet to be properly addressed by the Depart1nent; that is the cmruption and chronic misbehavior of the for-profit education industry. There are many issues that the Department needs to address including: transferability of credits, default prevention, higher graduation rates, and of course, incentive compensation. Apollo Group, parent company of University of Phoenix, is largest school in the cotmtry. Its enrollments increased to 157,800 at August 31 , 2002 from approximately 71 ,400 at August 31, 1998. At the end of February 2009, that number had grown to 397,000 students. How is this possible? In FY08 the company spent $322 million on advertising, most of which was on the internet. At the present rate of growth advertising will likely reach over $400 million dollars in 2009. They spent an additional $385 million in fy08 on enrollment counselor compensation.
In fiscal 2008, 82% of University of Phoenix's $2.9 billion of revenue came from Title IV programs. And total revenue companywide was $3.1 billion in fy08. That's nearly $2.4 billion dollars of taxpayer money flowing through the company. In 2001, UOP received only 10% of its revenue from Title IV programs with $770 million of revenue in fyOl. By 2001 that percentage of participation increased to 36o/o followed by 52%, up to the present. Clearly, there has been a massive n1sh to raid the student financial aid program.
How is the industry doing this?
Incentive Compensation
In 2000, the Department shut down Computer Learning Centers based on violations of incentive compensation regulations. In early 2004, the DOJ raided ITT Education for similar violations. However, through heavy industry lobbying efforts and a friendly administration, the so called "Safe Harbor" provisions were established that effectively nullified the ban on incentive compensation for enrollment counselors due to one word "solely" based on incentive compensation.
This devious loophole allowed the industry to bypass the regulation leading them to establish internal systems designed to prove that bonuses were based on factors other than the number of enrollments made. This loophole has created the disaster we find ourselves in today. One need look no further than SLM whose stock prices has dropped from the high 50's to 3 in the last year and a half. This is not just a function of the credit markets but the massive increase in defaulted loans and the wave loans about to come off forbearance and deferment; loans that emanate from the for-profit industry. Why? Enrollment counselors are overly incentivized to bring in students with no chance succeeding or paying off loans. There are many, many sad stories I can recount from direct interviews I have conducted with both fonner UOP students and enrollment cotmselors documenting the true horrific outcome for unsuspecting students. Similar stories are widely available in public depositions in the qui tam suit against UOP's parent. In the now famous February 2004 program review of UOP, the author begins, "This report contains a serious finding regarding the school's substantial breach of its fiduciary duty; specifically that the University of Phoenix (UOP) systematically engaged in actions designed to mislead the Department of Education and to evade detection of it improper incentive compensation system ... " According to testimony from the qui tam, management deliberately removed posters from the walls of one school just prior to the anival of Department investigators to hide their quota system. Is that corporate behavior the new Administration wants to allow? "The reviewers interviewed more than 60 present and former recntiters of students (called "enrolhnent counselors" by UOP) prior to, and after the site visit ... most of the recruiters said that when hired, UOP told them that the job had tremendous financial potential, and that they "could make a lot of money." UOP promised to double or triple their salary in 3 to 6
months ... "
In one deposition a former manager said, "h1 my experience as a

manager, there was no discernible difference in the way enrollment counselors were compensated prior to 2005 as compared to during and after 2005 .... As director of enrollment, approximately once a month, I attended director level meetings. At one of these meetings, at least one Vice President said that UOP was changing the matrix so "no one will ever prove its based on regs [registrations] ... the matrix is "all just smoke and mirrors," and "we're flying under the radar."
In a deposition from the stock options backdating suit, Chainnan and

Founder John Sperling said, "So I saw as my job to protect the company, and I told the people, "You run the business. Don' t wony about negative publicity. Don't worry about being called a diploma mill." I11 the prior paragraph Sperling arrogantly boasts: "For example, today I think we have some 36 political lobbyists at the state level, we have six at the national level, and there's a nLle or I cal it Sperling's law that no innovation, educational innovation can exist beyond the political power to protect it." I suspect many of those lobbyists are here today seeking to spin the industry in a positive light as they have always done. Buried on its web site UOP reports a graduation rate of only 9.77%. Is that what the taxpayer deserves? Is this how we want to invest in America's future? Last summer the Department raised the federal loan limits by $2000 on July 151 . What did Apol1o do? They raised their tuition by 10% to roughly $22,000. In another deposition an enrollment counselor stated, "A: I was told to enroll students no matter what their qualifications? Not matter what .... there were certain qualification levels. When enrollments were down, my manager was telling me I shouldn't worry about that ... " Another enrollment counselor complained that the potential student was illiterate but was force to admit that person regardless. While the incentive compensation issue remains unresolved, at the very least, the Department must take linmediate steps to protect unsuspecting students from predatory marketing practices of this industry. Refund Calculations
In an OIG report dated December 2005 the department found, "UOP applied inappropriate methodologies to detennine the "percentage of Title aid earned" for calculation ... " This quote references the return of
Title IV money. The report continues, "UOP did not have a policy to review tl1e accuracy of payment period end dates for the purpose of calculating Title IV aid. When the department issued guidance for determining payment period completion dates, UOP did not implement the guidance for over 9 months." In the department' s report two-thirds of the records examined showed students as having reached the 60/o mark for attendance allowing the school to keep 1OOo/o of the money. In 7 6% of files examined, the Inspector General determined, the company failed to make timely refund payments for students that were charged lOOo/o. In a January lOth 2008 letter the IG wrote another repmt saying, "UOP systematically monitored students' status and progress, readjusting tl1e beginning and ending dates of payment period to accommodate leaves of absence, "no shows", failed courses or repeat courses. Referring to this process as "remapping", UOP readjusted payment period end dates and rescheduled second disbursement dates to assure tl1at students actually completed their first payment periods and were eligible for a second disbursement." And the issues at Apollo are proliferating. In November, 2008 Grand Canyon University came public with for APOL president Brian Mueller at the helm. Mr. Mueller left Apollo in July. In August the Office of the Inspector General issues a subpoena related to enrollment practices and in September a lawsuit was filed citing enrollment violations. Having been in the investment for 15 years I can tell you it is extreme rare for a company to go public while under such legal burdens. Their revenues were up 66% in the March quarter to $59 million-not bad for a company whose revenue in 2005 was $51 million. On May 26 2005, John Higgins, the Inspector General testified in Congress " Violations of this requirement occur when refunds are not paid timely, when incorrect calculations result in returning insufficient funds, and when institutions fail to pay refunds at all, which is a criminal offense under HEA. Higgins went on to testify that 74% of their institutional fraud cases involve proprietary schools. Another company Bridgepoint, is filled with former UOP employees, came public in April of 2009. They also came public with an OIG audit tmder way. Their 2007 revenue was $85 million and $218 in 2008 and $84 million alone in
the March 09 quarter. program.
This is the California Gold Rush of Title IV
In March of 2005 the SF A office of the department wrote a letter UOP
regarding its audit of WIU, a division of UOP. In that report, the Department found that 3/8 37 .5o/o of refunds were not made within the 30 day legal limitation . They also found inaccurate refunds and refunds not paid at all. WIU incorrectly calculated refunds 25% of the time. Included at the end of the report is a spreadsheet showing many refunds made not 30 days late but up to 800 days late. At what point are refunds no longer considered repaid? Why does this matter? From an investment perspective I have long been highly suspicious of the reported numbers. Strong growth is one thing but having nearly 400k students is something else. According to a Department of Ed report, "Loan vohune at proprietary institutions grew tremendously at over 32% between 2007 and 2008 and has almost quadntpled since FYOO. At $19 .9B in FY08, proprietary school loan volume represents 23o/o of total volume, compared to 13.4% in FYOO." That means APOL is roughly 17% of proprietary school loan volume. In summary, the US Deprutment of Education is ill-preprued through no fault of its own to deal with such n1thless sophistication and distain for the law. Current regulations that are obsolete or have been softened by industry lobbying over years need to be improved. Incentive compensation for enrollment counselors should be suspended or at the very least based on graduates going out the door not wann bodies coming. The Department should rol1 back the 90/10 n1le to 80/20. Program reviews should be done annually. Lower the cohort default rate loss of eligibility threshold from 30% to 15%. Move the proposed "3rd default rate" calculation change to apply retroactively not starting with the 2009 cohort but with current default rate data. Starting with the 2006 default rate data the government would better protect itself against default rate manipulation through the use of defennents and forbearance as laid out in detail in the IG's December 2003 report. I am submitting my text for the record and would gladly provide supporting documentation for any of the facts referenced in my comments upon request.
From: To:
Robert MacArthur <nnacarthur@altresearch com> Woodward, Jennifer 8/30/2010 2:46:38 PM DV 1Ok came out last week. ..! have been digging on HLC anyway re transfer of credits. I met Leah Matthews at CHEA 2 wks ago.
CC:
Date: Subject:
DeVry University Regional accreditation in the United States is a voluntary process designed to promote educational quality and improvement, and is an important strength for DeVry University. Management believes regional accreditation offers DeVry University a significant advantage over most other private sector colleges. Since 1981, DeVry University has been accredited by the Higher Learning Commission ("HLC") of the North Central Association of Colleges and Schools, which is one ofthe six regional collegiate accrediting agencies in the United States. College and university administrators depend on the accredited status of an institution when evaluating transfers of credit and applications to their schools; employers rely on the accredited status of an institution when evaluating a candidate's credentials; and parents and high school counselors look to accreditation for assurance that an institution meets quality educational standards. Moreover, accreditation is necessary for students to qualify for federal financial assistance, and most scholarship commissions restrict their awards to students attending accredited institutions. Keller Graduate School ofManagement was first awarded its North Central Association accreditation in 1977, and DeVry Institutes was first awarded North Central Association (now HLC) accreditation in 1981. Each school was separately accredited until February 2002, when the North Central Association approved the merger ofDeVry Institutes and Keller Graduate School into a single institution to fonn DeVry University. After a comprehensive evaluation visit in August 2002, the HLC approved a 10-year re-accreditation for DeVry University. The HLC further affinned that DeVry University can offer, without restriction, any of its programs onsite, on! ine, or through any combination of the two. In September 2008, DeVry University was accepted into the Academic Quality Improvement Program (AQIP) of the HLC, a seven year accreditation reaffinnation process based on creating a culture of continuous improvement, one of DeVry University's key values.
In several conversations with fanner students and enrollment counselors we have been told that students were routinely told their credits would transfer when they signed up, only to find out their credits did not transfer once they were enrolled. This would, of course, drive up the number of classes needed to graduate. We also have a deposition from the Hendow case (20 1-14) where an enrollment counselor testified that 75% of new enrollments were transfer students. In effect, we believe, low-end students are bounced in and out several online for-profit education companies over a relatively short-period of time. Those credits probably should have been transferrable if the other schools had the same accreditor. But our point is that as students hopped from one school to the next their debt load increased and whoever was last to cany that student is now being told all prior debt is being used against them. There is some very aggressive language in the NegReg regarding misrepresentations about the transfer of credits. DOE NRPM_final.pdf: "Under proposed Section 668.34(a)(6), institutional policies would need to describe how a student's GPA and pace of completion are affected by transfers of credit from other institutions. This provision would also require institutions to count credit hours from another institution that are accepted toward a student's educational program as both attempted and completed hours." Page 255: "In proposed Section 668.72, which describe the types of false, erroneous ... we would expand the list of
prohibited misrepresentations to include false, erroneous, or misleading statements relating to the following: institutional, programmatic, or specialized accreditation; conditions for acceptance of transfer credits ..."
HLC Falls Down on Transfer of Credit
June 2008 HLC Commission Policy Report, Transfer of Credit paragraph 3.8: "Each institution shall determine its own policies and procedures for accepting transfer of credits, including credits from accredited and non-accredited institutions, from foreign institutions, and from institutions which grant credit for experimental learning and for nontraditional adult learning programs. An institution's periodic review of its transfer policies and procedures should include evaluation of their clarity to those who administer them, to the students who follow them, and to employers and other stakeholders. It should also include the consistency of their interpretation and application throughout the institution, as well as their responsiveness to new types oflearning opportunities outside institutions of higher education." One could drive a truck through that set of loopholes. In several conversations with former students and enrollment counselors we have been told that students were routinely told their credits would transfer when they signed up, only to find out their credits did not transfer once they were enrolled. This would, of course, drive up the number of classes needed to graduate. We also have a deposition from the Hendow case (20 1-14) where an enrollment counselor testified that 75% of new enrollments were transfer students. In effect, we believe, low-end students are bounced in and out several online for-profit education companies over a relatively short-period of time. Those credits probably should have been transferrable if the other schools had the same accreditor. But our point is that as students hopped from one school to the next their debt load increased and whoever was last to carry that student is now being told all prior debt is being used against them. There is some very aggressive language in the NegReg regarding misrepresentations about the transfer of credits. DOE NRPM_final.pdf: "Under proposed Section 668.34(a)(6), institutional policies would need to describe how a student's GPA and pace of completion are affected by transfers of credit from other institutions. This provision would also require institutions to count credit hours from another institution that are accepted toward a student's educational program as both attempted and completed hours." Page 255: "In proposed Section 668.72, which describe the types of false, erroneous ... we would expand the list of prohibited misrepresentations to include false, erroneous, or misleading statements relating to the following: institutional, programmatic, or specialized accreditation; conditions for acceptance of transfer credits .. ."
HLC Falls Down on Transfer of Credit
June 2008 HLC Commission Policy Report, Transfer of Credit paragraph 3.8: "Each institution shall determine its own policies and procedures for accepting transfer of credits, including credits from accredited and non-accredited institutions, from foreign institutions, and from institutions which grant credit for experimental learning and for nontraditional adult learning programs. An institution's periodic review of its transfer policies and procedures should include evaluation of their clarity to those who administer them, to the students who follow them, and to employers and other stakeholders. It should also include the consistency of their interpretation and application throughout the institution, as
well as their responsiveness to new types of! earning opportunities outside institutions of higher education." One could drive a truck through that set of loopholes.
In several conversations with former students and enrollment counselors we have been told that students were routinely told their credits would transfer when they signed up, only to find out their credits did not transfer once they were enrolled. This would, of course, drive up the number of classes needed to graduate. We also have a deposition from the Hendow case (20 1-14) where an enrollment counselor testified that 75% of new enrollments were transfer students. In effect, we believe, low-end students are bounced in and out several online for-profit education companies over a relatively short-period oftime. Those credits probably should have been transferrable if the other schools had the same accreditor. But our point is that as students hopped from one school to the next their debt load increased and whoever was last to carry that student is now being told all prior debt is being used against them. There is some very aggressive language in the NegReg regarding misrepresentations about the transfer of credits. DOE NRPM_final.pdf: "Under proposed Section 668.34(a)(6), institutional policies would need to describe how a student's GPA and pace of completion are affected by transfers of credit from other institutions. This provision would also require institutions to count credit hours from another institution that are accepted toward a student's educational program as both attempted and completed hours." Page 255: "In proposed Section 668.72, which describe the types of false, erroneous ... we would expand the list of prohibited misrepresentations to include false, erroneous, or misleading statements relating to the following: institutional, programmatic, or specialized accreditation; conditions for acceptance of transfer credits ... "
HLC Fails Down on Transfer of Credit
June 2008 HLC Commission Policy Report, Transfer of Credit paragraph 3.8: "Each institution shall determine its own policies and procedures for accepting transfer of credits, including credits from accredited and non-accredited institutions, from foreign institutions, and from institutions which grant credit for experimental learning and for nontraditional adult learning programs. An institution's periodic review of its transfer policies and procedures should include evaluation of their clarity to those who administer them, to the students who follow them, and to employers and other stakeholders. It should also include the consistency of their interpretation and application throughout the institution, as well as their responsiveness to new types oflearning opportunities outside institutions of higher education." One could drive a truck through that set ofloopholes.
In several conversations with former students and enrollment counselors we have been told that students were routinely told their credits would transfer when they signed up, only to find out their credits did not transfer once they were enrolled. This would, of course, drive up the number of classes needed to graduate. We also have a deposition from the Hendow case (20 1-14) where an enrollment counselor testified that 75% of new enrollments were transfer students. In effect, we believe, low-end students are bounced in and out several online for-profit education companies over a rel ati vely short-period of time. Those credits probably should have been transferrable if the other schools had the same
accreditor. But our point is that as students hopped from one school to the next their debt load increased and whoever was last to cany that student is now being told all prior debt is being used against them. There is some vety aggressive language in the NegReg regarding misrepresentations about the transfer of credits. DOE NRPM_final.pdf: "Under proposed Section 668.34(a)(6), institutional policies would need to describe how a student's GPA and pace of completion are affected by transfers of credit from other institutions. This provision would also require institutions to count credit hours from another institution that are accepted toward a student's educational program as both attempted and completed hours." Page 255: " In proposed Section 668.72, which describe the types of false, erroneous ... we would expand the list of prohibited misrepresentations to include false, erroneous, or misleading statements relating to the following: institutional, programmatic, or specialized accreditation; conditions for acceptance of transfer credits .. ."
HLC Fails Down on Transfer of Credit
June 2008 HLC Commission Policy Report, Transfer of Credit paragraph 3.8: "Each institution shall determine its own poljcies and procedures for accepting transfer of credits, including credits from accredited and non-accredited institutions, from foreign institutions, and from institutions which grant credit for experimental learning and for nontraditional adult learning programs. An institution's periodic review of its transfer policies and procedures should include evaluation of their clarity to those who administer them, to the students who follow them, and to employers and other stakeholders. It should also include the consistency of their interpretation and application throughout the institution, as well as their responsiveness to new types of learning opportunities outside institutions of higher education." One could drive a truck through that set of loopholes.

203-244-5174
nnacarthur@altresearch. com
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From:
To: CC:
Date: Subject:

7/30/2010 8:51 :16 AM
Education industry ...

203-244-5174
ALTERNATIVE RESEARCH SERVICES, INC

Robert MacArthur tmacarthur@.altresearch.com 203-244-5174 "" 203-215-3843 c July 29, 20 10
For-Pr ofit Education Industry

Sell Short:
Gainful Employment Mess ESI- Deutsche Bank Cuts Estimate 29% and No Reaction? Delayed? Reassessment and Inflection Short Thesis Intact _((Reigning in For-Profit Education"
Getting to Know James Kvaal' At 11 am on July SOtb, The New America Foundation is sponsming a meeting with James Kvaal, the incoming Deputy U nder Secretary of Education (Bob Shireman's replacement). As the public gains a better understand how aggressive Kvaal will be toward the for-profit sector, we believe industry shar:es are at risk of dec1ine. Kvaal along with two other panel members will be discussing Gainful E mployment. This could be a negative catalyst to the space. Gainful Employment Politics For the most part, we have attempted to stay somewhat on the s idelines of Gainful Employment ("G /E") issue. We listened to a few conference calls, read Street research, etc. regarding the document published last Fl'iday. We've tried to let the dust settle befote passing judgment. We were surprised by the complexity. No one was prepared for the Department's addition of repayment rate ratios and a discretionary income collar, for example. As it's written, we are very negative on the value and integrity of the G/E regulation~ When we met with Bob Shireman, one of few comment s that he made was that DOE can't discriminate against the for-profits by regulating them separately. We suggested that this is exactly what because of their access to public markets/' This piece of legislation is designed to look like the Department is not discriminating against the for-profits, when in fact they are. Several of the pmgrams especially online liberal arts programs - will fail the 3 tests and be forced to shut down.
http://higheredwatch.newametica.net/blo!,.'Posts/2010/event a conversation with administration oiTic ial james kv aal about regulating for pr 2 This was not conjecture on our part. In the 90s, the OIG suggested the for-profit sectors access to capital markets allowed them to hide and/or d istort the true nature of their fin ancial health.
Robert MacArthur rmacarthur123@comcast.net 203-244-5174 w
203-2 15-3843 c July 29, 2010
As indicated by some of the tables on pages 2 1 and 53-56 of the G/E reg, DOE has various school types falling into subsets that are regulated in different ways, as if they started with a bell curve and designed the regulations to make it fit, with the for-profits at the tails of the cmve, in territmy where regulation will be most harsh. 'We estimate that 22.7% of the proprietary institutions will be subject to the proposed requirements of the restricted status." (.227 times 2 ,086 proprietary institutions that have programs that prepare students for gainful employment equaJs 474 affected institutions.) Over
40% of~ and 4 year for profit schools have
a repayment rate les$ than 35%. 6
DOE goes on to say, ''Even with a repayment rate of less than 35% undet the proposed regulations a program would still be eligible for Title TV HEA program funds, without restrictions, as long as the program has an acceptable debt to income level." That leaves wiggle room for bad schools. In the proposed debt to income measure, the newly introduced discretionary income model "assumes that bor-rowets" with incomes above 150% of the poverty guidelines can devote 15% of earnings to loans payments. How the government can assume a level of personal financial discipline is beyond comprehension. All of the Pell Runners have income less than 150% of the povetty line. The govermnent is assuming students will he making no payments. Then why are schools such as APOL allowed to he so aggressive in their use and abuse of Pell, when the DOE is effectively saying that they accept/realize that APOL throws away the money? DOE seeks comment on whether these tegulations are harsh enough or not. We think Pell recipients should be precluded from attending for-profit schools entirely. Othet loopholes of concetn: "The institution would have to provide information to the Department such as survey tesults of employers or formet students, or through other empirical evidence, documenting the increased earnings." If the DOE is reliant on the industry for data, that represents loophole. "Effective July 1, 2012 ... institutions would he required to alert prospective and currently emolled students they may have difficulty in repaying their loans under certain circumstances." Page 38 - major loophole; f/p schools can't be trusted. "The institution must also provide the most recent debt-to-income ratios and the loan repayment for that program. An institution must provide the waming if the program's repayment rate is less than 45% and, using a sYP [S year period], and if applicable. PSYP [prior S year period]"
Page 33: "At the associate' s degree level, only about 5% of public college graduates have debt of $20k or more, while 42% of for-profit graduates (if they graduate) have debt at those levels. "
2
Robert MacArthur m1acarthurl23@comcast.net 203-438-0688 203-215-3843 July 29, 2010
ID~t~tutional-level
Repayiller:.t Rates
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Private nonprofi: less-:han-2-year ?-Jbl!.c 2-year ~.Jbl:.c 4 -yeor or above

~.Jblic less-t~~n-2-
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19.59\
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Fully Eligible
Fully Eligible
Fully Eligible
Fully Eligible Restricted Restricted
Restricted
Fully Eligible
Trading, W OtTies and Strategy We have put some serious thought into where to go with the for-profit short at this junctme. Why didn't ESI go down when Deutsche Bank knocked 29% out oftheir 2011 numbers earlier th is week? Arguably, the stocks are disconnected from earnings because of the overarching impact of legislative risk. We anticipated this correctly. If ESI failed to fall (Kelly Flynn cut numbets as well on Tuesday), then APOL is equally compressed versus the 2011 eps expectations. This is true across the space. So either 3
EST should be shmted in anticipation of delayed teaction to the earnings cut or APOL should probably be boxed/coveted here at $46.50 because an equal petcentage estimate cut yields a $4.13 eps for APOL in CYll, but the stock wouldn't move anyway according ESJ behavior pattern. Therefore, to stay with the short in the near-term, we need the legislative initiative. From the standpoint of a legislative catalyst, the Senate Education Committee is expected to hold a hearing on August 4''h; we are not sure of the topic(s) yet or who will testifY. We don't see this hearing as a market mover. Since Congress is out of session for August, we see no news coming from them. NegReg isn't coming until November P', at the earliest. The negative press is abeady built into the space. CPLA talked about shifts in lead flow acquisition costs on their eps call, but nothing fatal. Worst case scenario: The group switches from trading off legislative risk and back to earnings growth, in the absence of new information, the space could rally. If there is any roll back in Gainful Employment the group will rally. New deep-pocketed institutional money, albeit being very na'ive, could step up to buy the low pie's. WE ARE NOT SAYING COVER. We are attempting to do a "Risk Assessment" to convey the change in risk between now and the first half the year when the group was higher and switching from prices trading off eps to regulatory. We had a target of $40 for APOL by the end of 2010. With the stock having hit that point a few weeks ago, we don't see the stock trading through $40 for some time, short of a raid by the DOJ or a low percentage catastrophic event. Rather, investors should expect APOL to develop a trading tange for the next several months between $40 and $55. Another risk is the timing disconnect between the regulatory impact and the present day. The industry may not begin to start to make changes to comply with the regulations until next year. 20l1 will be a transition year, followed by full implementation in AY2012 - centuries away in stock market time. One question on the JPM call earliet this week, was whether or not lower tuition rates fiom G IE will translate to lowet debt. Can we expect students to be more rational in their borrowing practices in the face of tuition rates falling by 25% or more? Unless loan limits are decreased correspondingly, it is not a no-btainet to assume lower debt levels. One question that came up in the Q&A was the feasibility of Steve Eisman's suggestion of "risk-sharing." Source indicated a risk-sharing proposition would be easy to implement, but the outcome might be distasteful, as schools would increase tuition furthet to offset the added risk. Bear Case is Intact--Yes
Jntra-quruter churn still holds true. Turnover or disruption of emolhnent cou nselors ovet the next 6 quarters holds true. More filtering of unqualified students and negative associate's degree growth is still intact. Higher marketing, increased competition, changing behavior to accommodate more scrutiny fiom the government: All valid. They are going to take time to really show themselves in the financial statement, pethaps by December and into CY1 Qll. Without question, in our minds, the implications of G/E for APOL rue severe. No matter what the end product looks like, we believe APOL is at serious risk of having multiple programs and/ or students ineligible to receive Title IV. Keep in mind many of APOL's nebulous courses, such as "Introduction to Communication" and other bogus
4
classes. APOL has a h istory of roJling out new programs that keep students in school longet by changing the requirements mid-stream. That practice will be harder to sustain under the new rules. Politically, we believe we have the initiative longer term. In Congress, we have "bad apple" mentality. It is not far outside the reahn of reality to assume that APOL will be used as an example of a bad apple. A witch hunt of APOL will provide a shot across the bow to the industry that they are next unless they improve their performance. The question is: Does Congress know how deep, how severe the misbehavior is at UOP? On the JPM call, source also pressed the new posture of Senators Enzi and Alexander, jumping on the "bad apples" in the industry that need to be shut down. Congress needs more education/info about the space. Whether the federal government goes after this latter group one at a time or all taken together as a "bad apple" , APOL and its children represents the best short opportunities. The other schools may actually benefit by APOL's demise. Mark Kantrowitz
Loan repayments are a performing asset. He talked about the new ratio including ALL borrowers, in ordet to weed out the loophole of abusing the deferments. Emollment growth limit could be imposed on schools if they fail to comply, based on a 3 year moving average of growth. He bel ieves double-d igit enrollment growth impl ies a reduction in fitst year emollment limitation (unclear why he thinks that unless he assumes emollment rise 3 years in a row.) Opined on the outcome of the language. In some places, pruts were left open-ended, as the DOE real izes t here will be publ ic comment. He th inks some believe the "restricted" zone should be harsher. Talked about increase exposure to schools as they are forced to disclose debt/income ratios. Difficulty in assembling information. Schools rue going to have to track and provide data by program. Example: Colleges may not have the ability to track repayment rates (e.g. in the case of a consolidation loan m where the guarantee agency takes the loan.) He thinks the DOE came up with the 35% repayment rate by taking 30% 3 rd year default calculation (d idn't say where that number came fiom, probably higher for f/p's), and the DOE simply add 5% to make it marginally harder. New programs ate class ified with the same restrictions as ex ist ing "restricted" programs until there is enough data to show they are doing okay. That heads off the mad rush to add new programs, especially if they are similar to existing programs that are aheady restricted, may change the name and try to get the new program name reclassified. The rule blocks this; Kantrowitz referenced pg 98 and 115 (table). He also talked about the slippery language on page 42 regarding new programs. Questions were asked about the source of data. He talked about income data coming from the Social Security Administration, but there is a mismatch, because the debt ratio numbet would be coming fiom an average of 3 years, based on academic awrud year. He said it is also based on the debt of a graduating class. Median debt as a percent of annual average income by program, not by OPE lD. Schools are not disclosing graduation rate by program--yet. Don't expect that willingly.
5
He commented the language was designed as " 3 strikes and you're out!" lOW, only the worst of the bad apples will be affected. The DOE thinks that's 5% of programs and as many as 8 % of students. (Probably 50% of APOL students though.) Finally, he talked about changes in the marketing of education, specifically, the internet. Schools are going to migrate to higher cost leads hoping for better retention. The business practice of blasting solicitations to pmchased pools of leads is going to stop. As a result, he expects emollment growth to slow across the board Our Idealist Solution
The government should regulate the industry by dictating margins for companies that hit cettain threshold of revenue ftom taxpayers. Since the Administration has already moved toward Socialism, why not view the sector as a government contractor hired to perform certain duties for the greater good of society, as we seek to compete in a global environment? Gross margins could be pegged at 50%, with instructional costs at 50% of COGS. Operating margins could be dictated into 20% (ESI is at 40%) and net margins no greater than 10% etc. Those percentages could be haircut up in favor of the industry as they drop their percentage of income from Title IV. This knocks out the 90/10 jssues as companies are incentivized by fatte1 margins ifthey reduce reJiance on government money. It seems far-fetched, but given the pendulum swing into Socialism, almost anything is better than the G IE language fiom Friday. We are being semi-cynical Given the new variables from G/E we are not confident that these rules will stick. Standardized government education makes sense. Looking at other government contractors whose margins, well, might as well be dictated: From October of 2005 to present General Dynamics has an average gross margin of -17%. The operating margin was -12% with net margin of 8%. Lockheed Martin has had an opetating mrugin of 11% for the last several years with net margins of 7%. RTN; 20%, 12% and 89{>, respectively. CACI, a personnel suppliet to the CIA has a 30% gross margin, 6% operating margin and 3.5% net margin. APOL 60%, 33% and 13%, respectively.
6
Sellers Fred To: Kolotos John Chesley, Susan Finley Steve Bergeron. David Kvaal, James Kanter, Martha Ochoa, Eduardo Yuan Georgia CC: Date: 9116/2010 1:05:30 PM Subject: Education Sector report on GE Don't know if folks have seen the attached analysis but I found it based on an article in Inside Higher Ed. The website where I found the report is: http://www.educationsector.orglpublications/are-you-gainfully-employed-setting-standards-profit-degrees Fred
From:
EDUCATIONSECTOR REPORTS
September 2010
ARE YOU GAINFULLY EMPLOYED?

Setting Standards for For-Profit Degrees
By Ben Miller
ABOUT THE AUTHOR

BEN MILLER is a policy analyst at Education Sector. He can be reached at bmiller@educationsector.org
ABOUT EDUCATION SECTOR

Education Sector is an independent think tank that challenges conventional thinking in education policy. We are a nonprofit, nonpartisan organization committed to achieving measurable impact in education, both by improving existing reform initiatives and by developing new, innovative solutions to our nation's most pressing education problems.
Copyright 2010 Education Sector Education Sector encourages the free use, reproduction, and distribution of our ideas, perspectives, and analyses. Our Creative Commons licensing allows for the noncommercial use of all Education Sector authored or commissioned materials. We require attribution for all use. For more information and instructions on the commercial use of our materials, please visit our website, www.educationsector.org. 1201 Connecticut Ave., N.W , Suite 850, Washington, D.C. 20036
202.552.2840 www.educationsector.org
Education policy events in Washington, D .C ., attract a familiar cast of characters: think tank representatives, members of organizations with eight-letter acronyms, and the occasional retired college professor. But an event at the New America Foundation this summer attracted a different crowd: organizations with names that ended in "markets," "capital," and "fund." The questions from the audience weren't about quality teaching or common curriculum standards; they were about income vs. earnings, access to federal databases, and student debt thresholds. Someone hearing just the audio feed might have easily mistaken the conference for the quarter ly earnings call of a Fortune 500 corporation.
The subject of the event was for-profit higher education. Representatives from the financial sector had come to New America, a nonpartisan public policy instit ute, to hear a high-level Obama administration official talk about a regulatory controversy that could make them- or lose themhundreds of millions of dollars. Just a few days before, the U. S. Department of Education had released a new proposal that would make it more difficult for for-profits to access billions of dollars in federal funds. At the center of the proposal is a rule called "gainful employment" that would penalize forprofit colleges and other vocational training programs for saddling students with more debt than they can pay back. For-profits have grown by leaps and bounds in recent years, largely free of federal regulation. That freedom would be significantly curtailed if the gainful employment st andard takes effect. Vocational training programs would be judged by the ratio of the debt that graduates assume relative t o their current earnings and t he rate at which t hey are able to repay it. If programs offered by for-profit colleges exceed certain thresholds on those measures, they risk losing eligibility for federal st udent aid. Given t hat many for-profit colleges receive close to 90 percent of their revenue from f ederal grants and loans, losing access to these dollars would be a death sentence. With such high stakes, the proposed gainful employment standard has generated intense debate. While the owners of for-profits see a $29 billion industry that produces some of the best earnings ratios in the stock market, a group of well-funded short-sellers paints a picture of a fraudulent, overleveraged industry t hat's poised f or a subprime mortgage-style collapse. The inst itutions argue that they serve a class of students excluded from traditional higher education and that they are crucial for meet ing the Obama administrat ion's college completion goals. But many lawmakers worry t hat in fulfilling that mission, for-profits have relied too heavily on federal aid, forced st udents t o borrow t oo much money, and produced degrees of questionable worth. Sen. Tom Harkin, the Iowa Democrat who chairs the Senate committee overseeing t hese schools, has warned t hat "even good actors in t his industry are lured int o the vortex of bad practices in order t o compete and meet investors' expect ations." 1 Critics of t he gainful employment standard, meanwhile, have claimed t he proposal "will eliminate quality programs while doing little or not hing to address the issue of excessive st udent debt. " 2 Some have even gone so far as t o say it "will attack our freedom and individual liberty to make decisions that have consequences. " 3
www.educationsector.org
EDUCATION SECTOR REPORTS: Are Y Gainfully Employed? ou
Yet despite all the noise and controversy, important questions have been left unanswered: Which institutions are most vulnerable to the proposed rules? What types of programs are most likely to be affected? This report tries to answer these questions, using publicly available data to present, for the first time, a picture of what effect the gainful employment proposal could have at more than 12,600 vocational programs at colleges and universities across the country. This includes more than 2,350 bachelor's degree programs. Much of the focus in Congress and in the media has been on institutions, particularly those that are publicly traded. But this analysis suggests that individual programs within those institutions may vary widely in how they perform under the proposed gainful employment standard. An institution could very well offer both programs that are unaffected and programs that become ineligible for federal student
Overall, the programs most likely to be affected are those tied to high-tech fields, such as e-commerce or graphic design, or those tied to jobs with low expected starting salaries, such as medical assistant or chef. Although these programs cover a range of different jobs, they employ similar marketing tactics. Colleges are forbidden by law to make false promises of jobs or to inflate salary data, so they play on emotions, appealing to students' desires to be valued in their careers.5 TESST College of Technology in Beltsville, Md., a school owned by Kaplan Higher Education, tells would-be medical assistants that they are joining a "growing field that allows [them] to assist others in need."6 Students looking at Le Cordon Bleu Institute of Culinary Arts, owned by Career Education Corporation, are encouraged to "follow [their] passion" and "explore [their] creativity. " 7 Kaplan advertises its information technology degrees as a chance for students to "be the most valued person at work. "8 And at the Art Institute of Pittsburgh's Online Division, the ads for the interior design program tell prospective students that they can have a "profound impact on people's lives."9 These marketing pitches also often tout the benefits of an entire industry, like health care, rather than the realities of the specific job for which the program is preparing students- jobs that are entry-level with low pay and typically have little opportunity for advancement. And as this analysis shows, many of these programs are poor investments for students. While these at-risk programs comprise only a small minority of all programs at for-profit colleges, it would be wrong to conclude that most for-profit programs will emerge from the new federal standards unscathed. A much larger number-some 65 percent-are likely to fall in a middle ground between full eligibility and total ineligibility called "eligible with a debt warning," which requires colleges to, among other things, post prominent cigarette pack-style "debt warnings" alerting potential students to the likelihood that enrolling could be hazardous to their financial health. The gainful employment standard would not lead to a wholesale shutdown of the for-profit sector. But it would probably force many for-profits to substantially change their pricing and approach to student debt.
Colleges are forbidden by law to make false promises of jobs or to in late salary data, s hey play on emotions, appealing to students' desires to be valued in their careers.
aid. This analysis also finds that the type of programs that could lose eligibility under the gainful employment standard vary significantly. For instance, there are a large number of ineligible programs for medical assistants, but these programs only exceed the proposed debt-to-income standard by a few thousand dollars, meaning they could avoid penalties if they slightly reduced their costs. Others programs, like those in culinary arts, are less likely to be ineligible, but those that miss the mark often miss by a wide margin. Out of more than 12,600 programs, about 4 percent, or just over 500 programs, would lose eligibility because of the new standard. This includes 8 percent of bachelor's degree programs, 6 percent of associate degree programs, and 1 percent of programs that are generally certificate programs of two years or less. 4
EDUCATION SE CTO R REPORTS: Are You Gainfully Employed?
More broadly, it would establish a new federal perspective on higher education, involving close examination of college prices relative to graduates' future earnings, an idea that was first contemplated decades ago but is only now seeing the light of day.
requirement, Congress and f ederal agencies turned their attention to closing schools, tracking the rate at which borrowers defaulted on their loans, and limiting the percentage of revenue for-profit colleges could receive from federal aid programs. Today, for-profits are again in the spotlight. Enrollment at these schools grew by 160 percent in the last decade. 11 And despite enrolling only about 10 percent of all students, for-profits consume 25 percent of all Pell Grant dollars disbursed and 21 percent of all federal student loan dollars.12 That's a large investment for a sector in which the average graduation rate is 20 percent for bachelor's degrees and just over 60 percent for programs of two years or less, and in which it's estimated that as many as 40 percent of student loans go into default. 13 Those numbers have prompted the federal government to take a fresh look at the sector. The U.S. Senate has held multiple hearings about the quality, recruitment practices, and cost of these institutions, questioning whether the more than $26 billion in federal aid given to these schools each year is a good investment. Likewise, the Obama administ ration is seeking greater control of these schools through the regulatory process. This June, the U.S. Department of Education proposed language on 15 issues that, among other things, would prevent for-profit institutions from paying recruiters based on student enrollment and provide more consumer protections against false advertising. A month later, it released a proposal to define gainful employment by relying upon measures of student borrowing, expected earnings, and student loan repayment rates. That regulation is currently going through a public comment period, and a final version will be released later in 2010. If enacted, it will go into effect on July 1, 2011. It if does, the standard would tie college quality to work-force outcomes for the first time, substantially changing the way vocational programs are judged in the process.
An Undefined Standard
Gainful employment is not a new standard. When Congress passed the Higher Education Act in 1965, it required that non-accredited public or private notfor-profit programs provide gainful employment in a recognized occupation in order to receive federal money for student aid.10 When for-profit colleges later became eligible for these aid programs, Congress required them to meet the same criteria. But Congress never fully defined gainful employment or explained how colleges could meet the standard. Even when for-profits came under intense scrutiny as part of a Congressional investigation into widespread industry fraud in the early 1990s, the term remained unclear. Instead of clarifying the
Categories of Eligibility
Eligible
These programs have a repayment rate of at least 45 percent, and the annual loan payment is less than or equal to 8 percent of the average annual earnings or 20 percent of discretionary income.
Ineligible
These programs have a repayment rate below 35 percent and an annual Joan payment that is both above 12 percent of average annual earnings and 30 percent of discretionary income.
Eligible with a Debt Warning

These programs have either a repayment rate or debt-to-income ratio that exceeds the threshold for an eligible program, but not both. In other words, the repayment rate must be at or above 45 percent, or the debt-to-income ratio must be at or below 8 percent or 20 percent, but both cannot occur.
Restricted
These programs have a repayment rate below 45 percent and a debt-to-income ratio below 8 percent and 20 percent. They also have either a repayment ratio at or above 35 percent or a debt- to-income ratio at or below 12 percent or 30 percent, or both.
Calculating Gainful Employment

To determine whether a program meets the proposed gainful employment standard, the department will consider how much students borrow to attend that
EDUCATION SECTOR REPORTS: Are You Gainfully Employed?
program, the annual income of program graduates, and the rate at which program graduates repay their loans. Using those first two pieces of information, the department will create a ratio of annual earnings to debt payments. Each individual program offered by a for-profit institution and all non-degree training programs at public or private, not-for-profit colleges would have to meet certain thresholds on the debt-toearnings comparison and maintain a certain minimum repayment rate in order to remain eligible for federal student aid funds. A program's repayment rate looks at the status of federal student loans that entered repayment in the last four years. Among those loans, it measures the dollar amount of all loans being actively repaid divided by the amount of loans that entered repayment during that time frame. The regulation defines the numerator of this equation as the original outstanding principal balance of all loans that entered repayment in the past four years and were repaid in full or had enough payments to reduce the principal owed in the last fiscal year.14 Note that the numerator is based on the original principal value of a loan that is being repaid,
The proposed gainful employment standard also judges programs based upon two ratios of students' annual debt payments to their earnings. They are calculated using the following three figures:
Annual loan payment: The median borrowing amount among graduates from the past three years is used to calculate an annual loan payment based on the assumption that the debt is paid over 10 years with an interest rate equal to the standard unsubsidized Stafford loan rate. Average annual earnings: The average annual income earned by program graduates over a three-year period. 15 This data will be collected by a federal agency, most likely the Social Security Administration, and reported as a single figure to the department. Discretionary income: The average annual earnings minus 150 percent of the poverty threshold for a single individual living in the continental United States (about $16,245 in 2009).
Ineligible programs have a repayment rate below 35 percent and an annual loan payment that is both above 12 percent of average annual earnings and 30 percent of discretionary income.
not the amount repaid. In other words, if the principal owed is reduced by at least $0.01 , then the entire balance of the loan is counted in the numerator. For example, consider a school that had two students borrow $1,000 each. One borrower makes no payments and does not reduce the principal, the other pays enough to reduce the principal owed to $999. In this case, the repayment rate is $1,000 divided by $2,000, or 50 percent. The repayment rate can also be thought of as the percentage of loans being repaid, weighted for the size of the loans.
For each program, the department calculates the annual loan payment and then compares it to both the annual average earnings and discretionary income numbers f or that program. The department's proposal establishes thresholds for repayment rates and debt-to-income ratios. Based upon their performance relative to these thresholds, programs are placed into four different categories of eligibility: "eligible," "ineligible," "eligible with a debt warning," or "restricted." These categories rest on three types of ranges. If a program is entirely above the upper bound, then it is eligible; if it is entirely below the lower bound, then it is ineligible. All others that fall somewhere between these two thresholds are either eligible with a debt warning or restricted.
Eligible: These programs have a repayment rate of at least 45 percent, and the annual loan payment is less than or equal to 8 percent of the average annual earnings or 20 percent of discretionary income. Eligible programs are free of any restrictions. Ineligible: These programs have a repayment rate below 35 percent and an annual loan payment that is both above 12 percent of average annual earnings
EDUCATION SE CTOR REPORTS: Are You Gainfully Employed?
Table 1. How to Determine If a Program Meets the Gainful Employment Standard
AND
::;8% ::;8% >8% > 8%and::; 12% > 8%and::; 12% >12% >12%
~ 20%
<!
45%
Debt warning Debt warning Debt warning Restricted Restricted Restricted Restricted Debt warning Debt warning Debt warning Restricted Restricted Restricted
Eligible Eligible Eligible Debt warning Debt warning Debt warning Debt warning
>20% ::;20%
> 20% and ::; 30%
>30% > 20% and ::; 30% >30%
INELIGIBlE
and 30 percent of discretionary income. These programs will lose federal student aid eligibility. Ineligible programs may not provide federal student aid to any new students and must warn existing enrollees of debt dangers, in addition to all the other disclosures described below. Eligible with a debt warning: These programs have either a repayment rate or debt-to-income ratio that exceeds the threshold for an eligible program, but not both. In other words, the repayment rate must be at or above 45 percent, or the debt-to-income ratio must be at or below 8 percent or 20 percent, but both cannot occur.16 These programs may still participate in the federal student aid programs, but they must include in all materials and online a prominent warning saying that students may have difficulty repaying their loans. The school must also disclose its recent loan repayment and debt-to-income rates. Restricted: These programs do not meet any of the requirements for an eligible program, but exceed some of the benchmarks for an ineligible program. They occupy a middle ground. These programs have a repayment rate below 45 percent and a debt-toincome ratio below 8 percent and 20 percent. They also have either a repayment ratio at or above 35 percent or a debt-to-income ratio at or below 12 percent or 30 percent, or both. Programs marked as restricted by the department will have their enrollment capped at the average of the past three years, must provide warnings to consumers about debt levels, and must get statements from area employers about why the program should continue.
These last two categories are opposites. A program that is eligible with a debt warning is good enough on one measure to meet the eligible threshold, but falls short in the other. A restricted program doesn't meet any of the eligible standards, but has at least one calculation that is above the ineligible threshold. (See Table 1.)
Other Important Considerations

In addition to the new set of standards and measurements, the proposed gainful employment rule contains a few other provisions worth mentioning. The bottom 5 percent: The gainful employment standard will go into effect in the 2012-13 academic year, but penalties will be administered differently that first year. Rather than preventing all ineligible programs from receiving federal student aid, those with low repayment and debt-to-income rates will be broken down by the type of degree or credential (associate, bachelor's, certificate, etc.) awarded. In each category, the programs will be sorted by repayment rate. The programs with the lowest rates will lose their eligibility for aid until the enrollment of all the ineligible programs equals 5 percent of the enrollment of all programs in that category. The remaining programs will face the same penalties as restricted programs. New programs: Traditionally, new programs have been able to gain access to federal student aid dollars as long as they are offered at an accredited institution.
Methodology
It is possible to estimate potential income levels for individual programs because all institutions are required to report an instructional program code for each of their offerings. 1 Each code corresponds to specific professions and their earnings data-information that is kept by the U.S. Bureau of Labor Statistics.2 Because one code can be linked to multiple professions, the salary estimate reflects the average annual 25th percentile earnings for each instructional code. For codes tied to multiple jobs, the earnings are weighted by the number of people employed in each job. Multiplying the salary amount by 8 percent and 12 percent produced income thresholds for the average annual earnings. Calculating discretionary income required subtracting 150 percent of the poverty threshold for a single individual and then multiplying the remaining amount by 20 percent and 30 percent. Under the proposed gainful employment calculation, the income thresholds will be compared to the annual payment on debt owed by a program's students. Because actual earnings data ~re not available, this analysis instead calculated how much debt a student could take on if his or her annual loan payments were equal to the income thresholds determined earlier. Loan amounts were calculated by dividing the average annual earnings and the discretionary income levels by 12 to determine a monthly payment. The resulting figure was then used to calculate the original amount a student would have borrowed if he was making that payment each month for 10 years and had a fixed interest rate of 6.8 percent? These loan terms are identical to those on an unsubsidized federal Stafford loan. The resulting origin~! loan balance amounts represent the maximum debt load a student could take on. Students with higher debt burdens would be devoting a larger percentage of their income to making annual loan payments than what is allowed under the proposed standard. While the U.S. Department of Education did release estimated federal student loan borrowing levels by institution, these figures did not include average private loan borrowing by school-additional debt that is also included in the proposed gainful employment calculations. Private student loans can be a significant source of additional debt. Moreover, the borrowing information was not reported uniformly-some institutional data reflected both graduate and undergraduate borrowers, while some offered separate figures for the two. The lack of private student loan borrowing is especially problematic because it is a significant source of additional debt.4 Unfortunately, there is no central repository of reliable information on private student loan borrowing at the institutional level. So instead of relying on reported borrowing information, this analysis approximates students' debt levels by looking at the cost of their program, minus federal grant aid received. Where available, program costs were calculated using actual pricing information for tuition, fees, books, and supplies reported by institutions. ~ This information is available for 1,890 schools in the department's Integrated Postsecondary Education Data System, or IPEDS, that also had repayment rate information available. For programs that take more than a year to complete, the total cost figure encompasses all charges that may be spread out across several years. If an institution did not specifically report costs by program, its cost estimate per program is based on the school's published figures for tuition and fees and books and supplies. Bachelor's degree programs reflect the past four ye~rs of cost information; associate degree programs reflect the past two. While students at proprietary colleges and universities do take on large levels of debt, they also receive significant amounts of federal grant aid. To account for this, each program's cost estimate was reduced by the average amount of federal grant aid received by students at that institution, data that are also reported to IPEDS. Bachelor's degree programs had their costs reduced by the average federal grant aid received over the past four years; associate degree programs had their costs reduced by the average grant aid over the past two years. Programs' eligibility under the proposed gainful employment standard was then determined by taking the cost estimates and subtracting from them the borrowing thresholds established using the Bureau of Labor Statistics data. If a program's cost minus the borrowing thresholds yielded a positive number, a student was likely to borrow more than the income estimates would allow. If the subtraction produced a negative number, students were likely to borrow less than the maximum allowable amount. This information was paired with the institutional repayment rates reported by the department to determine whether a school would be affected by the proposed standard. While there is no guarantee that such programs would actually be sanctioned under the new standard, this analysis does suggest which types of programs and institutions may need to consider reining in their borrowing over the next few years. There are several limitations to this approach. Students may borrow less than the full amount to cover program costs, or they may borrow more than the full amount. The assumption that students will borrow the full cost of their education, minus available federal grants, is supported by a number of statistics on student debt and the revenue structure of for-profit colleges. An analysis of data from the National Postsecondary Student Aid Survey published
Methodology, cont.
by Education Sector last year shows that over 92 percent of students at for-profit colleges take out a loan to finance their education. 6 And the debt levels these students assume are quite high. The department estimates that the median debt level of for-profit students ranges from $18,415 for an associate degree to over $31 ,000 for a bachelor's degree.l Similarly, the College Board found that over 53 percent of bachelor's degree recipients at for-profit institutions graduated owing over $30,500.8 And while it is reasonable to expect that not every student would borrow at such a high level, for-profit colleges and their defenders note that they cannot control how much students borrow and that some take out too much debt. That over-borrowing could balance out statistics for students who take out a lesser amount in loans. The revenue structure of for-profit colleges also bolsters the assumptions about student borrowing used in this report. For-profit institutions may not take in more than 90 percent of their revenue from the federal student aid programs, and many, especially the large publicly traded companies are close to this threshold. 9 After subtracting federal grant dollars, the remaining loan money represents a very significant portion of a school's revenue. And there is evidence that the revenue that does not come from federal aid programs still comes in the form of loans. For example, Corinthian Colleges Inc., a large publicly traded company, reported that 89 percent of its revenue comes from federal aid programs and only about 1 to 2 percent comes from cash payments from students. 10 That leaves private student loans as the most likely other source of financing. Students' actual earnings could also be higher than the Bureau of Labor Statistics figures. Estimates of federal grant aid may also be too generous, because they reflect awards given to first-time, full-time students. These amounts are going to be higher than what the large number of part-time students would receive. While this approach could incorrectly identify programs as at-risk for violating the gainful employment standard when they are not, it is also possible for the opposite to occur. Some programs may produce graduates with even lower earnings than the national figures, further lowering the income threshold. This analysis is meant to provide an overall estimate of how the proposed federal rules will change the for-profit higher education sector as a whole and how different program types are likely to be affected. It is not a fool-proof predictor of which individual institutions or programs will meet the standards.
Notes
1. These institutions are known as program reporters and must break down cost by program because their offerings start at multiple times throughout the year and do not follow the standard academic calendar. 2. Each student aid-eligible offering is assigned a six digit Classification of Instructional Programs (CIP) code that identifies the content area covered by a program. For ex;;~mple, a program in cosmetology may be assigned the code 12.()401 , which corresponds to "Cosmetology/ Cosmetologist, General." Using information from the National Crosswalk Service Center, institutions can then link a program's CIP code to the corresponding Bureau of Labor Statistics codes. To continue the example, a program wrth a CIP code of 12.0401 has four corresponding codes in the bureau's database: 39-5012 (hairdressers, hairstylists, and cosmetologists), 39-5091 (makeup artists, theatrical and performance), 39-5092 (manicurists and pedicurists), 39-5094 (skin care specialists). For each profession, the SOC database provides information on the number of people employed in an occupation and their earnings at the 1Oth, 25th, 50th, 75th, and 90th percentiles. 3. Stan Brown, "Loan or Investment Formulas," Oak Road Systems, February 19, 2010, http://oakroadsystems.com/ math/loan.htm#LoanAmount (accessed September 7, 2010). 4. Sandy Baum and Patricia Steele, "Who Borrows Most? Bachelor's Degree Recipients with High Levels of Student Debt," College Board, April 2010, http://advocacy. col!egeboard.org!site$/defaultlfiles/Trends-Who--BorrowsMost-Brief.pdf (accessed September 7, 201 0), 3. 5. Program reporters must provide the total cost for a program. Thus, if a two-year program is listed, the expense figure that goes with it covers both years of enrollment. 6. Kevin Carey and Erin Dillon, "Drowning in Debt," (Washington, DC: Education Sector, July 9, 2009) http:// www.educationsector.org/analysis/analysis_show.htm?doc_ id=964333 (accessed September 7, 201 0). 7. "Program Integrity: Gainful Employment (Notice of Proposed Rulemaking)," Federal Register Page 43647. 8. Sandy Baum and Patricia Steele, "Who Borrows Most? Bachelor's Degree Recipients with High Levels of Student Debt," 1. 9. " Emerging Risk: An Overview of Growth, Spending, Student Debt and Unanswered Questions in For-Profit Higher Education," U.S. Senate Health, Education, Labor, and Pensions Committee, June 24, 2010, http://harkin.senate.gov/ documents/pdf/4c23515814dca.pdf (accessed September 10, 2010), 4. 1o. coco - 02 201 o Corinthian Colleges Earnings Conference Call," Final Transcript, Thomson StreetEvents, February 2, 2010, http://phx.corporate-ir.net/External. File?item=UGFyZW 50SUQ9Mzc3NjM4fENoaWxkSUQ9Mzc2NT14fFR5cGU9MO= =&1=1, (accessed September 7, 2010), 10.
Under the proposed gainful employment standard, new programs will also have to be approved by the department. They will have to file an application with the department and include enrollment projections along with comments from unaffiliated employers about the need for such a program and the availability of related jobs. The department will then determine whether to grant the program eligibility.
Longer time frames: Programs that prepare people for careers in which income levels increase substantially after a few years (such as doctors or social workers) can have their data calculated over the
are protected by federal privacy laws. This analysis estimates how many and what kind of programs are at risk under the proposed standards by comparing program costs to the potential income levels of program graduates and by looking at the repayment rate for the institution overall. In other words, if a student borrowed to cover the entire cost of his or her program, after receiving available federal grant aid, would that amount, coupled with the institution's repayment rate, put that program in danger of losing eligibility? (See "Methodology" sidebar on page 6 for a complete explanation of these estimates.) This analysis examined 12,662 programs offered by 2,667 colleges or universities. It encompasses three different types of programs, all of which are classified by an instructional code known as a CIP. First, the analysis looked at institutions that report the total cost of specific programs. 20 This group includes 793 programs offered at public or private, not-for-profit institutions, only two of which would be negatively affected by the standard. These 6,140 programs at 1,890 institutions report students' exact cost to attend that program. The analysis also included any program offered at a for-profit institution that produced at least one bachelor's or associate degree last year. This includes 2,351 bachelor's degree programs at 431 schools and 4,171 associat e degree programs at 721 schools. In every case, only institutions with repayment rate information were included. Of this sample of more than 12,600 programs, 504-or about 4 percent-would be ineligible for federal student aid funds based upon this analysis. That percentage is a bit lower than the department's estimates. Of the remaining programs, 16 percent would be eligible, 65 percent would be eligible with a debt warning, and 15 percent would be restricted. 21 (See Figure 1 .)
The ineligible programs in culinary arts have an average repayment rate of 27 percent and have costs more than $29,000 above the borrowing limits.
fourth, fifth, and sixth years after their students leave school. To stay eligible, programs that use the longer time frame must show that their students' annual loan payment is no more than 20 percent of discretionary income or no more than 8 percent of average annual earnings.
Overall Results
Under the gainful employment proposal, the department estimates that about 5 percent of programs would be deemed ineligible and 8 percent would be restricted. 17 Another 48 percent would be eligible with a debt warning, and 39 percent would be fully eligible. 18 Among for-profit institutions, the department expects about 1,658 programs to be declared ineligible, but it did not say how many forprofit programs it considered overall. 19 It provided no details on which institutions or program types are likely to fall into this category. It is impossible to independently verify the department's estimates because student income data
Ineligible Programs
The 504 programs with high cost-to-income ratios and low repayment rates are offered at 222 different colleges or universities. Of those, 102 colleges had more than one ineligible program. But 196 of the institutions with an ineligible program had at least one other program that would retain its eligibility. This means that even if that program lost student aid eligibility, the school could continue offering other
Figure 1. Eligibility Status Under Gainful Employment

All Programs
Bachelor's Degree Programs
W .
Associate Degree Programs
- Ineligible Restricted
in culinary arts have an average repayment rate of 27 percent and have costs more than $29,000 above the borrowing limits. The 12 ineligible programs in baking and pastry arts also fare poorly with an average repayment rate of 25 percent and costs more than $22,000 above the limits. Others have already raised concerns about student debt at culinary institutions. In March, the New York Times ran a front-page article on student debt at forprofit colleges, featuring a picture of students in chefs' uniforms. Inside, it discussed the story of Andrew Newburg, who paid $41 ,000 for a program at Le Cordon Bleu with the promise of a $38,000 line cook job, only to find out classmates were taking $8-anhour dishwashing jobs. 22 Thirteen programs at Le Cordon Bleu show up on the list of ineligible schools, and 18 are on the list of restricted schools.
Debt warning
Eligible
Restricted Programs
According to the analysis, 1,899 programs, or 15 percent, would be restricted under the proposed gainful employment standard. These offerings all had repayment rates that were too low or cost-to-income ratios that were too high, but not both. The programs are offered by 807 different institutions. Cosmetology programs were the most common type of offering to
programs, so, it would not be put out of business entirely. These 504 programs represent 87 different instructional codes. The instructional type with the largest number of ineligible programs is medical/clinical assistant, which represented 74 of the 504 violations. Other common types were programs for culinary arts/ chef training (34), e-commerce (31), and accounting technology/technician and bookkeeping (26). Though medical/clinical assistant offerings were among the most common program types to violate the borrowing standards, the average amount by which they exceeded these thresholds was much lower than that for other program types- particularly those in the food services. On average, medical/clinical assistant exceeded the borrowing threshold for 12 percent of average annual income by just over $7,900. Similarly, other health-related programs like health information and medical records, medical insurance coding, and medical office assistant all had several programs in violation, but these exceeded the 12 percent threshold by an average of between $7,000 and $9,000. Since many of these programs are offered at the associate or bachelor's degree levels, that works out to only a few thousand dollars over each year. Other program types are nowhere near meeting the gainful employment standard. The ineligible programs
Table 2. Most Common Types of Ineligible Programs

Instructional category
MedicaVCiinical Assistant Culinary Arts/Chef Training E-Commerce/Eiectronic Commerce Accounting Technology/Technician and Bookkeeping Graphic Design Health Information/Medical Records Technology/Technician Interior Design Administrative Assistant and Secretarial Science, General Baking and Pastry Arts/Baker/Pastry Chef Design and Visual Communications, General Medical Insurance Coding Specialist/Coder Fashion Merchandising
74 34 31 26
21 20 13 12 11 11 11
end up in this category, with 210 programs restrict ed. Other program types that show up in large numbers include medical/clinical assist ant (142 instances), animation, interactive technology, video graphics, and special effects (83), and electrical, electronic and communications engineering technology (70). Forty-five culinary arts programs are categorized as restricted, while 15 baker/pastry chef programs fell into this category. Many of these restricted programs could be in further trouble if their graduates' earnings end up being lower than the estimates. Over 800 of the restricted programs had a repayment rate below 35 percent, and 163 of these had a repayment rate below 20 percent. If these programs end up violating the debtto-income ratio they will become ineligible.
offered by for-profit colleges in these two degree types. This was done by using completion data from IPEDS, which each year reports the type of program and degree level for every credential conferred by a college or university. A program's total cost was estimated using the figures for tuition, fees, books, and supplies for the total number of years it would take to complete a program. This means summing the cost over four years for bachelor's degrees and over two years for associate degrees.24 This methodology has a few additional limitations. Unlike the programs in which the institutions report specific costs, exact tuition charges are not available for these bachelor's degrees. Instead, the analysis assumes that the tuition is the same for each offering at a school. Recent research indicates price variability is less pronounced at four-year institutions than at two-year colleges. According to a research paper published in May 201 0 by a fellow at the Association for Institutional Research and the National Center for Education Statistics, only about 13.3 percent of for-profit four-year institutions vary their tuition by program, and 6.7 percent vary their fees by program.25 Second, it is possible that a student may take longer to complete a degree. In that case, the cost would be even higher than the estimate.
Bachelor's and Associate Degree Programs

One particular concern raised by critics of the gainful employment standard is that it would "preclude for-profit colleges from offering bachelor's degree programs," and eliminate many associat e degree programs, all due to their high cost-2 3 To test t hese assertions, the analysis separated out all programs
Bachelor's Degree Results
Table 3. Most Common Types of Restricted Programs

Cosmetology/Cosmetologist, General MedicaVCiinical Assistant Animation, Interactive Technology, Video Graphics and Special Effects Electrical, Electronic and Communications Engineering Technology/Technician CAD/CADD Drafting and/or Design Technology/Technician Corrections and Criminal Justice, Other Legal Assistant/Paralegal Administrative Assistant and Secretarial Science, General Graphic Design Interior Design Culinary Arts/Chef Training 142 83
The bachelor's degree subset includes 2,351 programs offered at 431 institutions. Out of all the bachelor's degree programs considered, 62 percent would be either eligible or eligible with a debt warning under the proposed gainful employment standard. An additional 29 percent would be restricted, and 8 percent-or 193 programs-would be ineligible. (See Figure 1.)
70
Ineligible Programs
68 66
55 53
The 193 programs that would be ineligible are offered at 78 colleges and universities. This includes programs at branches of the Art Institutes, the International Academy of Design and Technology, ITT Technical Institute, and Westwood College. Of the ineligible programs, 31 are in e-commerce-the most of any program type. Other program types with large numbers of ineligible programs include interior design (19) and graphic design (16). On average, all of t hese
1Q EDUCATION SECTOR REPORTS: Are You Gainfully Employed?
Table 4. Most CommonTypes of Ineligible Programs, Bachelor's Degrees

Instructional category E-Commerce/Eiectronic Commerce Interior Design Graphic Design Fashion Merchandising Animation, Interactive Technology, Video Graphics and Special Effects Web Page, Digital/Multimedia and Information Resources Design Accounting Technology/Technician and Bookkeeping Computer Graphics Design and Visual Communications, General Fashion/Apparel Design Cinematography and FilmNideo Production
..
.
31
Table 5. Most Common Types of Restricted Programs, Bachelor's Degrees

Instructional category Animation, Interactive Technology, Video Graphics and Special Effects Electrical, Electronic and Communications Engineering Technology/Technician Corrections and Criminal Justice, Other Interior Design Legal Assistant/Paralegal Accounting
79
19
16
9
70
45 36 32
31
8 8 8
7
Web Page, Digital/Multimedia and Information Resources Design Graphic Design Psychology, General Computer and Information Systems Securit y
24
23
21
7
7
21
programs are wel l below t he minimum repayment rate of 35 percent and are more than $20,000 away from meeting the debt -t o-income st andard. These results indicate that programs connected to greater work-force needs are less likely to be ineligible. Only a handful of programs in accounting and one program each in business management , legal assistant/paralegal, and nursing would be ineligible. By contrast, most ineligible programs are in "dream job" areas: t hey provide training in cutting-edge fields like online businesses and graphic design, or in luxury occupations like int erior design or fashion merchandising. These areas are associated wit h relatively high borrowing levels, but do not offer large numbers of jobs.
paralegal, accounting, web page, digit al/multimedia and inf ormat ion resources design, and graphic design also appeared numerous times.
Associate Degree Results

The associate degree subset includes 4,171 different programs offered by 721 institutions. 26 Of t hese programs, 6 percent, or 267 programs, would be ineligible under the gainful employment st andard. Anot her 75 percent of programs would be fully eligible or eligible with a debt warning, while the remaining 19 percent would be rest ricted. (See Figure 1.)
Ineligible Programs
The 267 ineligible programs are offered by 142 different colleges or universities. This includes programs offered by well-known college chains like the Art Institutes, Everest (college, university, and inst it ut e), ITT Technical Institute, and Kaplan (college and university). Fifty-seven different t ypes of programs fall into the ineligible category. Medical/clinical assistant programs are the most common type of offering to be ineligible, with 67 programs f alling int o this category. Programs in culinary arts/chef training (22) and health inf ormat ion/medical records technology (21} also
Restricted Programs
About 29 percent of bachelor's degree programs would be rest ricted-meaning they would not be able to offer federal financial aid to new students and would have t o demonstrate a continued need for t heir program from the local business community. The most common types of programs in this category are in animation, interactive technology, video graphics and special effects (79 programs}, followed by electrical, electronic and communications engineering technology (70}, correct ions and criminal justice (45}, and interior design (36}. Programs in legal assistant/
11
Table 6. Most Common Types of Ineligible Programs, Associate Degrees

Program instructional category Medical/Clinical Assistant Culinary Arts/Chef Training Health Information/Medical Records Technology/Technician Accounting Technology/Technician and Bookkeeping Administrative Assistant and Secretarial Science, General Medical Office Management/Administration Baking and Pastry Arts/Baker/Pastry Chef Medical Insurance Coding Specialist/Coder Medical Office Assistant/Specialist Cosmetology/Cosmetologist, General Graphic Design
Table 7. Most Common Types of Restricted Programs, Associate Degrees

Program instructional category Medical/Clinical Assistant CAD/CADD Drafting and/or Design Technology/Technician Administrative Assistant and Secretarial Science, General Health Information/Medical Records Technology/Technician Medical Administrative/Executive Assistant and Medical Secretary Medical Insurance Coding Specialist/Coder Allied Health and Medical Assisting Services/ Other Medical Office Management/Administration Graphic Design Accounting Technology/Technician and Bookkeeping
IBI
67 22 21 18 13 10 10 10 9
68
53
39
34
27
27
26
23
21
appear frequent ly on the list of ineligible program types. On average, none of the most common types of ineligible programs is close to meeting the repayment rate st andard, but many are less than $10,000 above the borrowing threshold. These programs would have to either significantly reduce costs or raise their repayment rates t o avoid losing eligibility. One int eresting trend that emerges from the dat a for associate programs is the large number of medicalrelated programs that would be ineligible under the proposed st andard. In addition t o the medicalrelat ed categories already mentioned, medical programs in insurance coding, office assistant, office management, and secretary all appear in high numbers on the list of ineligible programs. All of these professions have low starting salaries. As a result, many would not be able to justify t he price tag of as much as $28,000 for some of these programs.
Culinary Arts/Chef Training
21
varied somewhat from those on the list of ineligible programs. Medical/clinical assistant programs again showed up on the top with 108 restricted programs. They are followed by programs in computer aided design and drafting (68), administ rative assistant and secretarial science (53}, and health informat ion/ medical records t echnology (39). In aggregat e, data on associate and bachelor's degree programs suggest t hat a larger percentage of t hese programs might be in danger of losing eligibility t han t he overall sample that also included certificate programs. For bachelor's degrees, the programs at greatest risk appear to be in fields t hat are related to high-tech jobs or luxury professions t hat may not be in high demand; for associate degrees, the concerns arise around expensive programs associated with low-salary professions. The data suggests t hat degree programs that provide t raining for well-paying, highdemand jobs should not be affected too severely.
Restricted Programs
The 787 restricted programs are offered at 375 different colleges and universities. This includes multiple branches of Argosy University, the Art Inst itutes, Brown Mackie College, Bryant and St ratton College, DeVry University, Everest (college, institute, and university), ITT Technical Institute, and Le Cordon Bleu. The most common program types on this list
Publicly Traded Companies

Several programs at publicly t raded companies show up on the lists of either ineligible or rest ricted programs. The Art Institutes, Everest University, ITT
12
Technical Institute, and Westwood College would all have both ineligible and restricted programs. While the University of Phoenix, Strayer University, DeVry Inc., and American InterContinental University would not have any ineligible programs, they all show up on the list of restricted programs. Table 8 shows estimates of the percentage of programs at colleges owned by publicly traded companies that would be eligible, eligible with a debt warning, restricted, or ineligible. It includes programs of all levels from certificate to bachelor's degree.
programs must provide the same information. Local companies hire area graduates and can recognize a quality training program. Seeking their feedback recognizes the valuable role they can play in helping to ensure that students are entering a program that is likely to produce jobs. The gainful employment standard is also a gain for students as consumers. Publishing repayment rates, debt ratios, and cost warnings gives potential enrollees information that, using a set formula, can be compared across all institutions. This information is more useful than job placement data, which can be calculated in different ways and is not easily verifiable. It is also more helpful than graduation rate information, which doesn't give an accurate picture of student success at schools with large numbers of non-traditional or part-time students. But perhaps the greatest consumer benefit is providing this information on a program-by-program basis, rather than aggregating it across an institution. For-profit colleges offer a wide variety of training programs in completely unrelated fields, so breaking apart the information by program ensures that a nursing student, for example, can see how his or her program actually performed without getting results conflated with business programs that serve students seeking very different careers.
An Important Step Forward

The proposed gainful employment regulation is a significant departure from existing laissez-faire policy on federal student aid, policy that requires little accountability for the use of funds or outcomes for students. Formally acknowledging the link between training and earnings is an important codification of the promises about jobs and salaries that for-profit institutions highlight in their marketing materials. The standard also represents a first step in better engaging employers in discussions about higher education. It means that before an institution can offer a new program it must provide assurance from local companies that the curricula are aligned with needed skills and that sufficient job demand exists. Restricted
Table 8. How Publicly Traded Companies Would Fare Under the Gainful Employment Standard
Company All publicly traded companies American Public Education Capella Education Co. Career Education Corp. Corinthian Colleges Inc. DeVry Inc. Education Management Corp. Grand Canyon Education Inc. ITT Educational Services Inc. Kaplan Higher Education Lincoln Educational Services Strayer Education Inc. Universal Technical Institute Inc. University of Phoenix
1
Eligible(%)
Debt warning (%)
Restricted (%)
Ineligible(%)
6
Programs
4 85
64
15 62
21
0 38 23
0 16 4 0 13 0 7 5 9 0 0 0
13 430 626 244 718 46 825 316 139 19 46 487
0 5
61 80 73 40 78 66
77
11
26 46 0 25 12 18 16 0 10
22 2 5 7 0 4 0
66 84 96 90
13
The gainful employment standard also explicitly introduces value as one way of judging quality and cost at the same time. Current college rankings, especially those compiled by U.S. News & World Report, already list "best value" colleges that offer good quality for their cost. But the opposite can also be true; at a certain price point, the quality of a college becomes irrelevant. A student could get the best clinical/medical assistant training in the world, but if it costs $35,000 or more, and if the average annual income for these positions is just $29,000, then the student is going to have trouble paying off the debt. The inclusion of debt-to-income ratios by the gainful employment standard is a worthwhile attempt to capture this idea with easily understandable data.
the gainful employment standard regardless of the college's tax status. The calculation of the repayment rate also presents some difficulties. Loans are counted as being repaid if there has been any reduction in the principal owed. But this standard fails to consider whether borrowers are actually on track to pay off the debt on time or whether they are just making a few minimum installments. For example, a borrower with a $1,000 loan who makes enough payments to reduce the principal by $1 a year for four years is considered to be in repayment even though, at that rate, he or she wouldn't be able to pay down the debt in 10 years. Including both federal and alternative, or private, student loans in the borrowing figures also makes the debt-to-income ratio harder to determine. Much of private borrowing is direct to the student. There is no central repository of information on private student borrowing information, and schools may have no way of capturing all the private loans taken out by their students. Also, assuming a low fixed rate will make the annual payment on private loans seem cheaper than it actually is. The loan also may have a 20- or 30-year repayment time frame, rather than the assumed length of 10 years. In either case, exact costs are misstated. Private student loans also don't fit the rationale of why gainful employment needs to be defined in the first place. From a taxpayer's point of view, poor usage of federal student aid dollars is a waste of scarce resources. There is no similar taxpayer investment with private loans. Another concern with the proposed standard's debtto-income ratio is that it only considers program completers. While this makes sense from the standpoint of wanting to make sure graduates are gainfully employed, it is also important to remember the large numbers of borrowers who drop out. Students who fail to graduate are frequently left with significant amounts of debt but none of the economic benefits associated with a college degree or certificate. One 2005 study found that students who borrowed and did not complete their program were "twice as likely to be unemployed as borrowers who received a degree, and more than 10 times as likely to default on their loan."27 A program that fails to graduate large numbers of its students should also be seen as not providing gainful employment.
At a certain price point, the quality of a college becomes irrelevant. A student could get the best clinical/medical assistant training in the world, but if it costs $35,000 or more, and if the average annual income for these positions is just $29,000, then the student is going to have trouble paying off the debt.
But the proposed standard isn't perfect. It applies to all for-profit programs (except those in the liberal arts), but only to non-degree certificate programs at public and private not-for-profit colleges. Thus, a for-profit institution and a neighboring community college could offer the exact same program, but only one of them would have to meet the gainful employment standard. If the offerings and instructional program codes are the same, then the same standards should be applied to all institutions. Programs in the liberal arts should continue to be excluded because they do not carry an implicit promise of a job in a specific profession. But strictly vocational offerings should be subject to
14
The debt-to-income ratio also fails to recognize that federal student loan regulations allow students to borrow beyond the total cost of their program. Students who take out far more in loans than necessary can inflate borrowing totals, which can lead to a school being penalized for something largely out of its control. 28 One way around this problem would be to compare the average borrowing amounts relative to program costs. Those that seem fairly close should be judged according to the debt figures, while programs with a large discrepancy should be subject to further investigation. If an investigation shows that increased borrowing is solely due to student decisions, then the school should be judged only on a portion of that borrowing. A common critique of the new gainful employment proposal is that it holds institutions accountable for other outcomes beyond their control. More specifically, it judges programs based on their graduates' earnings several years after they have left school. This issue recalls the rhetoric around cohort default rates, in which colleges argue that student characteristics, not program quality, play the largest role in assessing whether a student is likely to default. But this argument contradicts the schools' marketing claims that their programs can improve students' lives and lead to better jobs. Either programs lead to better jobs and higher earnings-in which case those results should be measured using a standard like gainful employment-or they don't, in which case their institutions should not be making these claims.
Establishing clear connections between employers, jobs, wages, and training-oriented programs is a welcome new way of thinking about education not just in terms of quality, but also in terms of value.
Congress could also take legislative action in this area. The Senate's Health, Education, Labor, and Pensions Committee has already held two hearings on for-profit colleges and promises to convene more in the fall. The hearings could prompt legislation to further limit the percentage of revenue that proprietary colleges can receive from federal aid programs. Such legislation might also prevent these colleges from using money from these aid programs to pay for marketing. America's higher education system is among the most diverse in the world in terms of the types of colleges and variety of programs it provides. But, to date, federal student aid programs have done little to formally acknowledge that diversity. The gainful employment standard is an important first step in addressing that flaw. Establishing clear connections between employers, jobs, wages, and trainingoriented programs is a welcome new way of thinking about education not just in terms of quality, but also in terms of value. Most important, it does this at the sub-institutional level, acknowledging that these types of programs have little overlap with other offerings at the same institution. Critics of the gainful employment standard are quick to disparage it as an attempt to shut down the sector. But this claim is unfounded. This analysis shows that gainful employment would likely force 4 percent of programs to close and restrict the activities of another 15 percent. But these results are not set in stone. Colleges will not be judged by the gainful employment standard for a few years yet, so they will have time to reduce their costs and student borrowing, to help students repay their debts, and to help those students find higher-paying employment. And any process that can encourage reducing student costs or improving job placement is a good thing.
Gaining From Gainful Employment

The gainful employment standard is just one part of a larger movement to regulate for-profit colleges. Other regulations released in June propose to eliminate exemptions that previously allowed schools to tie part of recruiters' compensation to getting students to enroll. The regulations would also crack down on so-called ability-to-benefit tests-exams given to students without a high school degree to determine their ability to handle college-level work. A U.S. Government Accountability Office report in September 2009 found that colleges were coaching ill-prepared students through these tests so they could receive federal student aid.29
15
Notes
1. Sen. Tom Harkin, "Beware of For-Profi t Higher Education," Forbes, August 11 , 2010, http:/ /www.forbes. com/20 10/08/01 /higher-education-student -debt -opinionsbest-colleges-1 0-harkin .html (accessed September 6, 201 0). 2. Jennifer Epstein, "Pushback on Gainful Employment," Inside Higher Ed, April 22, 2010, http://www.insidehighered.com/ news/201 0/04/22/gainful (accessed September 3, 2010). 3. Daniel Bennett, "Beating My Head on the Desk Won't Stop the Insanity," Center for College Affordability and Productivity, May 21 , 2010, http://collegeaffordability.blogspot.com/20 10/05/ beating-my-head-on-desk-wont-stop.html (accessed September 3, 2010). 4. Many institutions that do not offer a traditional semester-length course schedule report information to the U.S. Department of Education by program. 5. Gregory D. Kutz, "For Profit Colleges: Undercover Testing Finds Colleges Engaged in Deceptive and Questionable Marketing Practices, " U.S. Government Accountability Office, August 4, 2010, http://www.gao.gov/products/GA0- 10-948T (accessed September 7, 2010). 6. TESST College of Technology "Medical Assistant," TESST College of Technology, http://bit.ly/aJk2aO (accessed September 7, 2010).
7. Le Cordon Bleu Institute of Culinary Arts, "Le Cordon Bleu Institute of Culinary Arts in Pittsburgh," http://lecordonbleupittsburgh.com/index.asp?src=141574 (accessed September 7, 2010).
future, then it can be judged over the fourth, fifth, and six years after entering repayment. 16. There are three ways a program can end up in this category: (1) it has a repayment rate above 45 percent and a debt-toincome ratio above 8 percent and 20 percent, (2) it has a debt-to-income ratio at or below 8 percent and a repayment rate below 45 percent, or (3) it has a debt-to-income ratio at o r below 20 percent and a repayment rate below 45 percent. 17. James Kvaal (remarks at the conference, "Reining in For-Profi t Higher Education," New America Foundation, Washington, D.C., July 30, 2010). 18.1bid. 19. "Program Integrity: Gainful Employment (Notice o f Proposed Rulemaking)," Federal Register 75: 142, July 26,2010 Page 43636, http://www.gpo.gov/fdsys/ pkg/FR-201 0-07-26/ pdf/201 0 -17845.pdf (accessed September 3, 2010). 20. Some programs may be spread over multiple years, but the cost figure represents the total expense to complete that program. 21. The numbers do not add up to 100 percent due to rounding. 22. Peter Goodman, "In Hard Times, Lured Into Trade School and Debt," New York Times, March 13, 2010, http://www.nytimes. com/201 0/03/14/business/ 14schools.html (accessed September 13, 2010). 23. Mark Kantrowitz, "What is Gainful Employment? What is Affordable Debt?" FinAid.org, March 11 , 2010, http://www. finaid .org/educators/20 100301 gainfulemployment.pdf (accessed September 3, 2010). 24. Data for all other award levels was d iscarded because they required fractions of a year, and it was too d ifficult to estimate the appropriate cost amount. 25. Sean Simone, "Tuition and Fee Differentiation at Degree Granting Postsecondary Education Institutions," Association for Institutional Research, National Center for Education Statistics, May 2010, http://www.airweb.org/images/Simone_Final_ Report_2010.pdf (accessed September 10, 2010), 20. 26.1n total, the analysis considered 6, 747 programs at 790 for-profit institutions. Some colleges offered both bachelor's and associate degrees and so were considered under both categories, albeit for different p rograms. 27. Lawrence Gladieux and Laura Perna, "Borrowers Who Drop Out: A Neglected Aspect of the College Student Loan Trend," National Center for Public Policy and Higher Education, May 2005, http://www.highereducation.org/reports/borrowing/ borrowers.pdf (accessed September 3, 201 0). 28. Some colleges argue that excess borrowing is used to fund things like vacations and car payments. In o ther cases, the school may encourage students to borrow more than they need because it is easier to take out the maximum and then return money, rather than take out too little and need more. For example, a recent investigation from ABC News found that students at a branch of the University of Phoenix were being told to take out the maximum because it was easier and they could keep the extra money w ith no questions asked. 29. "Proprietary Schools: Stronger Department o f Education Oversight Needed to Help Ensure Only Eligible Students
8. Google, "Kaplan Information Technology Degree Google Search," http://bit.ly/biWSjk (accessed September 7, 2010). 9. The Art Institute of Pittsburgh Online Division, "Interior Design Program," http://bit.ly/9gUSbj (accessed September 7, 2010). 10. The Higher Education Act of 1965, Public Law 89-329, 89th Cong. , 1st sess. (November 8, 1965), Page 30, http://ftp . resource.org/gao.gov/89-329/00004C5 7 .pdf (accessed September 3, 2010). 11. Author-calculated statistic using data from the U.S. Department of Education's Integrated Postsecondary Education Data System. 12. Author-calculated statistic using data from the U.S. Department of Education's Federal Student Aid Data Center. 13. Author-calculated statistics using data from the U.S. Department of Education's Integrated Postsecondary Education Data System. Kelly Field, ''Government Vastly Undercounts Defaults," Chronicle of Higher Education, July 11, 2010, http://chronicle.com/article/Many-More-StudentsAre/66223/ (accessed September 3, 201 0). 14. Loans that are replaced by a single consolidation loan are not considered paid off. Loans that have an in-school or military deferment or entered repayment after March 31 of a g iven fiscal year are excluded. 15. By default, institutions have the rate calculated over the three years in repayment. If they can prove to the Department of Education that g raduates' salaries increase significantly in the
16
Receive Federal Student Aid," U.S. Govemment Accountability Office, August 2009, http://www.gao.gov/ new.items/d09600. pdf (accessed September 10, 2010).
17
From: Carol Cataldo <cataldo2@ix netcorn corn> To: Finley Steve CC: Date: 5/27/2010 9:18:36 AM Subject: EisrnanSohnConference[l]
Steve . . presume you saw this, but if not . . .
INonresponsive
Carol
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 " Sub prime 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 oftraditional 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 administration 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 ofunrestricted 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
5
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.
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%-100% 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 oflending 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/l 0 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
5
costs, compensate employees based on enrollment, influence key regulatory bodies and manipulate reported statistics- ALL TO MAlNTATN 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 ofBPI.
"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 G/ 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 a/so 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
5
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? It 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 N ovember 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 tum 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 of the 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 fiscal2009 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 5
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- [n 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 1. 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 tum 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 companies 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.
5
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 industty. 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.]

To:
Rob MacArthur 2/1/2010 12:07:12 PM ESI downgrade
CC:
Date: Subject:
Morgan Stanley
MORGAN NOR TH
STANLEY
RESEARCH
AMERICA
Morga,n S tanley & Co. Incorporated
Suzanne E. Stein
Suzanne.stein@morganstanley.com
+1 (1)212 761 0011
Vance H. Edelson
Va,nce.Edelson@morganstanley.com
+1 (1)212 761 0078
Cristina Colon
February 1, 2010
Cristina.Colon@ morga,nstanley.c om
+1 (1)212 761 4453
Stock Rating Equal-weight Industry View In-Line
ITT Educational Services

Downgrade to EW Based on Possibility of Tuition Cuts
What's Changed
Rating Price Target
Key Ratios and Statistics

Reuters: ESI.N Bloomberg: ESI US Business Services I United States of America Price target Shr price, close (Jan 29, 2010) Mkt cap, curr (mm)
NA
$96.87 $3,468 $133.75-85.04 12/08 5.17 18.4 5.17 12/09 8.01 12.0 7.91 12/10e 10.45 9.3 10.31 12/11e 12.53
Overweight to Equal-weight $130.00 to NA
52-Week Range Fiscal Year ending ModeiWare EPS ($) Prior ModeiWare EPS ($) P/E Consensus EPS ($) Div yld (%)
Investment conclusion: We are downgrading shares of ESI to Equal-weight and eliminating our price target. The specter of harsh "gainful employment" regulations, which will link program eligibility with a ratio of student debt to potential earnings, puts ITT's programs at high risk for tuition cuts. While the Department of Education (ED) will not issue its final ruling on this for several months, it has shown no willingness to soften the regulations. We cannot be certain of how this proposal will withstand potential legal or legislative challenges, but it is likely to remain a headwind for the near future. Operating fundamentals remain strong and we are our current estimates remain intact, but a hypothetical assessment of a potential decline in revenues now forms our scenario analysis. What's new: Negotiated rulemaking (negreg) ended without a firm ruling on gainful employment and we do not anticipate any update for several months. This is a challenge for high-priced programs, such as ITT's, which average -$19K/yr. We are most concerned about ITT's bachelor degree programs, which we estimate are - 25% of total enrollment, but certain associate degree programs, would likely not qualify under this measure as well. Although the regs include alternatives for demonstrating eligibility (based on loan repayment rates or actual income), these seem equally burdensome. Industry implications: Until we get program specific information, it is difficult to quantify this risk on a company-by-company basis. More at risk are programs with high tuition and some longer-term programs. Within our coverage we see ESI as most at risk, with APE I having the least risk to this potential regulation.
7.7
11 .81
Unless otherv.ise noted, all meuics are based on Morgan Stanley M odeiWare framework (please see explanation later in this no te). ~ Consensus d ata is provided by FactSet Estimates. e = Morgan Stanley Research estimates
Quarterly ModeiWare EPS

Quarter Q1 Q2 Q3 Q4
e
~
2008 1.08 1.20 1.28 1.61
2009 2009 Prior Current 1.59 1.87 2.01 2.58
2010e 2010e Prior Current 2 .09 2.47 2.63 3 .26
Morgan Stanley Research estimates
Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.
For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
Morgan Stanley
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Februa ry 1, 2010 ITT Educational Services
Risk-Reward Snapshot: ITT Educational Services (ESI, $96.87, EW)

Key Debate: The impact on revenue from gainful employment regs
S140
$ 130(+34%} 120
Investment Thesis
Proposed regulations for Title IV eligibility, specifically the definition of gainful employment (GE), will potentially force ESI to cut prices, posing a significant threat to revenues. The high price tag of ESI 's programs put its programs at risk, particularly bachelor degree programs (-25% of its students), many of whom are unlikely to satisfy GE requirements. While there is speculation that ED will drop this issue from the regs because it could lack statutory authority to control tuition, ED disagrees with this and is forging ahead.
100
$100 (+3%) .
80
S75(-23%)
60
40
20
Jar>-08
0 ~------------------------------------------------------Ju~08
Jan-09
Ju~9
Jan-10
Ju~ 10
Base Case (Jan-1 1)
-Historical Stock Performance
Current Stock Price
Bull Case
$130
Base Case
15x hypothetical 2010 Bull Case EPS 15x hypothetical 2010 Base Case EPS 15x hypothetical 2010 Bear Case EPS
All scenarios below are derived from Exhibit 3 on page 6. Gainful employment proposal is dropped and there is no impact on revenues- overhang of institutional loans and threat of future regulatory action remains. Operating margins remain in the high 30% range although pricing remains pressured. Gainful employment regs are enacted and revenue drops 10-15%. The impact on operating margins is significant and earnings (relative to what they would have been absent the impact of neg reg) drop by 25-30% over time. Gaimful employment regs are enacted - revenue declines 20-25%, as the company is forced to discontinue programs that do not meet new gainful employment requirements. EPS is -50% below what it would have been absent these new rules.
Range of Scenarios is Wide

We estimate a 10-15% revenue reduction if gainful employment regs are enacted as proposed, assuming some programs require price cuts to comply with the regs (and that a few may have headroom to raise tuition). Lower exposure to internal loans would partly offset the earnings impact and could raise the PIE multiple investors use to value ESI shares. We think our bear case scenario (25% revenue reduction) is a remote possibility. While a few programs may require substantial price cuts, 25% is too high in our opinion, and the cuts would not occur immediately. In a bull case scenario, EO drops the proposal (possibly after legal challenge), in which case our revenue estimates would be unchanged.
$100
Bear Case
$75
Regulatory Concerns Jeopardize Long-term Growth Potential

Rating Price 1/29/10 Market PiE PiE PEG PEG EViEBITOAEV/EBITOA Implied C2011E LTGrowth Cap (mn) C2010E C2011E C2010E C2011E C2010E Rate
coco
ESI APOL CECO EDMC DV STRA APE I CPLA
EW
EW EW
$ 14.00 $ $ 96.87 $ $ 60.59 $ $ 21.75 $ $ 19.00 $ $ 61.06 $ $207.78 $ $ 38.14 $ $ 73.38 $

$ 19.99
1,241 3,541 9,455 1,820 2,717 4,405 2,996 721 1,249 599
8.1 9.3 11.0 11.7 16.5 16.7 21.5 21.6 23.3 27.7
15.5
7.0 7.7 9.4 10.5 13.0 13.6 16.7 16.2 18.0 20.9
12.5
0.5 0.5 0.6 1.0 0.7 0.7 0.8 0.5 0.8 0.6
0.7
0.4 0,4 0.5 0.9 0.5 0.6 0.6 0.5 0.6 0.4
0.6
3.3 5,1 5.2 4.4 7.4 9.1 12.5 10.7 11.3 8.4
7.7
3.0 4.3 4.5 3.9 6.3 7.4 9.8 7.9 8.9 6.6
6.2
-17.5% -5,1% -3.3% -0.3% 3.7% 0.2% 3.0% 2.8% 3.9% 5.1%
1 .4%
uw
EW
Potential Catalysts
Release of the Notice of Proposed Rulemaking which will include ED's proposed changes. Legal or legislative activity.
ow
EW
ow
EW
LRN
ow
Risks
Lower placement rates or salaries. Rising Cohort Default Rates. Legal/legislative/regulatory activity.
Average
Source: Fac!Set, Mo rgan Stanley Research
Morgan Stanley
MORGAN
STANLEY
RESEARCH
February 1, 201 0 ITT Educational Services
Investment Case
Summary & Conclusions
We are downgrading s hares of ESI to Equal-weight and eliminating our price target given the overhang from possible tuition cuts if the Department of Education (ED) enacts proposed reg ulation on gainful employment. Draft regulations, offered by ED during last week's negotiated rulemaking (negreg) session, set a maximum debt-to-earnings ratio of 8% for non-degree programs and all programs offered by proprietary (for-profit) schools. While this provision is not final, the distinctly firm stance the federal negotiators took on this issue leads us to believe it will survive the last cut, which ED is expected to reveal in late March or April of this year. We expected ED to moderate its proposal during the final round of negreg but it refused any concessions on the matter. We view ESI as the most at-risk company in our coverage to this potentially new regulation given its high-priced programs (-$19K per year), almost all of which is funded through student loans. These students tend to be job changers, and as financially independent (often low-i ncome) working adults, who lack family support to pay for education, they pay very little of their tuition out of pocket, relying on student loans. The average cumulative debt load of students attending a program, and its relation to potential earnings from jobs associated with specific training in those programs will be used to determine program eligibility. Details of ED's proposal are outlined below. We estimate that the average earnings for students in ESI's programs (at the 25th percentile of earnings) wou ld need to be - $41K to support the estimated average debt load per student of $24K (Exhibit 1). The company estimates the average starting salary of its graduates is in the $32K range. We would expect this $32K figure reflects graduates starting at wages that are in the lowest percentiles of their respective fields. However, ED's methodology uses the 251h percentile of wages to compute the earnings side of the ratio, which helps account for wage increases over time and differences across students (some may do better or worse than others). Based on our review of BLS data, we estimate that occupations with $32K at the low end of the wage spectrum should report $38-$40K at the 25th percentile (this represents a 20% - 25% gross-up from the base, which also seems mathematically reasonable relative to a 25th percentile). To demonstrate eligibility, programs that lead to occupations with 25th percentile earnings of $38K- $40K would have to graduate students with a median debt load of $22K - 23K. We acknow1edge that averages don't tell the whole story, and that in reality, some programs will fall short of the criteria (while others may find headroom to increase tuition). Further, ED does not make a distinction between different degree levels or provide clear guidelines for associating CIP and SOC codes to each program. This puts ESI's bachelor programs especially at risk since their greater length and cost leads students to incur more debt, and although their earnings potential may be higher than with an associate's degree, this incremental benefit may be difficult to prove using the methodology ED has provided (which is mainly intended for non-degree programs).
Exhibil1
NegReg Issue #6 - Gainful Employment in a Recognized 129/10): Occupation (latest draft, released 1
An institution is considered to provide an eligible program that prepares students for gainful employment in a recognized occupation if the Secretary determines at the ~nd of e~ch three-year period that the debt-to-earnings ra~to assoc1ated with the program is 8% or less. A program Wlth ~ . debt-to-earnings ratio of more than 8% may cont1nue to qualify as an eligible program if it meets one of the following standards. First, if the institution has a 90% loan repayment rate. Second, if the institution submits acceptable documentation showing that students who completed or graduated from the program during the thre~-year pe~iod had earnings from occupations related to the tra1n1~g prov1de~ by the program that are higher than the BLS earmngs_ used tn calculating the debt to earnings ratio. See AppendiX B for the full text of this proposed regulation.
Example of Debt-to-Income Ratio Annual Tuition x Length of Program - Transfer credits x Student loans Estimated Debt Load $19,125 2 years 10 % of program 70 % of tuition $24,098
Must prepare students for jobs that earn at least $41 ,597 this amount in the 25th percentile f
Source Company data, Morgan Stlnley Research
Morgan Stanley
MORGAN
STANLEY
RESEARCH
February 1, 2010 ITT Educational Services
Although ED allows for alternative methods of demonstrating eligibility, we cannot gain conviction that ESI would be able to meet these criteria. One method allows programs to use actual graduates' wages to calculate the debt-to-income ratio (which would be beneficial if such numbers prove higher than the BLS-reported statistics), but it would necessitate that the company gather this data from a "substantial" number of graduates. Since privacy laws restrict schools to merely asking that students voluntarily provide this data, and ED does not define the size of a "substantial" sample, we do not consider this a viable option at this point. Another option is for schools to demonstrate that program graduates have a loan repayment rate of 90% or higher, but ED introduced a new methodology for calculating this rate which differs from the widely used and accepted Cohort Default Rate (CDR). While CDRs could provide a (very rough) directional indicator of where loan repayment rates could land, the new calculation would exclude loans in forbearance, deferment, or belonging to students who did not complete the program. Although we believe ESI's repayment rates would likely come in below its CDRs, we note its last reported 2-yr rates were in the 9.8% - 15.2% range (so that even at the low end, rates are closing in on the limit). Without additional disclosures, we cannot gain conviction that its programs would clear the 90% repayment rate under the new methodology. What about other for-profits? With such a wide range of ways to potentially categorize a specific program, which will ultimately determine the maximum tuition it will charge, it is virtually impossible to determine the specific impact on an institution. During negotiations, even ED officials admitted that their estimates of how this would impact the industry were based on "a messy spreadsheet that they would not share with the public" {which negotiators found disturbing, to say the least). They offered that only about 120 programs (not 120 institutions) would lose eligibility under these new rules. We made broad assumptions of the impact, but acknowledge that one of the unintended consequences of this regulation may be that schools raise tuition on programs that are well below the threshold as defined in gainful employment to make up for programs which will require tuition cuts. We also acknowledge that schools have a mix of certificate, associate, bachelor, masters and doctoral degrees, which will impact the results (students accumulate more debt the longer they are in school). Further, how exactly some will fare on the alternative methods of qualifying- through low default rates and actual income measures - is also unknown.
Exhibit 2
Overview of For-Profits
Company Implications of new gainful employment regs APE I Graduates have very low debt burdens as a result of 1) very low tuition rates and 2) large portion of revenue coming from Dept. of Defense programs (such as Veterans' Assistance) which are not loan-based.
APOL Low tuition across University of Phoenix programs means expected wages (as estimated with BLS data) wouldn't have to be particularly competitive for these programs to demonstrate eligibility. Some programs may be at risk, particularly Culinary programs, which are high-cost and can be associated with some relatively low-wage occupations. Programs are likely to qualify via loan repayment history, if not the primary debt-to-income measure. Capella derives more revenues from corporate reimbursement than do most peers, which eases students' need for debt financing . Also, with a 2-yr CDR of just 2.5%, Capella would easily meet the loan repayment alternative for demonstrating eligibility. While students do accumulate debt when working through these programs, their shorter-term nature means that the cumulative debt burden upon graduation is lower. If the median debt load in a given program was $10K, the program could be eligible if the associated occupation had a BLS-reported 25th percentile wage as low as $20K. Some programs could be affected, but average starting salaries for DeVry graduates are -30% higher than ITT's, while tuition is roughly lower. Some programs could be affected, particularly at the relatively costly Art Institutes. However, these may still qualify under the loan repayment rate alternative. The 2-yr CDR for the Art Institutes is 7.1% on a consolidated basis. Corporate reimbursements reduce students' need for debt financing, which should make it easy for most programs to clear the debt-to-income ratio. In any case, with a 2-yr CDR of 6%, Strayer would be likely to demonstrate eligibility at least via the loan repayment alternative.
CECO
CPLA
coco
DV
EDMC
STRA
Source. Company data, Morgan stanley Research
Morgan Stanley
MORGAN
STANLEY
RESEARCH
We expected some concession from ED on this issue, given the push back from a wide range of negotiators, but ED was not willing to negotiate. While negotiated rulemaking is intended to be an iterative process of finessing existing regulations, rather than redefining the law, ED was evidently seeking to radically change the provisions of the Higher Education Act (HEA) through this process, particularly with respect to this issue. Deputy Undersecretary of Education, Robert Shireman, has been an outspoken advocate for reducing student debt and has clearly targeted for-profits. Vigorous opposition to the gainful employment proposal came from many negotiators, including those representing community colleges (2-year public institutions) and traditional colleges (4-year public institutions). Many considered the proposal "social engineering" as it offered government support only for programs that lead to high-income jobs, potentially excluding certain disciplines that could include fine arts, public service, or other in-demand occupations. Further, many questioned the statutory authority of ED to rule on this matter, as the HEA does not explicitly allow for price controls. It was also considered discriminatory against lower income groups (as the same program could qualify if it were offered to a wealthier population), among other things. Legal challenges are a certainty, and for-profits are likely to get support from traditional2-year and 4-year institutions. We expect the for-profit education sector, led by the Career College Association (CCA) to wage an all out legal battle against ED on the grounds that it does not have the statutory authority to regulate tuition.
intent is to illustrate how this could impact profitability over the long-term. We use five scenarios: 0%, 10%, 15%, 20%, and 25% revenue cuts and show the resulting impact on operating margins and earnings. The reduction in operating leverage is tremendous, as the conversion of revenue to operating income has been in the 54% - 59% range in the last three years. Our hypothetical model makes the following assumptions: 1) Revenues decline in line with tuition cuts, but enrollment levels are unchanged at this time Cost of educational services (which correlates with enrollment) remains flat as revenue decreases, pressuring gross margin disproportionately; Bad debt expense (BDE), which factors into student services and administrative (SSA) costs, declines slightly to acknowledge less student financing from internal lending and PEAKS program. SSA excluding BDE remains flat to account for the large fixed cost base. Stock-based comp is flat as a percentage of revenues, Depreciation expense is the same in all scenarios.
2)
3)
4) 5) 6)
Potential Impact on Earnings from Lower Revenues

Our hypothetical model of tuition cuts illustrates the potential impact of tuition cuts (lower revenues) on ESI's earnings (Exhibit 3). We note that these changes would not go into effect immediately as they do in our hypothetical model, but our
The impact on earnings as revenue declines is staggering (shown in Table 3). We did not adjust for price elasticity of demand, but we would expect some additional demand for ESI's programs if prices declined which could offset the impact to some degree. Admittedly, ESI could make changes to its cost structure if faced with a lower revenue outlook, but in the (limited) history of the for-profit postsecondary education industry, right-sizing efforts tend to be problematic, costly, and drawn-out (see CECO).
Morgan Stanley
MORGA N STANLEY RESEARCH February 1, 2010 ITT Educational Services
Exhib~
Hypothetical Impact on ITT Educational Services, Inc. if Revenue Declines

S in millions
Fiscal Year Ending December 31 Total Revenue assumes 10% cut to revenue assumes 15% cut to revenue assumes 20% cut to revenue assumes 25% cut to revenue Cost of Educational Services Gross Margin assumes 10% cut to revenue assumes 15% cut to revenue assumes 20% cut to revenue assumes 25% cut to revenue Student Services & Administrative Expense %of Total Revenue assumes 10% cut to revenue (2% cut to BDE) assumes 15% cut to revenue (2.5% cut to BDE) assumes 20% cut to revenue (3% cut to BDE) assumes 25% cut to revenue (3.5% cut to BDE) Stock Based Compensation Expense %of Total Revenue assumes 10% cut to revenue assumes 15% cut to revenue assumes 20% cut to revenue assumes 25% cut to revenue Depreciation & Amortization %of Total Revenue Income from Operations Operating Margin Income from Operations (assumes 10% revenue cut) Operating Margin (assumes 10% revenue cut) Income from Operations (assumes 15% cut) Operating Margin (assumes 15% revenue cut) Income from Operations (assumes 20% revenue cut) Operating Margin (assumes 20% revenue cut) Income from Operations (assumes 25% revenue cut) Operating Margin (assumes 25% revenue cut) Normalized (Loss) Income per Share @10% @15% @20% @25%
2009 $1,319.2
2010E $1,639.6 $1,475.7 $1,393.7 $1 ,311 .7 $1 ,229.7 $541.0 67.0% 63.3% 61 .2% 58.8% 56.0% $470.9 28.7% 438.1 429.9 421.7 413.5
2011E $1 ,910.9 $1,719.8 $1 ,624.3 $1 ,528.7 $1,433.2 $630.2 67.0% 63.4% 61 .2% 58.8% 56.0% $544.1 28.5% 505.9 496.3 486.7 477.2 $19.1 1.0% 17.2 16.2 15.3 14.3 $35.6 1.9% $717.5 37.5% 531 .0 30.9% 445.9 27.5% 360.9 23.6% 275.8 19.2% $12.53 $9.14 -27% $7.67 -39% $6.20 -51% $4.72 -62%
2012E $2,061 .7 $1 ,855.5 $1,752.4 $1,649.3 $1 ,546.3 681.3 67.0% 63.3% 61 .1% 58.7% 55.9% 587.1 28.5% 545.9 535.6 525.3 514.9 20.6 1.0% 18.6 17.5 16.5 15.5 $40.1 1.9% $772.7 37.5% 569.7 30.7% 478.0 27.3% 386.2 23.4% 294.5 19.0% $13.88 $10.01 28% $8.38 -40% $6.75 -51% $5.12 -63%
2013E $2,264.3 $2,037.8 $1 ,924.6 $1,811.4 $1,698.2 745.2 67.1% 63.4% 61 .3% 58.9% 56.1% 644.3 28.5% 599.0 587.7 576.3 565.0 22.6 1.0% 20.4 19.2 18.1 17.0 $41 .6 1.8% $852.1 37.6% 631 .6 31 .0% 530.9 27.6% 430.1 23.7% 329.4 19.4% $15.73 $11 .32 28% $9.49 -40% $7.66 -51% $5.83 -63%
$436.8 66.9%
$376.3 28.5%
$13.1 1.0%
$17.4 1.1% 15.6 14.8 13.9 13.0
$24.9 1.9% $493.0 37.4%
$29.4 1.8% $610.3 37.2% 451 .5 30.6% 378.6 27.2% 305.6 23.3% 232.7 18.9%
$7.98
$10.45 $7.69 26% $6.45 -38% $5.20 -50% $3.96 -62%
Source: Morgan Stanley Research
Morgan Stanley
MORGA N STANLEY February 1, 2010 ITT Educational Services
RESEARCH
Valuation
Base Case. Given our view that some version of ED's proposal will be in the final regs and there is no assurance that it will be successfully challenged by the industry, our new base case valuation yields a stock price of $100, which reflects the results of our hypothetical model. Our hypothetical model illustrates that a 10-15% reduction in revenue drives a 30% reduction in EPS. Investors' aversion to internal lending and concerns about tuition levels (especially in the context of negotiated rulemaking) lead to a discount in the valuation multiple. We believe that investors are likely to use a higher multiple for ESI if it is not making institutional loans to students (or at least reduces the amount). For our base case, we place a 15x multiple on a reduced FY1 0 EPS (for the purposes of valuation only as we realize the regs will not go into effect for several years). The stock is currently trading at approximately this level, hence our Equal-weight rating.
Bull Case. Our bull case price target is based on the DCF valuation of our current model (which assumes no revenue reduction from new regulations). In this scenario, the issue of Gainful Employment is either thrown out by the department (which we see a highly unlikely) or successfully fought on legal grounds (which we do not view as likely, but is at least possible). In this scenario, we use our previous base case price target of $130 as a price target. Bear Case. Given the difficulty of analyzing every one of ESI's programs (as we cannot be certain of the exact CIP codes and SOC codes- see Appendix A) this scenario assumes a 20-25% reduction to revenues, which as illustrated in our hypothetical model, could have a devastating impact on earnings (down 50-60% based on our model). In this scenario, if we make the same assumption that investors are likely to use a higher multiple, because the risk of institutional loans and negotiated rulemaking no longer exists, we achieve a target price of $75.
Risks that could caus e ESI shares to decline, in our view, include: 1) worsening legal or regulatory hurdles; 2) need to cut tuition in some programs; 3) enrollment growth that does not keep pace with the company's expansion of its facilities; 5) further deterioration of student default rates; 6) a real or perceived decline in demand for IT employment
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Febru ary 1, 2010 ITT Education al Ser vices
Exhib~
ITT Educational Services: Income Statement, 2009-2012E (Does Not Reflect Potential Regulatory Changes) IFiscal Year Ending December 31 2009 1Q10E 2Q10E 3010E 4Q10E 2010E 2011E 2012E
Total Revenue Annual Growth Cost of Educational SeJVices Gross Margin Student SeJVices & Administrative Expense %of Total Revenue Special Legal and other Investigation Costs %of Total Revenue Stock Based Compensation Expense % of Total Revenue Total Expenses EBITDA EBITDA Marg1 n Year-over-Year Growth Depreciation & Amortization % of Total Revenue Income from Operations Operating Margin Interest Income Interest Expense Pretax Income Income Tax Benefit (Expense) Net Income, recurring Cumulative effect of ace. Chgs. Extraordinary (charges) I gains Net Income Avg. Diluted Shares Outstanding Reported Net Income (Loss) per Share Extraordinary Income (Loss) per Share Normalized (loss) Income per Share
E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research.
$1 ,319.2 29.9% $436.8 66.9% $376.3 28.5% $0.0 0.0% $13.1 1.0% $826.2 $517.9 39.3% 479% $24.9 1 .9% $493.0 37.4% 3.3 (0.7)
$369.7 28.3% 123.8 66.5% 117.6 31.8% 0.0 0.0% 5.5 1.5% $247.0 $129.9 35.1% 22.6% $7.1 1.9% $122.7 33.2% 0.3 (0.2)
$398.5 25.7% 134.7 66.2% 115.4 29.0% 0.0 0.0% 4.0 1.0% $254.1 $151 .7 38.1% 22.9% $7.2 1.8% $144.5 36.3% 0.5 (0.2)
$418.5 23.2% 139.8 66.6% 121.4 29.0% 0.0 0.0% 3.8 0.9% $264.9 $160.7 38.4% 24.6% $7 1 1.7% $153.6 36.7% 0.7 (0.2)
$452.9 21.0% 142.7 68.5% 116.6 25.8% 0.0 0.0% 4.1 0.9% $263.4 $197.5 43.6% 23.8% $80 1.8% $189.6 41 .9% 0.9 (0.2)
$1 ,639.6 24.3% $541 .0 67.0% $470.9 28.7% $0.0 0.0% $17.4 1.1% $1 ,029.3 $639.8 39.0% 23.5% $29.4 1.8% $610.3 37.2% 2.4 (0.9)
$1 ,910.9 16.5% $630.2 670% $544.1 28.5% $0.0 0.0% $19.1 1.0% $1 '193.4 $753.1 39.4% 177% $35.6 1 .9% $717.5 37.5% 6.0 (0.8)
$2,170.1 13.6% 717.1 67.0% 618.0 28.5% 0.0 0.0% 21 .7 1.0% $1 ,356.8 $853.6 39.3% 13.4% $404 1.9% $813.3 37.5% 10.1 (0.8)
--- --- --- --- --- --- --- --$495.6 $122.8 $144.7 $154.0 $190.3 $611 .9 $722.8 $822.7
--$302.9 0.0 0.0 (192.8)
--$74.9 0.0 0.0
(47.9)
--$88.3 0.0 0.0
(56.4)
--$94.0 0.0 0.0
(60.1)
--$116.1 0.0 0.0
(74.2)
--$373.2 0.0 0.0
(238.6)
--$440.9 0.0 0.0
(281 .9)
--$501 .8 0.0 0.0
(320.8)
--$302.9 37.9 $7.98 $0.00 $7 98
--$749 35.8 $2.09 $0.00 $2.09
--$88.3 35.7 $2.47 $0.00 $2.47
--$94.0 35.7 $2.63 $0.00 $2.63
--$116 1 35.7 $3.26 $0.00 $3.26
--$373.2 35.7 $10.45 $000 $10.45
--$440.9 35.2 $12.53 $0.00 $12.53
--$501.8 34.4 $14.60 $0.00 $14.60
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Exhib~
5 2012E $2,061.7 7.9% 122,712 10.0%
ITI Educational Services: Key Metrics, 2009-2012E (Does Not Reflect Potential Regulatory Changes) IFiscal Year Ending December 31 1010E 2010E 3010E 4Q10E 2010E 2011E 2009
Total Revenue YoY Change(%) Student Enrollment YoY Change(%) New student Enrollment YoY Change(%) Continuing Students YoY Change(%) Persistence rates YoY Change(%) Revenue per student (based on driving assumptions) YoYChange(%)
E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research
$1 ,319.2 29.9% 80,766 30.3% 85,928 31.6% 61 ,203 30.0% 75.6% 0.8% $4,780 5.3%
$369.7 28.3% 83,716 27.6% 22,722 20.0% 60,994 30.6% 75.5% 0.2% $4,577 -1 .5%
$398.5 25.7% 86,471 25.1% 23,237 18.0% 63,235 27.9% 75.5% 0.2% $4,760 -1 .5%
$418.5 23.2% 97,288 22.8% 32,731 18.0% 64,557 25.4% 74.7% 0.2% $4,840 -1.5%
$452.9 21.0% 97,865 21.2% 22,497 15.0% 75,368 23.1% 77.5% 0.2% $4,656 -1.5%
$1,639 6 24.3% 97,865 21 .2% 101,187 17.8% 75,368 23.1% 75.8% 0.2% $4,708 -1 .5%
$1,910.9 16.5% 111,556 14.0% 113,241 11.9% 87,034 15.5% 75.8% 0.0% $4,638 -1 .5%
$4,620 -1.5%
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Exhib~
ITI Educational Services : Balance Sheet, 2009-2012E (Does Not Reflect Potential Regulatory Changes) IFiscal Year Ending December 31 2009 1Q10E 2010E 3Q10E 4Q10E 2010E 2011E
ASSETS Current Assets Cash and Cash Equivalents Marketable Securities Restricted Cash Short-term Investments Accounts Receivable Deferred taxes Prepaid Expenses & Other Current Assets Total Current Assets Property, Plant & Equip. , net Direct Marketing Costs, net Other Assets Deferred income taxes Total Assets LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Accounts payable Current portion of long term debt Accrued Compensation and related liabilities Accrued Taxes Other Accrued Expenses Total Accrued Expenses Deferred Revenue Total Current liabilities long -Term Debt Deferred Income Taxes Minimum Pension liability Other non-current liabiltlies $1288 0.0 1.9 143.4 85.4 13.8 17.7 $391.0 $195 4 0.0 23.9 6.4 $616 7 $139.1 0.0 1.9 143.4 131.4 13.8 20.5 $450.2 $1994 0.0 23.9 64 $6799 $230.5 0.0 1.9 143.4 146.1 13.8 201 $555.8 $204.2 0.0 23.9 6.4 $790.3 $3162 0.0 1.9 143.4 158.1 13.8 23.5 $656.9 $209.6 0.0 23.9 6.4 $896.8 $4273 0.0 1.9 143.4 176.1 13.8 21.4 $783.9 $2152 0.0 23.9 6.4 $1,029.4 $427.3 0.0 1.9 143.4 176.1 13.8 21 .4 $783.9 $215.2 0.0 23.9 6.4 $1 ,0294 $801 .8 0.0 1.9 143.4 200.4 13.8 23.1 $1,184.3 $231 .2 0.0 23.9 6.4 $1,445.9
2012E
$1,225.7 0.0 1.9 143.4 223.0 13.8 26.2 $1,634.0 $246.5 0.0 23.9 6.4 $1,910.8
$61 .3 0.0 26.3 10.2 15.0 51.6 171.9 $284.8 $150.0 0.0 0.0 25.3 $460.1
$68.8 0.0 26.3 10.2 15.0 55.0 147.9 $271.7 $150.0 0.0 0.0 25.3 $447.0
$74.8 0.0 26.3 10.2 15.0 59.9 159.4 $294.1 $150.0 0.0 00 25.3 $469.4
$77.7 0.0 26.3 10.2 15.0 62.1 167.4 $307.2 $150.0 0.0 0.0 25.3 $482.5
$793 0.0 26.3 10.2 15.0 63.4 181.2 $323.8 $150.0 0.0 0.0 25.3 $4992
$79.3 0.0 26.3 10.2 15.0 63.4 181 .2 $323.8 $150.0 0.0 0.0 25.3 $499.2
$92.9 0.0 26.3 10.2 15.0 81.4 206.1 $380.3 $150.0 0.0 0.0 25.3 $555.7
$95.1 0.0 26.3 10.2 15.0 92.6 234.0 $421.8 $150.0 0.0 0.0 25.3 $597.1
Total Liabilities Stockholders' Equity Common Stock Additional paid-in Capital Retained Earnings Accumulated Other Comprehensive Income (Loss) Treasury Stock Total Stockholders' Equity Total Liabilities & Stockholders' Equity
E = Morgan Stanley Research estimates Source: Company data, Morgan stanley Research
$0.5 154.5 1,006.9 (10.1) (995.3) $156 6 $6167
$0.5 160.8 1,081 .8 (10.1) (1 ,000.3) $232.8 $679.9
$0.5 165.5 1,170 1 (10.1) (1,005 3) $320.8 $790.3
$0.5 170.0 1,264.1 (10.1) (1 ,010.3) $414.3 $896.8
$0.5 174.9 1,380.1 (10.1) (1 ,015.3) $530.2 $1,029.4
$0.5 174.9 1,380.1 (10.1) (1 ,015.3) $530.2 $1 ,0294
$0.5 194.0 1,821.0 (10.1) (1, 115.3) $890.2 $1,445.9
$0.5 215.7 2,322.9 (10.1) (1 ,215.3) $1,313.7 $1,910.8
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R ESEA R CH
Exhibit?
ITT Educational Services: Cash Flow Statement, 2009-2012E (Does Not Reflect Potential Regulatory Changes) IFiscal Year Ending December 31 2009 1Q10E 2Q10E 3Q10E 4Q10E 2010E 2011E 2012E
Cash Flows From Operations Net income Provision for doubtful accounts Depreciation and amortization Deferred mcome taxes Excess tax benefit from stock option exercises Stock-based compensation expense Pension settlement and amortization of prior service costs Others Changes 1 operating assets and liabilities: n Restricted cash Accounts receivable Direct marketing costs, net Accounts payable Accrued income taxes Other operating assets and liabilities Deferred revenue Short term investment Cash From Operating ActiVities Cash From Investing Activities Facility expenditures and land purchases Capita I expenditures, net Acquisition of college, net of cash acquired Proceeds from sales and maturities of investments Purchase of investments Issuance of note receivable Proceeds from repayment of note receiVable Cash Used in Investing Activities Cash From Financing Activities Proceeds from revolving borrowings Excess tax benefit from stock option exercises Proceeds from exercise of stock opt1 ons Repurchase of common stock Cash From Financing Activity $302.9 82.0 24.9 (1 .4) (5.3) 13.1 0.0 (1.2) 5.8 (136.8) (4.2) 4.9 1.0 5.3 10.4 0.0 $74.9 0.0 7.1 0.0 0.0 5.5 0.0 0.0 0.0 (46.0) 0.0 7.5 3.5 (2.8) (24.1) 0.0 $88.3 0.0 7.2 0.0 0.0 4.0 0.0 0.0 0.0 (14.7) 0.0 6.0 4.8 0.4 11 .5 0.0 $94.0 0.0 7.1 0.0 0.0 3.8 0.0 0.0 0.0 (12.0) 0.0 2.8 2.3 (3.5) 8.0 0.0 $116.1 0.0 8.0 0.0 0.0 4.1 0.0 0.0 0.0 (18.0) 0.0 1.6 1.3 2.2 13.8 0.0 $373.2 0.0 29.4 0.0 0.0 17.4 0.0 0.0 0.0 (90.7) 0.0 18.0 11 .8 (3.7) 9.2 0.0 $440.9 0.0 35.6 0.0 0.0 19.1 0.0 0.0 0.0 (24.2) 0.0 13.6 17.9 (1 .7) 24.9 0.0 $501 .8 0.0 40.4 0.0 0.0 21 .7 0.0 0.0 0.0 (22.7) 0.0 2.2 11.2 (3.1) 27.9 0.0
--- --- --- --- --- --- --- --$301.3 $25.7 $107.6 $102.5 $1289 $364.7 $526.1 $579.5
($4.2) (24.0) (20.8) 242.3 (244.8) (15.5) 2.7 $0.0 (11.1) 0.0 0.0 0.0 0.0 0.0 $0.0 (12.0) 0.0 00 0.0 0.0 0.0 $0.0 (12.6) 0.0 0.0 0.0 0.0 0.0 $0.0 (13.6) 0.0 0.0 0.0 0.0 0.0 $0.0 (49.2) 0.0 0.0 0.0 0.0 0.0 $0.0 (51 .6) 0.0 0.0 0.0 0.0 0.0 $0.0 (55.7) 0.0 0.0 0.0 0.0 0.0
--- --- --- --- --- --- --- --($64.3) ($11 .1) ($12.0) ($12.6) ($13.6) ($49.2) ($51 .6) ($55.7)
$0.0 5.3 8.8 (348.5) $0.0 0.0 0.8 (5.0) $0.0 0.0 0.8 (50) $0.0 0.0 0.8 (5.0) $0.0 0.0 0.8 (5.0) $0.0 0.0 3.0 (20.0) $0.0 0.0 0.0 (100.0) $0.0
0.0 0.0 (100.0)
--- --- --- --- --- --- --- --($334.4) ($4.3) ($4.3) ($4.3) ($4.3) ($17.0) ($100.0) ($100.0)
($97.5) 226.3 0.0 $128.8 $10.3 128.8 0.0 $139.1 $91.4 139.1 0.0 $230.5 $85.7 230.5 0.0 $316.2 $111 .1 316.2 0.0 $427.3 $298.5 128.8 0.0 $427.3 $374.6 427.3 0.0 $801 .8 $423.8 801.8 0.0 $1 ,225.7
Net increase (decrease) in Cash Cash & Equ1 valents - Beginmng Cash Adjustment due to Restatement Cash & Equivalents - End
E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research
11
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Appendix A: CIP I SOC Codes and Estimated Earnings for Selected ESI Programs Network Administration Estimated 25th Petie Wage CIP Program Title $53 ,843 11 .0901 Computer Systems Networking and Telecommunications 11 .1002 System , Networking, and LAN/WAN Management/Manager $61 ,074 $55,052 11.0802 Data Modeling/Warehousing and Database Administration 11.1001 System Administration/Administrator $68,423 Technical Support CIP Program Title Estimated 25th Petie Wage $ 54,685 11 .9999 Computer and Information Sciences & Support Services, Other $ 23 ,577 52 .0411 Customer Service Support/Call Center/Teleservice Operation $ 22 ,000 52.0499 Business Operations Support and Secretarial Services, Other 11.0301 Data Processing and Data Processing Technology/Techn ician $ 38,158 15.1203 Computer Hardware Technology/Technician $ 33,680 15.1204 Computer Software Technology/Technician $ 39,730 15.1299 Computer Engineering Techno logies/Technicians, Other $ 70 ,148 47 .0104 Computer Installation and Repair Technology/Technician $ 31 ,231 47.01 06 Appliance Installation and Repair Technology/Technician $ 26,760 47 .011 Security System Installation, Repair, & Inspection Technology/Technician $ 64,740 Instrumentation CIP Program Title Estimated 25th Petie Wage 15.0404 Instrumentation Technology/Technician $35,473 $26 ,109 15.0499 Electromechanical & Instrumentation and Maintenance Technolog ies/Technicians, Other
Source: O'NET for the US Dept of Labor, Bureau of Labor Statistics, Morgan Stanley Research
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Appendix 8 : Draft Regulatory Language for Gainful Employment
PART 668-STUDENT ASSISTANCE GENERAL PROVISIONS Subpart A- General **** 668.6 Gainful employment in a recognized occupation.
(a) General. (l) An institution is considered to provide an eligible program that prepares students for gainful employment in a recognized occupation if the Secretary detennines at lhe end of each three-year period that the debt to earnings ratio associated with the program is eight percent or less. If the debt to eamings ratio for a program is more than eight percent, the Secretary may nevertheless consider that program to be an eligible program if it satisfies an altemative measure tmder paragraph (c) of this section. (2) For purposes of this section (i) A program refers to any educational program offered by the institution under 668.8 (c)(3) or (d). (ii) A three-year period is the period covering the three most recently completed award years; (iii) In accordance with procedures established by the Secretary, the institution must report for each student who completes or graduates from a program (A)The Classification of Instructional Program (CIP) code for the program; (B) The date the student completed or graduated from the program ; and (C) The amounts the student received from institutional loans, and private educational loans.
(b) Debt to earnings ratio. As illustrated in Appendix A to this subpart, the Secretary calculates the ratio for the three-year period by - (1) Determining the median loan debt of students who completed or graduated from the program (loan debt includes title IV, HEA program loans (except Parent PLUS), institutional loans, and private educational loans) during the three-year period and using the median loan debt to calculate an annual loan payment based on a 10-year repayment schedtde and the current at1J1ual interest on Unsubsidized Federal Stafford Loans of Direct Unsubsidized Lom1s. (2) Using the most current Bureau of Labor Statistics (BLS) data, available at http://www.bls.gov/oes/current/oes stru.htm, to determine the annual earnings, at the 25th percentile, made by persons employed in occupations related to the training provided by the program. The Secretary may use national or regional BLS eamings data; and (3) Dividing the amount of the annual loan payment by the annual earnings, rounding down to the nearest one tenth.
(c) Alternative measures. A progratn with a debt to earnings ratio of more thatl eight percent may continue to qualif as an eligible program if-y (1) Loan repayment rate. The secretary detenuines that students who completed or graduated from the program have a 90 percent loan repayment rate. The loan repayment rate is calculated by - (i) Determining the number of student borrowers who entered repayment during the three-year period, except that this number does not include borrowers who at the end
Source: Department ol Education Office of Postsecondary Education, Negotiated Rulemaking 1/27/10
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Appendix B: Draft Regulatory Language for Gainful Employment (continued)
of tbis period are in an in-school deferment status or on any military-related deferment status; (ii) Of the number of borrowers who entered repayment, detennini:ng the number of borrowers who are actively repaying their loans. For thjs purpose, a borrower is considered to be actively repaying a loan ifhe or she made scheduled loan payments tmder a loan repayment plan and at the end of the three-year period the borrower-(A) Is not delinquent or in default on the Joan; or (B) Is not in a defennent or forbearance status; and (iii) Dividing the number of borrowers who are actively repaying their loans w1der paragraph (b )(2)(ii) of this section by the number of borrowers who entered repayment under paragraph (b)(2)(i) of tbis section and multiplying the result by 100; or (2) Actual earnings. (i) The institution submits information acceptable to the Secretary showing that students who completed or graduated from the program during the three year period had earnings, from occupations related to the training provided by the program, that are higher than the BLS earnings used in calculating the debt to earnings ratio under paragraph (b)( l) of this section: and (ii) By using the actual earnings to recalculate the debt to earnings ratio, the institution meets the eight percent requirement in paragraph (a)(l) of this section. (d) Deadline for submitting documentation. The institution must submit the documentation required m1der paragraph (c)(2) of this section no later than 45 days after the date the Secretary notifies the institution a program does not satisfy the debt to earnings requirement under paragraph (a) of tllis section or the loan repayment rate measure under paragraph (b)(1) of tbis section. (e) New and additional programs. (1) The institution must apply to the Secretary under 34 CFR 600.10 (c) (l) to have a new program desig11ated as an eligible program, and as part of that process the institution must provide the CIP code for that program. Until program-specific loan data are available, the Secretary calculates the debt to earnings ratio for a new progran1 by using the median loan debt incurred by students who completed or graduated from any program offered by the institution during the most recent three-year period. (2) If an additional program replaces, or will replace, a program the institution offers, or previously offered, that fails or failed to satisfy the debt-to-earnings ratio requirement with a program that prepares students for the same or related occupation, tlle instit11tion must apply to the Secretary under 34 CFR 600.10 (C)(I) to have the additional program designated as an eligible program. As part of that application process, the institution must provide the ClP code for that program . The Secretary calculates the debt to earnings ratio for the additional program by using the loan debt of students in the previous program and the loan debt of students in the replacement program, w1tilloan debt data are available for the additional program for a three-year period.
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(3) Before offering a new or additional program m1der this paragraph, the institution obtain docmnentation from employers not affiliated with the institution affirming that the program curriculum aligns with recognized occupations at those employers. Note: The Department would calculate the debt to earnings ratio at the end of the first year after the rules take effect. After that, we would calculate the ratio every three years (we could calculate it annually and provide it to schools so they know what's likely to happen at the end of the 3 year period).
Appendix A to Subpart A of Part 668 - - Calculating the Debt to Earnings Ratio The Office of Management and Budget (OMB) maintains a Standard OccupationaJ Classification (SOC) system which is a numerical coding system that classifies occupations for the purpose of collecting, calcuJating, or disseminating data. Through that system, and associated data collections, the Bmeau of Labor Statistics (BLS) makes available hourly and annual wage data that is updated over a three year cycle. For each standard SOC occupation, data on the mean and 101 , 2511\ 50 1h (median), h 75u\ and 90~' percentile are available. For any CIP that is associated with multiple SOCs, the 25'11 percentile annual wage is calculated by - Step 1: Determining all SOCs associated with the CIP using the 08NET- SOC to CIP crosswalk available at http://online.onetcenter.org/crosswalk/CIP/; Step 2: Obtaining from BLS the employment and annual 25'11 percentile wage for each SOC associated with the CIP, by entering the SOC at http://www. bls.gov/oes/current/oes stm.htm ; Step 3: Multiplying the employment by the annual 25 1h percentile wage for each SOC associated with the CIP to calculate the TOTAL 2511' percentile wages; Step 4: SUMMfNG the employment in each SOC associated with the CIP; Step 5: SUMMING the TOTAL 25111 percentile wages associated with the CIP; Step 6: Dividing the TOTAL 25111 percentile wages associated with the CIP by the SUM of the employment in each SOC associated with the CIP to arrive at a weighted average 25u' percentile annual wage;
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Step 7: For any classification of instructional program (CIP) that is associated with a 111 single SOC, the 25 percentile annual wage is used to determine the relationship between debt and eamings; The median loan debt of students who completed the program during the threeyear period is detennined by: Step 8: For each of those students, using the TOTAL amount received from any title IV, HEA loan program (except Parent PLUS), institutional loan, and private education loan (compiled from data submitted by t11e institution and data in NSLDS); Step 9: ARRANGING the values in Step 8, including values of zero where students did not incur any loan debt, in order from lowest to highest, and selecting the middle value. If there is an even number of values, the median is the average of the two mjddle values. Step 10: CALCULA TTNG the annual loan payment on the median loan amount in Step 9 based on a 10-year repayment schedule (120 payments) and the current Unsubsidized FFEL/Direct Loan interest rate; Step 11: For multiple SOC's, DIVIDING the amount of the annual loan payment in Step 10 by the annual earnings in Step 6, rotmding down to the nearest one tenth; and Step 12: For a single SOC, DIVIDING the amount of the annual loan payment in Step 10 by the annual eamings in Step 7, rounding down to the nearest one tenth.
Source: Department of Education Office of Postsecondary Education, Negotiated Rulemaking 1/27/10
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Mr. flG
fi STAr. l
C~
roNJ ModeiWare
Analvst Certification
Morgan Stanley ModeiWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created by local accounting regulations. For example, ModeiWare EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO basis. ModeiWare also emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company generates earnings.
Disclosure Section
The information and opinions in Morgan Stanley Research were prepared by Morgan Stanley & Co. Incorporated, and/or Morgan Stanley C.T.V.M. S.A. and their affiliates (collectively, "Morgan Stanley"). For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York. NY, 10036 USA. The folfowing analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Suzanne Stein. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.
Global Research Conflict Management Policy

Morgan Stanley Research has been published m accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. As of December 31 , 2009, Morgan ~'>tanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: AECOM Technology Corp., Brink's Home Security, Career Education Corp, Cintas Corporation, Corinthran Colleges, CoStar Group Inc., DigitaiGiobe Inc., Manpower, MSCIInc., priceline.com, Robert Half International, Strayer Education, The Advisory Board Company, The Corporate Executive Board, URS Corporation, Verisk Analytics, Inc.. As of January 21 , 2010, Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuers covered in Morgan Stanley Research (including where guarantor ofthe securities): Brink's Home Security, Expedia Inc., H&R Block, Iron Mountain, Manpower, Republic Services Inc., RSC Holdings, URS Corporation, Verisk Analytics, Inc., Waste Management, Inc.. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of AECOM Technology Corp., DigitaiGiobe Inc., Education Management Corp., lron Mountain, tv!SCI Inc., Rosetta Stone Inc, RSC ~oldings, Verisk Analytics, Inc.. Wilhin the last 12 months, Morgan Stanley has received compensation for investment banking services from AECOM Technology Corp., Brink's Home Security, DigitaiGiobe Inc., Education Management Corp., H&R Block, Iron Mountain, Jones Lang LaSalle, MSCIInc., Orbrtz Worldwide, Inc, priceline.com, Republic Services Inc., Robert Half fnternational , Rosetta Stone Inc, RSC Holdings, URS Corporation, Verisk Analytics, Inc. , Waste Management, Inc.. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from AECOM Technology Corp., Apollo Group, Brink's Home Security, Capella Education, Career Education Corp, CB Richard Ellis Group, Cintas Corporation, Corinthian Colleges, DeVry, DigitaiGiobe Inc., Education Management Corp., Expedia Inc., Granite Construction, H&R Block, lnnerWorkings, Iron Mountain, ITI Educational Services, Jones Lang LaSalle, K12 Inc., KBR, Inc, Manpower, MSCI Inc., Orbitz Worldwide, Inc, priceline.com, Republic Services Inc., Robert Half International, Rosetta Stone Inc, Strayer Education, URS Corporation, Verisk Analytics, Inc., Waste Management, Inc .. Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services olher than investment banking services from CB Richard Ellis Group, DigitalGiobe Inc., H&R Block, Jones Lang LaSalle, MSCllnc., priceline.com, Robert Half International. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: AECOM Technology Corp., Apollo Group, Brink's Home Security, Capella Education, Career Education Corp, CB Richard Ellis Group, Cintas Corporation, Corinthian Colleges, DeVry, DigitaiGiobe Inc., Education Management Corp., Expedia Inc., Granite Construction, H&R Block, lnnerWorkings, Iron Mountain, ITI Educational Services, Jones Lang LaSalle, K12 Inc., KBR, Inc, Manpower, MSCIInc., Orbitz Worldwide, Inc, priceline.com, Republic Services Inc., Robert Half International, Rosetta Stone Inc, RSC Holdings, Strayer Education, URS Corporation, Verisk Analytics, Inc., Waste Management, Inc.. Within the last 12 months, Morgan Stanley has erther provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: CB Richard Ellis Group, DigitaiGiobe Inc., H&R Block, Jones Lang LaSalle, Manpower, MSCI Inc., priceline.com, Robert Half International, URS Corporation, Waste Management, Inc.. An employee, director or consultant of Morgan Stanley is a director of CB Richard Ellis Group, Digital Globe Inc., MSCI Inc.. Morgan Stanley & Co. Incorporated makes a market in the securities of AECOM Technology Corp., American Public Education, Inc, Apollo Group, Brink's Home Security, Capella Education, Career Education Corp, CB Richard Ellis Group, Cintas Corporation, Corinthian Colleges, CoStar Group Inc., DeVry, Education Management Corp., Expedia Inc., Granite Construction, H&R Block, lnnerWorkings, Iron Mountain, ITT Educational Services, Jackson Hewitt, Jones Lang LaSalle, K12 Inc., KBR, Inc, Manpower, Orbitz Worldwide, Inc, priceline.com, Republic Services Inc., Robert Half International, RSC Holdings, Strayer Education, The Advisory Board Company, The Corporate Executive Board, URS Corporation, Verisk Analytics, Inc., Waste Management, Inc .. 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Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, provrding liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, Investment services and investment banking. Morgan Stanley sells to and buys from customers tfle securities/instruments of companies covered in Morgan Stanley Research on a principal basrs. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.
Important US Regulatory Disclosures on Subject Companies
STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the
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equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's v1ews, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.
Global Stock Ratings Distribution

(as of January 31, 2010)
For disclosure purposes only (in accordance with NASD and NYSE requirements) , we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-we1ght, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation ; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.
Coverage Universe Stock Rating Category Count %of Total Investment Banking Clients (IBC) Count % of% of Rating TotaiiBC Category
Overweight/Buy Equal-weight/Hold Not-Rated/Hold Underweight/Sell Total
999 1088 21 396 2,504
40% 43% 1% 16%
296 333
41 % 46% 1% 12%
30% 31% 19% 23%
4
90 723
Data include common stock and A DRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.
Analyst Stock Ratings

Overweight (0). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the nex1 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the nex112-18 months. Not-Rated (NR). Currently the analxst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry teams) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a nsk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
Analyst Industry Views

Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index: Europe - MSCI Europe; Japan - TOPIX; Asia -relevant MSCI country index.
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Industry Coverage:Business Services

Company (Ticker) Vance H. Edelson AECOM Technology Corp. (ACM.N) Brink's Home Security (CFL.N) CB Richard Ellis Group (CBG.N) Cintas Corporation (CTAS.O) CoStar Group Inc. (CSGP .0) Dig~aiGiobe Inc. (DGI.N) Expedia Inc. (EXPE.O) Granite Construction (GVA.N) H&R Block (HRB.N) HFF Inc. (HF.N) lnnerWorkings (INWK.O) Iron Mountain (IRM.N) Jackson Hewitt (JTX.N) Jones Lang LaSalle (JLL.N) KBR, Inc (KBR.N) Manpower (MAN.N) Orbitz Worldwide, Inc (OWW.N) RSC Holdings (RRR.N) Republic Services Inc. (RSG.N) Robert Half International (RHI.N) The Advisory Board Company (ABCO.O) The Corporate Executive Board (EXBD.O) URS Corporation (URS.N) Waste Management, Inc. (VVM .N) priceline.com (PCLN.O) Suzanne E. Stein Rating (as of)Price* (01/29/2010)
0 (1 0/26/2009)
++
$26.97 $41 $12.3 $25.11 $40.38 $23.53 $21.41 $30.88 $21.52 $6.18 $5.73 $22.86 $2.74 $57.01 $18.73 $51.79 $6.14 $7.18 $26.79 $26.92 $32.29 $23.14 $44.88 $32.05 $195.35
E (02/05/2008) E (07/21/2008) u (02/05/2008) 0 (08/17/2009) E (03/1 0/2008) E (01/28/2009) u (1 0/26/2009) 0 (04/09/2008) 0 (11/12/2007) E (04/20/2009) NR (11/18/2009) E (02/05/2008) 0 (09/22/2008) E (05/24/2007) E (02105/2008) 0 (07/02/2007) 0 (01/ 11/2010) u (05/26/2009) u (02/05/2008) E (02/20/2008)
American Public Education, Inc (APEI.O) Apollo Group (APOL.O) Capella Education (CPLA.O) Career Education Corp (CECO.O) Corinthian Colleges (COCO.O) DeVry (DV.N) Education Management Corp. (EDMC.O) ITT Educational Services (ESI.N) K12 Inc. (LRN.N) MSCI Inc. (MXB.N) Rosetta Stone Inc (RST.N) Strayer Education (STRA.O) Verisk Analytics, Inc. (VRSK.O)
0 (01/29/2009)
E (10/28/2009) E (05/01/2009) u (03/03/2009) E (01/25/2008) 0 (02/08/2008) E (11/11/2009) E (02/01 /2010)
$38.14 $60.59 $73.38 $21.75 $14 $61 .06 $1 9 $96.87 $19.99 $29.56 $17.77 $207.78 $28.12
0 (01/22/2008)
E E E E (12/1 0/2009) (05126/2009) (03/03/2009) (11/ 16/2009)
Stock Ratings are subject to change. Please see latest research for each company. Historical prices are not spl~ adjusted.
0 (02/05/2008)
E (06/23/2009) E (02105/2008)
2010 Morgan Stanley
From: Rob MacArthur <rmacarthur@altresearch com> To: Rob MacArthur CC:

Date: Subject:
11/27/2009 11 :58:54 AM
Excerpt from one of my research report.
The transfer of credit issue is stiiJ a puzzle. Please keep this to yourself Any comments, criticisms or corrections are welcome.

203-244-5174
This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleadlng. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Services Inc. is forbidden . This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.
We believe APOL's revenue growth for lQlO will be less than 10% (probably closer to zeto.) lQlO is likely the last quarter APOL will report positive sales growth for the next several yea1s. The for-profit sector is particularly vulnerable to regulatory changes given they have pushed the envelope so far, fot so long .Almost any marginal tinkering with the attendance, 90/10, SAP, lending, marketing etc will have enhanced repercussions across the space. With the focus now on the legislative and regulatory changes, it is wor'th noting the income statement impact that these changes will have. As we mentioned in a prior report, we have heard through the grapevine that the company discontinued the practice of lowering the salary for enrollment counselors who miss their quota. This was a pre-emptive move to placate the DOE that will slow growth in the current and upcomin.g quarters. In both the conference call and a recent analyst meeting, APOL management intends is to move back toward higher quality students with lowet drop-out rates. Similarly, we view this as pre-emptive. The relatively new management may be unaware of the full extent of the Pell Runner issue. Had they been informed, they would pmbably not have signed on as new executives. They think they rue making the prudent move to stem the Pell Runners, not realizing that the unwinding impact of the math will be near fatal. We pose[dJ these questions: Should the companies be allowed to book revenue from student loans and Pell Grants from students that never actually showed up for class? Shouldn't that money automatically be returned to the govermnent and not counted as an emollment or revenue? Shouldn't the company disclose in its SEC filing the high velocity tumover on the front end; that repor-ted enrolbnents are but a picture in time? What percent dmp out before completing the two or first classes they sign up for? If management doesn't the answers to aU of those questions then they are clueless about the impact. Math: @$650,000,000 dollars ofPell Recipients for APOL (DOE site most cmTent award year') I an average Pell Grant of $2500, yields 260,000 (almost 50% of 443k students) flying in and out - forget intra-quarter intra-week? Should they report 443,000 students to investors? What percentage of APOL enrollments are PeU Recipients (Runners)? And the bulls are under the impression that they a1e buying a future cash flow stream multiplying (tuition X year s X emollment)? We think not. We are betting on the tealignment of that shift fmm denial to reality affecting the stock. NegReg and Third Party marketers"
NegReg participant David Hawkins 1 expressed concern over the compensation of 3" patty marketers. He believes that the compensation of 3r<t pat'ty marketets violates the current law, and should be excluded from the safe harbor. There is a distinction between off-the-shelf, fee-for-click services (which many colleges use) and
The $650 million comes from the DOE web site; however, the award year is not a perfect overlap with the fiscal year. 2 34 CFR 668.14(b )(22)(ii)(L) 3 National Association for College Admission Counseling, Director of Public Policy and Research
arrangements where services are paid based on whether a student emolls; the latter may fall outside the Safe Harbor provisions- specifically, the 12th. Some off-the-shelf products (Google Ad-Words, pay-per-click services) and companies that provide lead-generation, stop short of being involved in the admission process itself. The key factor is that there is a separation between their involvement with the student and their involvement with admissio n offices. s'd party marketers can be paid based on the number of leads that actually emoll as a percent of total leads. Cost, quality, competition, economy, area, etc all are impacting both the quantity and quality of lead flow to the for-profits. Suffice it to say, that we believe all of these factors are working against the industry, but without f urther color on the issue, we'd rather not guess which one is impacting lead flow the most. Data is conflicting. Q uinStreet S-1 Filed November 17d 2009- Advertising DV Short?
"Qu inStreet is a leader in vertical marketing and media on the Intemet. We have bu ilt a stl'Ong set of capabilities to engage Internet vis itors with targeted media and to connect our marketing clients with their potential customers online .... [w]e generate revenue by delivering measurable online marketing results t o our clients."
QuinStreet S-1 Fiscal Year ended June 30, 2007 Revenue Seq Ch (%) %of Rev. from Edu Sector Rev from Edu Sector Seq Ch (%) % of Rev from DV Rev from DV Seq Ch (%) 167,370 2008 192,030 14.7% 74.0% 142,102 8.9% 23.0% 44,167 19.9% 2009 260,527 35.7% 58.0% 151 ,106 6.3% 19.0% 49,500 12.1% 3 months ended 9/30/08 62,678 3 months ended 9/30/09 78,552
78.0% 130,549
22.0% 36,821
51 .0% 40,062
13.0% 10,212
The fact that Qu instreet is coming public at a time when their business is already in decl ine (or close to it) speaks to our bearishness in the for-profits. "The education vertical has historically been our largest vertical, tepresenting 78%, 74%, 58% and 51% of net revenue in fiscal yerus 2007, 2008 and 2009 and 3Ql0, respectively. DeVry Inc., a for-profi t education company and our largest client, accou nted for 22%, 23%, 19%, a nd 13% of total net revenue for fiscal years 2007, 2008 and 2009 and 3Ql0." Assuming a $40 million run rate based o n the 3Q09 revenue for DV, there is an implied 20% decline in revenue. Healthcare, financial services, etc make up the balance of the business. "We are licensed as a mortgage broker in ~5 states for our online marketing activit ies. In om education vettical, our cl ients are subject to the U.S. H ig her Education Act, w hich, among other t hings, prohibits incentive compensation Ull'ecruiting students." Med ia a nd Intemet visitor mix (p57)- "Generally, our I nternet visitor soutces
include: revenue sharing agreements with third-party websites with whom we have a relationship and whose content is relevant to our clients' target customets; email lists owned by us, and gene1ated on an opt-in basis fmm Internet visitors to our websites; and display ads run through online advertising networks or directly with major websites or portals." "Our clients purchase om services according to a variety of pricing formulae, the vast majority of which ate based on pay fot performance, meaning clients pay only after we have delivered the desired result to them." More work to be done on acquisitions: Payler Corp. D/B/A HSH Associates Financial Publishers, or HSH, ,U.S. Citizens fot Fait Cred it Card Tetms, Inc, or CardRatings, SureHits, ReliableRemodeler and V endorseek CUnet.com (competition to Quinn)
CUnet.com is one of the biggest lead flow aggregators (owned by NNI): Wmking with enrollment team, CU identifies the top performing sites and allows you to improve yom school's placement with the top performers. 'We work with some of the country's lrugest and most popular higher learning institutions, including Univetsity of Phoenix, Westwood College, Lincoln Technical Institute, Kaplan University, Strayer Univers ity, and many more." The company provides more than 1,000 campus locations and online schools with performance-based educational marketing, lead generation, and vendor management services to enhance theit brands, and improve student recruitment and retention. " Pru-ticipant Oversight and Monitming --Dept of Ed Annual Repot't
6
FSA has always faced a significant challenge in conducting effective monitol'ing and oversight. Still anothet challenge facing both FSA involves identity verification of students receiving federal student financial assistance. FSA does not yet require schools to verify the identity of students receiving aid, which leaves the programs vulnetable to identity theft and other fraudulent schemes, patticulady distance education programs. Changing Posture at Accreditors?
The accreditors may be cutting ties to the for-profits, to avoid the wtath of a DOE that is changing the mosaic towrud more accountability and less ftaud. We attempted to communicate with the Higher Learning Commission to no avail. History: The DOE does NOT make policy regarding quality of education. Because this is a relatively subjective intangible, the Depat'tment bears no tespons ibility; the function is delegated to the accred iting agencies. Accreditors are responsible for cteating tlansferability of c1edits, but according to some sources, they cede that power back to the member schools, thereby passing the buck and bearing no responsibility. In one instance, the DOE's OIG wrote a harsh criticism of an accteditor, but without any authority to give its upbraiding "teeth", the OIG's criticism fell upon deaf ea1s. The
http-/lwww cunet com/products-and-seJ yjces aspx http:l/w ...vw.ed.gov/aboutlreports/annual/2009report/agencv-financial-report.pdf
only instance of wh ich we can think where an accred itor stood up to a for-profit school was the SACS (southeastern US) suspending eligibility of CECO's AIU d ivis ion around 2004. This caused CECO to set up shop outside the SACS' jurisdiction; hence the bit-th of Colorado Technical University. CECO switched to the Higher Learning Commission- APOL's accreditor. We had a brief conversation with Chief of Staff, Tom Benberg of SACS (shower needed post call). His comments wete vague and guatded. Middle States Commission Speaks to Coming Changes in Policy (MSCHE )" As negotiated mlemaking related to the Higher Education Act (HEOA) of 2008 has moved forward, it has become clear that the Commission will need to reexamine certain processes and membet institutions will need to focus on several new areas. The tegulatory environment has been evolving, with Congress, the United States Depat-tment of Education, and others demanding greater accountability from both higher education institutions and accreditors. A significant new provision requires that institutions that offe1 distance education must verify the identity of each student who is participating in a distance education class or coursework. Another area of emphasis in the Higher Education Oppot-tunity Act is Substantive Change. The new regulations include some significant modifications. To comply w ith the new regulations, the MSCHE staff is preparing modifications to the Substantive Change policy. Distance Education: A key area under the HEOA is d istance education, for which the federal govenunent now provides a new definit ion. Most past references have been to distance learning, which is now au outdated and inappropriate term; distance lea1ning refers to the process from the student's petspective, whereas d istance education describes the process from the perspective of the institution. A significant new provision requires that institutions that offer distance education must verify the identity of each student who is participating in a distance education. Another area of focus under the HEOA involves transfer of credit policies at member institutions. The new law requi1es that accreditors ensure, during on-site vis its for cand idacy, and during init ial or reaffinnation of accreditation, that institutions have transfer policies. Such policies must be published and must include the criteria used by the institution to determine the award of transfer credit. Beginning th is fall [2009], training for visiting members and chairs will include details about this expectation and how to verify that institutions are fonowing their transfer of credit policies. New Guidelines on DegTees and Credits: The Comm ission's Requirements of Affiliation stipulate that accredited institutions comply with all applicable federal, state, and other televant government policies As a service to MSCHE member institutions, we have collected information about federal definitions of degtees, credits, and other tenns. A review of th is information by appropriate institutional staff may prove useful. The guidelines, now available at ... '
www.msche.org/publications/ConfBrochureFINAL09.pdf. http://distance!earn. about. corn/gi/o.htm ?zi= 1/XJ&zTi= 1&sdn=distancelearn&cdn=education&tm= 1339& f=O O&tt=2&bt=O&bts=O&zu=http%3AUwww m sche org/ 7 vVWW .msche.org/docurnent s/De~ >ree-and-Credi t-Guidel ines-062209-FfNAL.doc
Transfer of Credits We know industry eruollment counselors at UOP say that credits are transferable to IV League schools. We are more interested in credits that are transfeJTed in fiom othe1 schools. We have heard conflicting information about the use of transfer credits to access financial aid. In a deposition in the stock options case, a former UOP employee said that up to 75% of new students were transfer students." Since loan amounts fot sophomores, juniors and seniors are higher, transfer credits could be used to reach the higher thresholds though we believe there is a evenue recognition linked to rate of progression and satisfactory academic progress that allows the schools to keep greate1 amounts of money when students drop. Furthet, the whole concept of prim work expeience or military time setved counting as credits toward a degree appears slippery as it generates a method to keep students emolled that might otherwise fail. From a Sept 17, 2007 APOL confe1ence call: 'What in essence we're doing is creating our own pool of potential graduates into University of Phoenix. What we're trying to create here now, is a group of first timers, that are two-year revenue stream customers for us that are profitable in and of themselves. But if we can transfer them into the University of Phoenix at University of Phoenix tuition rates, for no additional marketing expense, we've now created at a far reduced price, a student who's a four-year evenue stteam student. We've never had those in the past." Since Axia is an associates degree students a movement by the company away from it will raise marketing expenses. Bridgepoint (BPI) filing 424B4, filed on 4-16-09 "We develop and participate in various marketing activities to generate leads for prospective students and to build the Ashford University and University of the Rockies brands. For our online student population, we target working adults, many of whom have already completed some postseconda1y courses and are seeking an accessible, affmdable education from a quality institution. Fm our campus student population, we target traditional college students, typically between the ages of 18 and 24." "Om leads are primarily genel'ated fiom online soul'ces. Our main source of leads is third pa1ty online lead aggTegators. Typically, ouT contracts with online lead aggregators are for a period of 30 days, which provides us with significant flexibility to add or remove vendors on shmt notice. We also purchase key words from search providers to generate online leads di1ectly, rather than acquiring them through lead aggregators." CECO Call Comment re HLC
"In terms of background, in May 2008 the Higher Learning Commission (HLC)
Document 20 1-1 4, Filed 0 1/14/2009 in Hendow v UoP (EDCA, 2006), Case 2:03-cv-00457
" made certain recommendations to AIU as part of its initial grant of accreditation. They indicated then that they would schedule a focused visit at a later point in time to assess progress versus their recommendations. HLC advised AIU in October that the granting of new program approvals wi11 be delayed beyond om previous estimate." "Michael J. Graham: We bill at the beginning of the term recognizing a defened tuition liability. We recognize the revenue pro rata will be across the term. Withdrawals and refunds are processed in compliance with state, federal AND accrediting bodies. If you drop in the drop/ add period, we give a full refund, any refunds after that are given accord ing with the catalog and we file all the Title IV rules." "The refund policies are typically done by catalog; catalogs are updated on a regular basis. It's more driven by the accreditor and the state laws in each state, and those haven't changed much." "So fo t me, the HLC com ing back indicating that they wanted to wait. G iven the fact that the move of AIU was a bit atypical because we went from one regional accreditor to another, I think they're being cautious in the way that they do this and that' s appropriate." In 2008, 71% ofCECO's lead generation came from the Intemet. APEI - Accredited by HLC
"Our university system achieved regional accreditation in May 2006 with the HLC .... in June 2009, the HLC adopted new policies related to institutional conttol, stmcture and organizat ion. Par-t of the HLC's rationale for these changes was to better defme the range of its oversight of transactions related to change of ownership at institutions. The HLC also now extends its ove1sigbt to defined changes that occm in a parent or contmlling entity, and not necessarily in the institution itself. In particular, the change from accredited status to candidate status could adversely impact an institution's ability to par-ticipate in Title IV programs .... The HLC will now also be looking more closely at entities that own accredited institutions. [UOP is a division of Apollo Group, implying a movement toward increased regulation of the parent company-big negative forAPOLJ. Private Loans
We spoke to the Federal Reserve Board last week and learned that the new Truth-In-Lending ("TILA") provisions app1y not only to banks that make private loans, but to schools making private loans to their students. Our view is that once students realize the rates they are being charged, the size of the loans, pay-off amounts etc they MAY be less inclined to emoll (except for Pell Runnets).
HLC POLICY FOR TRANSFER OF CREDIT (Adopted October 1988, revised Februmy 2001) Each institution shall detetmine its ovm policies and procedures for accepting transfer credits, THE 1-llGHER LEARNING COMMISSION a Commission of the North Central Association of Colleges and Schools 30 N01th LaSalle Street, Chicago, IL 60602
History ofRegulatory Impediments to For-Profits Removed 12 Hou r Rule-- Th is is how the for-pmfits secretly altered their ability to keep higher petcentages of student funds and recognize greater revenue. AUG US T200 2ACTION UPDATE U.S. Deprutment of Education Washington D.C. in Regard to "THE NEGOTIATED RULEMAKING PROCESS'o Current law and Regulations: 12-hour Rule: The 12-hour rule has its genesis in the statute that governs the academic year. Section 481(a) (2) of the Higher Education Act provides that an academ ic yeru, for purposes of Title IV HEA student financial assistance progrruns, must contain at least SO weeks of instructional time. For a full-time undergraduate student, the student must complete at least 24 semester or trimester hours, 36 quarter hours, or 900 clock hours. For education programs using credit hours in a non-term or nonstandatd term format, the regulations defme a week of instructional time as "any week in which at least 12 hours of inst1uction, examination, or preparation for exami11ation is offered." This requirement is what is commonly referred to as "the 12-hour rule." "The Department did not establish a minimum number of instmctional hours that must occur during that one day because, as stated in the preamble to the November 29, 1994 regulations, full-time students attending standard term progTams we1e generally presumed to be in class attendance fo1 at least 12 homs each week." Proposed Change - 12-hour Rule and Student Financial Aid Disbmsement (July 2001): The Depar'tment has proposed eliminating the 12-hour rule for non-standard and non-term programs and would apply the one-day rule across all programs. Impl ications for Accreditation: It is not clear how and to what extent these regulations will directly impact the work of accrediting organizations. If published in final form, as the changes to the 12-hom rule ate currently proposed, the main d ifference will be that programs previously not eligible (or found it practically impossible to meet requirements for eligib il ity because of the 12-hour rule) for student fmancial assistance now will be. For example, the greatest impact will be on distance education programs that do not have fixed schedules, and on some programs offered by traditional institutions, such as weekend courses. If, as a result of loosening the restrictions of the 12-hour rule new cases of ti:aud and abuse occw, accrediting organizations and their standards will receive special scrutiny. They will be examined by policymakers who regard accrediting organizations as the responsible entity for ensuring institutions' compliance with Title IV, to see whether accrediting standards and their enforcement, could have prevented the fraud and abuse. (Cmonicle of Higher Education) November 15, 2002 12-Hom Rule, Viewed as Limiting Distance Education, Expires By DAN CARNEVALE: The 12-hour rule is dead. The U.S. Depar'tment of Education th is month issued a final
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http://www.chea.org/Governmentlgovt%20rel%20docs/1 2th%20rule%20reg%20update%20 12-30-02.pdf
regulation in the Federal Register to kill a once-obscme financial-aid restriction that had become a source of repeated complaints. Distance-education provide1s have been calling loudly for the nde's demise for seve1al yeas, arguing that it prevented them from developing innovative - 1: . OuuJJe progTams.
tl
"Down with the 50 Percent Rule: Up with Online Education Financial Aid,'" (2004) On February 8, 2006, online students got a boost in their ability to pay for distance education. The Higher Education Reconciliation Act (HERA) struck down the 50-percent rule, a 1992 statute denying online students equal access to cettain types offederalloans. Specifically, students at universities providing more than 50 petcent of their courses online couldn't qualifY for Title IV, HEA financial assistance. Now, they do ... The Fight Over the 50-percent Rule In its "Thitd Report to Congress on the Distance Education Demonstration Pmgram," the Department of Education called fm the repeal of the 50-percent rule and the requirement of "substantial interaction" between online faculty and students who telecommute to classes. Rep. John A. Boehner of Ohio, [industry campaign $ recipient] chaitman of the House Commjttee on Education and the Workforce, uTged his fellow lawmakers to eliminate "outdated barriers...so that colleges and universities a1en't stifled in their attempt to increase access to higher education through innovation and technology." " ... ruploma mills provided students with federal funding but "no viable education." Students got stuck with worthless degrees and massive loan debts. Not surprisingly, some students who felt cheated by diploma mills also felt entitled to ignore their loan repayments. They defaulted at three times the rate of other student debtors, and taxpayers got stuck with the bill. Now, with the repeal of the 50-percent rule, critics of online education feat the return of diploma mills. Buck McKeon said. "Some of America's most vulnerable students rue being deprived of a postsecondary education." (large recipient of campaign contributions from for-profits) GAO: ED Should Consider Eliminating or Modifying the 50-Percent Rule",. A GAO recommended that the Education Department consider waiving the restrictions that currently limit the financ ial aid that may be received by students taking distance education classes. The "50-percent rule" was originally created to prevent fraud and abuse of the federal student aid programs. More than a decade ago, concerns about fraud and abuse by some correspondence schools led to federal restrictions on, among other things, the percentage of courses a school could provide by distance education and stilJ
http://cluonicle.com/article/12-Hour-Rule-Viewed-as/30738 http: I /W'vvw. worldwidelearn. com/educa tion-advisor/indepth/financial-aid-on line. php 13 http'//www nasfaa org/publ jcatjons/2004/gao04279 html 14 http://www.gao.gov/new items/d04279.pdf
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qualify for federal student aid. However, deciding whether to eliminate or modify these restrictions involves consideration of several factors, including the extent to which any changes would improve access to postsecondary schools, the impact that changes would have on Education's ability to prevent institutions from conducting fraudulent or abusive practices, and the cost of implementation. Our analysis of these factors indicates that eliminating the restl'ictions without ensuring some form of management accountability would likely incur a higher risk for fraud and abuse than cmTently exists ... A change in federal policy to reduce the restrictions might result in an increased reliance on the work of acc1editing age11cies6 to enswe program quality and guard against fraud and abuse. Only one of the seven accrediting agencies we reviewed has policies and procedmes that require schools to satisfy all three components. At present, there is no federal requirement that accrediting agencies tequire institutions to use such an approach ... ( 1) setting measwable goals for program outcomes, (2) developing strategies for meeting these goals, and (3) disclosing the results of their efforts to the public Lessons learned ftom the Demonstration Program suggest that eliminating the 50- percent rules without adequate monitoring may increase the risk of fraud and abuse. For example, Education identified problems at 15 of the 21 participants remaining in the program as part of its monitoring efforts. The most common problems that surfaced included weaknesses in administrative systems for ttacking satisfact01y academic pmgress of students and the enrollment status (i.e., whether students withdrew from a class) of distance education students. Alternatively, relying on accrediting agencies to monitor compliance with student aid rules may be difficult because accrediting agencies do not consider it their role to act as "regulators" for the federal government.
From:
To:
rob@altresearch <nnacarthur@altresearch com> rob@altresearch 6/23/2009 10:08:22 AM Fallout from speech
CC:
Date:
Subject:
Chronicle of Higher Education Article today ...... .
"Later, Robert Collins, vice president for student financial aid for the Apollo Group, accused short-sale investors, who would profit if the share price of the company's stock fell, of spreading misinf01mation about his company to deflate the value of its stock. "It' s unfortunate that many short-sellers make their living by shorting Apollo stock," he said, before addressing issues raised in a 2004 Education Department program review and an inspector general's report." It will be interesting to see exactly which statement I made that is "misinformation." Bring it on ...
I referred to the for-profit institution as the next Countrywide Credit. This is where that thought came from:
Below this message is theCA State AG's official press release re their initial complaint against Countrywide.
"The company sold ever-increasing numbers of complex and risky home loans, as quickly as possible. Countrywide was, in essence, a mass-production loan factory, producing ever-increasing streams of debt without regard for borrowers. Today's lawsuit seeks relief for Californians who were ripped offby Countrywide's deceptive scheme."
AJso from the Chronicle Article:
"Competitive team environments encourage recruiters to think of students as points to be earned," said Jill ian L. Estes, a lawyer who is representing students in a case against Westwood College, which has campuses in six states. "They toe the line of propriety while ignoring the impact on students."
Officials from two for-profit institutions used the hearing as an opportunity to defend their institutions against allegations of impropriety. M. Lauck Walton, a regional vice president of Westwood College, said he was deeply offended by Ms. Estes' s "frivolous" claims and vowed to disprove them "in the appropriate forum." ...... this jerk was fairly senior at
Computer Learning Centers. I still have my employee list. It's not the first time I have found other former employees of CLCXQ working for other for profit schools. The Department should ban people from working at other schools. JoAnn Meron, eg, was named as a defendant in a case against Career Education a few years back, also a CLCX employee.

203-244-5174
This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.
ALT ERNATIVE RESEARCH SERVICES, INC

Robert MacArthur rmacarthur@altresearch.com 203-244-5174 w 203-215-3843 c June 19, 2009
Ladies and Gentlemen: My name is Rob MacArthur. I am a research consultant in the investment industry. I have been following the for-profit education sector for over a decade. Over the many years I have watched the cat and mouse game between the Department of Education and the industry. Sadly, despite claims of being heavily regulated this industry has been largely unregulated tmder the Bush Administration. With a former APOL lobbyist at the helm of Post-Secondary Education, enforcement was lax despite numerous inspector general reports urging better enforcement. This disservice to tax payers has enriched the managements of the for-profit industry and left in its wake thousands of students who bought into the hopes of a finer future only to be overrun with student debt. I personally have no investments in the industry. I am here before you today to bring to your attention an issue which has received some press but has yet to be properly addressed by the Department; that is the corruption and chronic misbehavior of the for-profit education industry. There are many issues that the Department needs to address including: transferability of credits, default prevention, graduation rates, and of course, incentive compensation . Apollo Group, parent company of University of Phoenix, is largest school in the country. In 1998 the company had 71K students. That nmnber grew to 157K in 2002 and is presently 397K. How is tltis possible? In FY08 the company spent $322 million on advertising, most of which was on the internet. At the present rate of growth advertising will likely reach over $400 million dollars in 2009. The company spent an additional $385 million in FY08 on enrollment cmmselor compensation.
In fiscal 2008, 82% of University of Phoenix's $2.9 billion of revenue came from Title IV programs. And total revenue companywide was $3.1 billion in fy08. That's nearly $2.4 billion dollars of taxpayer money flowing through the company. In 2001 , with $770 million of revenue, UOP received only 10% of its revenue from Title IV programs.
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Robert MacA rthur rnJaca rthurl2'3@comcast. nel 203-438-0688 203-2 15-3843 June 19, 2009
Incentive Compensation Through heavy industry lobbying efforts and a f1iendly administration, the so called "Safe Harbor" provisions were established that effectively nullified the ban on incentive compensation for enrollment counselors. This loophole has allowed the industry to bypass the regulation and claim EC' s are paid based on factors other than quotas, which testimony from former employees in the qui tam has proven is false. I am including depositions from the qui tam. Hiding behind the word "solely" in the Safe Harbors violates the spirit of the original law. This loophole has created a wave of defaulted debt and the taxpayer bears the burden. Enrollment counselors are overly incentivized to bring in students with no chance succeeding or paying off loans. There are many, many sad stories I can recount from direct interviews I have conducted with both former UOP students and enrollment counselors docmnenting the true horrific outcome for unsuspecting students. Similar stories are widely available in public depositions in the qui tam suit against UOP.
In the now famous February 2004 program review of UOP, the author begins, "This report contains a serious finding regarding the school's substantial breach of its fiduciary duty; specifically that the University of Phoenix (UOP) systematically engaged in actions designed to mislead the Department of Education and to evade detection of its improper incentive compensation system ... "
The Department interviewed more than 60 present and former enrollment cotmselors prior to, and after the site visit. Most of the recruiters said that when hired, UOP told them that the job had tremendous financial potential, and that they "could make a lot of money." UOP promised to "double or triple their salary in 3 to 6 months ... " In another deposition an enrollment counselor stated, "A: I was told to enroll students no matter what." ... regardless of qualifications. Another enrollment counselor complained that the potential student was illiterate but was forced to admit that person regardless. The Department must take i1nmediate steps to protect students from predatory marketing practices of this industry. Buried on its web site, UOP reports a graduation rate of only 9. 77%. Is that
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Robert MacArthur rnJacarthurl2'3@comcast.nel
203-438-0688 203-2 15-3843 June 19, 2009
what the taxpayer deserves? Is this how we want to invest in America's future? That national average graduation rate is closer to 55%.
Refund Calculations Regarding refunds, in an OIG report dated December 2005, the department found, ''UOP applied inappropriate methodologies to determine the "percentage of Title IV aid earned" for calculation ... " "UOP did not have a policy to review the accuracy of payment period end dates for the purpose of calculating Title IV aid." "UOP systematically monitored students' status and progress, readjusting the beginning and ending dates of payment period to accommodate leaves of absence, "no shows", failed courses or repeat courses. Refening to this process as "remapping", UOP readjusted payment period end dates and rescheduled second disbursement dates." - said the IG wrote another report in January 10th 2008. And the issues at Apollo are proliferating. In November, 2008 Grand Canyon University came public with former APOL president Brian Mueller at the helm. Mr. Mueller left Apollo in July of 08. In August of 08, the Office of the Inspector General issued a subpoena related to alleged enrollment practice violations and in September a lawsuit was filed citing enrollment practices. It is rare for a company to go public while under such legal burdens. Grand Canyon' s revenues were up 66% in the March quarter of 09 to $59 million-not bad for a company whose revenue in 2005 was $51 million. Another company Bridgepoint, filled with fonner UOP employees, came public in April of 2009. They also have OIG audit under way. Their 2007 revenue was $85 million and $218 in 2008 and $84 million alone in the March 09 quarter. On May 26 2005, John Higgins, the Inspector General testified in Congress that 74% of their institutional fraud cases involve proprietary schools. " Violations .... occur when refunds are not paid timely, when incorrect calculations result in returning insufficient funds, and when institutions fail to pay refunds at all, which is a criminal offense tmder HEA." In March of 2005 the SFA wrote a letter UOP regarding its audit of WID, a
4
Robert MacA rthur rnJacarthurl2'3@comcast.nel
203-438-0688 203-2 15-3843 June 19, 2009
division of Apollo Group. The Department found that 37 .5o/o of refunds were not made within the 30 day legal limitation. They found inaccurate refunds and refunds not paid at all. WIU incorrectly calculated refunds 25% of the time. Many late funds cite were up to 800 days late. Is this abiding by the spirit of the administrative capability statutes? I think not. While I understand the Administration ' s desire to improve access to college, the for-profit model is not an efficient way to achieve that goal. Intel even announced a few years ago they would no longer accept students with a diploma from UOP. One needs look no further than the ripoffreport.com and consmnercomplaints.com other web sites where hundreds of complaints from fmmer students can be fmmd. Rather than recount their stories I am entering several into the record. The Department is ill-prepared through no fault of its own to deal with such Iuthless, sophistication and contempt for the law. Current regulations that are obsolete or have been softened by industry lobbying over years need to be improved. I have 3 specific recommendations: Incentive compensation for enrollment counselors should be suspended or at the very least based on graduates going out the door not wann bodies com mg. Move the proposed "3rd default rate" calculation change to apply retroactively not starting with the 2009 cohmi but with current default rate data. Starting with the 2006 default rate data the government would better protect itself against default rate manipulation as laid out in detail in the IG' s December 2003 report. Lower the cohort default rate loss of eligibility threshold from 30% to 15o/o. I am submitting my text for the record and would gladly provide supporting documentation for any of the facts referenced in my comments upon request.
Robert MacA rthur rnJaca rthurl23@comcast.nel 203-438-0688 203-2 15-3843 June 19, 2009
From:
To: CC:
Date: Subject:
Pelesh Mark <MPelesh@cci edu> Private- Miller Anthony Yale, Matt Yuan. Georgia 4/20/2010 2 :01:18 PM Follow-up to Meeting on 4-15
Attached please find a letter from Jack Massimino and me as a follow-up to our meeting last week. We appreciated the opportunity to discuss the gainful employment issue, and have put together some ideas on how best to address the concerns and risks you identified. We are available, of course, for additional dialogue, and would be happy to answer any questions you may have on our proposals. MarkPelesh Executive Vice President Corinthian Colleges
202-682-9494
1350 I Street , N.W., Suite 1270 Washi ngton, D.C. 2ooos
u l (202) 682-9494
fo (2o2) 682-9170
www.cci.edu
April 20, 2010
The Honorable Anthony W. Miller Deputy Secretary of Education U.S. Department of Education 400 Maryland Avenue, S.W. Washington, D.C. 20202
Re:
Program Integrity Rulemaking- Gainful Employment
Dear Secretary Miller: Thank you for meeting with us on April IS, 20 I 0, to discuss the gainful employment issue in the Program Integrity rulemaking. Your articulation of the issue, the Department' s concerns, and the risks that the Department is attempting to mitigate was extremely helpful. We were heartened especially to hear that Secretary Duncan and you believe there is an impOiiant role for private capital in achieving the President's goals and in meeting the nation's education and workforce training needs. In this letter, we want to follow up on our conversation and provide a package of alternatives to the negotiated rulemaking proposal on gainful employment. We have tried to frame our proposals to be responsive to the concerns and risks you described. As explained below, we are suggesting that instead of the debt-to-earnings formula presented at neg reg, the Depatiment pursue a broader return on investment approach. First, it should adopt a set of immediate measures on (a) enhanced disclosure; (b) a more focused definition of gainful employment; (c) earnings gains from educational investments over time compared to debt costs; and (d) a student bill of rights. Second, it should have a study conducted on return on educational investment to serve as a foundation for an improved regulatory regime for higher education.
Corinthian Colleges- Workforce Education

As one of the largest private sector providers of postsecondary education preparing individuals to enter and advance in the workforce, we too have a keen interest in seeing that the Department, as the Secretary has put it, gets the gainful employment issue right. With over I 00,000 students at I J7 campuses and in our online division, Corinthian is serving principally young adults that the educational system has failed . Our typical student is a single minority mother who is unemployed or in a dead end job. Our mission is to help change her life by providing the education, training and support to graduate - often the first success she and her family have experienced -and to obtain employment that launches her in a career with material income gains. Clearly, any debt
~ Memlxr of the Corinthian CoU Inc. tges,
Jm Global Network
The Honorable Anthony W. Miller April 20, 20 J 0 Page 2 of5 that she incurs to invest in her education must be manageable and appropriate in relation to the income increase that she receives from that education and training. Our data show a good value proposition for our students. The completion rates in the programs at our schools are generally in the 60-70% range. Our company-wide placement rate in the fields for which we trained our students last year was 78. I%. Our alumni report a 27% increase in their incomes compared to their incomes prior to enrollment. And their loan repayments represent 6% of their monthly incomeapproximately $ 150 per month.
Gainful Employment Research

We want to bring to your attention research we commissioned last year because of its relevance to our discussion and its implications for a way forward on the gainful employment issue. Recognizing the critical issue of the value proposition in postsecondary education, we asked the Parthenon Group and its Center for Education Excellence to examine the delivery of value to students by private sector postsecondary institutions. Parthenon principally used the Depattment's own data in the BPS longitudinal studies, !PEDS and NPSAS, as well as sector data and primary research. Owing to the availability of data as well as our own focus as a postsecondary education and workforce training organization, the Parthenon research principally examined institutions offering two-year and Jess than two-year programs, We have given an overview ofParthenon's findings to Special Assistant Greg Darnieder and Deputy Assistant Secretary Glenn Cummings, and we left a copy of the Pa11henon report with Matthew Yale at the end of our meeting. Some of the key findings are: The private sector is investing $ 1 bil lion per year in capital in postsecondary education to expand capacity and access. The private sector serves a riskier student population as defined by the Department. The private sector is producing better graduation rates even when the broader purposes of public institutions- mainly transfer- are considered. The full economic cost of producing these graduation outcomes in the private sector is comparable to that of the public sector.
Private sector students realize income gains of $8,000, or 54%, from their educational investment- $250,000 over a 30-year working life. Private sectoa students' average debt burden is 7.6% at two-year institutions and 4. 7% at Jess than two-year institutions - monthly payments of $162 and $92 respectively.
It is also noteworthy that Patthenon found that students' awareness of the debt that they were taking on was actually better in the private sector than in the public or independent sectors.
The Honorable Anthony W. Miller April 20, 20 I 0 Page 3 of5 The findings in the Pmthenon research are highly pe1tinent to the gainful employment issue. The latter two findings above indicate that for certificate, diploma, and associate degree programs, students in the private sector are 1tot taking on disproportionate debt for value received. Yet, another report on the gainful employment issue prepared by Professor Jonathan Guryan, Associate Professor of Economics at the University of Chicago Booth School of Business, in conjunction with Charles River Associates, shows that the debt-to-earnings formula proposed by the Department to assess gainful employment in the negotiated rulemaking would have impacts far beyond the outliers that Department representatives have claimed. The Guryan-Charles River report estimates that 18% of private sector postsecondary programs would not meet the formula and that 33% of private sector students would be impacted. By 2020, the report estimates that 5.4 million students, including two million black and Hispanic students, would be denied access to postsecondary education as a result of the proposed debt-toearnings formula- impeding rather than helping the achievement of the President's goals. The discontinuity between Parthenon's findings and the impact of the formula proposed in neg reg suggests that the proposed formula is suspect. The Guryan-Charles River report provides an analysis that confirms it is the wrong way to assess student debt, and explains why. In sum, it shows that the choice ofmetrics in the formula to assure students' ability to repay their loans is logically flawed. The formula focuses on recent graduates' ability to pay in the early years after completing their education. However, this is inconsistent with the standard economic analysis of education, which clearly states that the choice of how much to borrow should be based on the gains from education over time and not on the basis of an earnings level at the beginning of a career. All of the components of the proposed formula share this fundamental flaw. And this conceptual problem is in addition to the absence of any data-based rationale for the components of the formula.
Proposal- Return on Investment Study

Accordingly, more research on the value to students from their educational investments is needed to guide sound public policy. This should be a comprehensive look at return on investment across higher education since all students, to one extent or another, pursue postsecondary education for purposes of economic advancement. Debt and earnings gains are plainly key elements that must be examined. But other elements should also be assessed in order to guide a new regulatory approach that would determine comprehensively and without unintended consequences whether the federal investment in postsecondary education is yielding appropriate outcomes. These would include completion, skills and learning achievement, placement, social service costs avoided, and tax contributions. As we noted in our meeting, the national accrediting agencies have done extensive data collection, standards development, and verification on completion and placement as a condition of their recognition by the Department over the last 15 years. We urge that their work be incorporated into the study. We would also be pleased to contribute the Parthenon research to this effort (which again utilized the Department's own data), and to offer our cooperation with additional research, data collection, and experimentation. As we mentioned in our two meetings with you, we have made a
The Honorable Anthony W. Miller April 20, 20 l 0 Page 4 of5 proposal in response to the Department's Experimental Sites Initiative that suggests a return on investment alternative to the 90- l 0 rule.
Proposal - Immediate Pacl{age of Improved Integrity Measures

We recognize from our discussion with you that the Depatimcnt's concerns compel action in the short run to mitigate the risks that it perceives. Accordingly, in addition to proposing a research study on educational ROI, we believe there are meaningful steps that the Depatiment can take now as part of the forthcoming rulemaking that will address those concerns and risks. We propose the following:
Enhanced Disclosure. We are aware that our national association, CCA, has made a proposal for more robust disclosure to the Department, which we endorse. However, we also understand that you believe that this step is necessary but not sufficient. Better Focused Definition of Gainful Employment. In addition to the flaws noted above, the proposed debt-to-earnings formula does not directly address the statutory provision on "gainful employment." Rather, it addresses student debt. Focusing on the gainful employment provision itself, a proposed regulation could specify criteria to show a close nexus between educational programs and gainful, i.e., compensated employment. Again, we understand that CCA is making a proposal for such criteria, which we also endorse. It uti lizes some of the Depatiment's own suggestions in the neg reg - employer affirmations and licensure/certification preparation- to determine program eligibility. Comparison of Earnings Gains .from Education to Debt Costs. In order to address the debt issue directly and on its own terms, a revised quantitative comparison should be formulated, based on standard economic analysis of the returns from education, of the earnings gains that accrue from educational programs and the percentage of debt to income over a period extending beyond the immediate post-graduation time frame. (We suggest a minimum of five years). This is a more conceptually sound approach, as the Guryan-Charles River report demonstrates. An educational program should only be considered suspect if the actual income gains from the program do not exceed debt costs incurred. Most studies show the return from an associate's degree to be at least I 0% per year of schooling. A debt percentage below such a return should be presumptively acceptable.
However, neither institutions nor, we believe, the Department has the data at thJs point to utilize this metric to determine eligibility on this basis alone. Thus, we respectfully suggest a delayed date for implementation while data are collected and the broader study of educational ROI is completed. In the meantime, as sufficient data are collected, a program's fa il ure under the metric could be used to trigger a review of the program's
The Honorable Anthony W. Miller April20, 2010 Page 5 of 5 educational quality and outcomes by a recognized accrediting agency, the state licensing body, or the Department itself using the extensive tools that already exist to ensure program integrity. We call your attention on this score to a memorandum prepared by CCA recently that lists the many measures available under current law and regulations to deal with bad actors.
Student Bill of Rights. Finally, to mitigate the risk you identified involving less-informed consumers, we suggest the adoption of a student bill of rights. A model is attached. Ideally, this should be adopted voluntarily by institutions. We are prepared to do so and to encourage other organizations in the private sector to make the same commitment to educational quality and integrity. A "nudge" fTom the Department could be helpful in this regard. One such incentive that might be made available to institutions concerns the phenomenon we discussed at our meeting. We believe that many student defaulters are those who drop out soon after enrolling and draw down a relatively small amount on a Title IV loan. We suggest that the Department accord institutions that adopt a student bill of rights the option of repaying these students' loans to cure the default. Conclusion
In summary, we propose a short and long-term package of measures to address the concerns and risks you have identified. We believe that enhanced disclosure, a more focused definition of gainful employment, a revamped metric comparing debt costs to eamings gains with a delayed implementation to allow data collection, but utility as a trigger for regulatory reviews, and a student bill of rights with a loan default incentive will be meaningful steps toward greater Title IV program integrity. In the long run, a well-crafted study of educational retum on investment across all of higher education may allow the development of a new outcomes-focused regulatory regime that could make a lasting contribution to the health and efficacy of the Title IV student aid system. Our organization is ready to be partners with you and the Secretary toward these ends. Sincerely,
~ ~/"f?rl;lf Jack Massimino Executive Chairman
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Mark L. Pelesh Executive Vice President Legislative & Regulatory Affairs cc: Matthew Yale Carmel Martin Georgia Yuan, Esq.
Proposed Student Bill of Rights Every American has been asked "to commit to at least one year or more of higher education or career training. This can be community college or a four-year school; vocational training or an apprenticeship. But whatever the training may be, every American will need to get more than a high school diploma." In order to achieve this goal, students must have access to the fullest range of education, training, and other learning opportunities. Students should have the following rights: 1. The right to choose the institution of higher education that best meets their needs. 2. The right to receive accurate, relevant, and verifiable information when deciding on which institution to attend and what program of study to pursue. This information should include: Institutional and programmatic accreditation; Cost of attendance; Admission and academic standards; Graduation/completion rates; and Placement information.
3. The right to full and accurate information about all financial aid that is available to the student, including complete infonnation about the terms and conditions of both federal and private student loans. 4. The right to information on the income gains graduates of the institution and its programs realize so that the student may evaluate the return on investment from the education offered by the institution. 5. The right to an enrollment agreement which states in easily understandable language the obligations of both the student and the institution. 6. The right to a suitable, accessible, quality learning environment, physical or virtual, including appropriate instructional materials, equipment, media, and facilities. 7. The right to be taught by qualified and competent instmctors, who are actively engaged in continuing professional development and who possess appropriate subjectmatter knowledge, as well as knowledge and skills relating to the instructional needs of the learners they address. 8. The right to support services to assist the student in achieving his or her educational goals, including academic advising and career services. 9. The right to fair and effective feedback on their performance and the opportunity to raise complaints and concerns that will be promptly addressed.
From:
To: CC:
Date: Subject:
Thomas Parrott Sharon <sthomasparrott@devcy com> Yuan, Georgia Private- Miller, Anthony 12/6/2010 7:37:26 PM Follow-up
Hi Georgia, It was great to visit with you during DeVry' s meeting with Secretary Duncan a few weeks ago. I was particularly pleased to hear that we share the process of"side by side" review of new regulations to further our understanding of what they really say. I am following up with you at Secretary Miller's suggestion, regarding our recent discussion at the Department concerning the new program integrity rules. I would very much appreciate an opportunity to share some thoughts that we have on solutions that meet both the letter and spirit of the new rules, while providing additional clarity to colleges and universities. I am happy to call or visit with you at your earliest convenience.
Best, Sharon
Sharon Thomas Parrott Senior Vice President Government and Regulatory Affairs Chief Compliance Officer DeVrylnc.
3005 Highland Parkway
Downers Grove, IL 60615-5799
p: 630.515.3146
f: 630-353-3968
c: 312-485-3225
e: stparrot@devry.edu
www.devryinc.com
From:
To:
Finley Steve Yuan, Georgia McFadden. Elizabeth Jablonski Sandy 7/19/201 0 11:24:44 AM For-Profit-Education Stocks Gain On Report Federal Gainful Employment Draft Not as Harmful as Thought
CC:
Date: Subject:
http://www.onn.tv/news-feed/midnight-trader/for-profit-education-stocks-gain-on-report-federal-gainful-employmentdraft-not-as-harmful-as-thought/
For-Profit-Education Stocks Gain On Report Federal Gainful Employment Draft Not as Harmful as Thought
03 :23 PM Eastern Daylight Time, 07/16/2010 (MidnightTrader)- For-profit-education stocks, like Apollo Group (APOL), Education Management (EDMC) and DeVry (DV), rose after Signal Hill Partners, citing unidentified sources, said a gainful employment draft from the Department of Education may be less harmful for higher education companies, Bloomberg reports. The originaJ proposal would disqualify for-profits aid if graduates spent more than 8% of starting salaries on repaying student loans, the story said.
From:
To: CC:
Date: Subject:

9/3/2010 10:00:18 AM found these re devry

203-244-5174
1 2
3
4
Michael D. Braun (16741 6) BRAUN LAW GROUP, P.C. 12400 Wilshire Blvd., Suite 920 Los Angeles, CA 90025 Tel: (310)442-7755 Fax: (31 0) 442-7756 Janet Lindner Spielberg (221 926) LAW OFFICES OF JANET LINDNER SPIELBERG 12400 Wilshire Blvd., Suite 400 Los Angeles, CA 90025 Tel: (310) 392-8801 Fax: (3 10) 278-2938
ORIGINAL.FILED
JAN 1 1 2005
5
6 7 8
SUPERIOR COURT
LOS ANGELES
Attorneys for Plaintiff
9
10
SUPERIOR COURT OF THE STATE OF CALIFORNIA FOR THE COUNTY OF LOS ANGELES
11
12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
___________________________ )
SARO DAGHLIAN On Behalf of Himself And ) ) ) Plaintiff, ) ) vs. ) ) DEVRY UNIVERSITY, INC., DEVRY INC., ) ) and DOES 1 through and including 100, ) Defendants. )
CASE NO.: BC345128 C LASS ACTION FIRST AME NDED COMPLAINT FOR DAMAGES AND EQUITABLE RELIEF
JURY TRIAL DEMANDED
All Others Similarly Situated,
Assigned to: Bon. Victoria Chaney Dept: 324 - CCW Case Filed: December 23, 2005
RtC'D JAN 11 2 006 .

FIRST AMENDED COMPLAINT FOR DAMAGES AND EQUITABLE RELIEF
\\Fileserver\shareddocs\BLG\OEVRY\PLD-WPD\FAC.wpd
......
FIRST CAUSE OF ACTION Violations of the California Education Code (Against All Defendants) 23. Plaintiff real leges and incorporates herein by reference each of the foregoing
2
3
4
5 paragraphs.
6
24.
Defendants' representations and omissions with resepct to the transferability of their
7 credits are in direct violation of the Education Code which states "no institution or representative of
8
9
an institution shall make or cause to be made any statement that is in any manner untrue or misleading, either by actual statement, omission or intimation." 94832(a). Moreover, "no institution or representative of an institution shall engage in any false, deceptive, misleading, or unfair act in connection with any matter, including the institution's advertising and promotion, the recruitment of students for enrollment in the institution. 94832(b). 25. Pursuant to 94814(a), an institution shall provide to students and other interested
10 11 12 13
14 persons, prior to enrollment, a catalog or brochure containing at a minimum the following 15 16 information .... [a]ll []material facts concerning the institution and the program or course of instruction that are reasonably likely to affect the decision of the student to enroll, as prescribed by
17 rules and regulations adopted by the council. 18 19 20 21 26. Pursuant to 94816(b), each institution offering a degree program designed to prepare
students for a particular vocation, trade, or career field ... shall provide to each prospective student a statement in at least 12-point type that contains the following statement which must be signed by the institution and the student and be dated. "NOTICE CONCERNING TRANSFERABILITY OF UNITS AND DEGREES EARNED AT OUR SCHOOL Units you earn in our (fill in name of program) program in most cases will probably not be transferable to any other college or university. For example, if you entered our school as a freshman, you will still be a freshman if you enter another college or university at some time in the future even though you earned units here at our school. In addition, if you earn degree, diploma, or certificate in our (fill in name of
22
23 24 25 26 27 28
6
\\Fileserver\shareddocs\BLG\DEVRY\~LD-WPD\FAC.wpd
......
FIRST CAUSE OF ACTION Violations of the California Education Code (Against All Defendants) 23. Plaintiff real leges and incorporates herein by reference each of the foregoing
2
3
4
5 paragraphs.
6
24.
Defendants' representations and omissions with resepct to the transferability of their
7 credits are in direct violation of the Education Code which states "no institution or representative of
8
9
an institution shall make or cause to be made any statement that is in any manner untrue or misleading, either by actual statement, omission or intimation." 94832(a). Moreover, "no institution or representative of an institution shall engage in any false, deceptive, misleading, or unfair act in connection with any matter, including the institution's advertising and promotion, the recruitment of students for enrollment in the institution. 94832(b). 25. Pursuant to 94814(a), an institution shall provide to students and other interested
10 11 12 13
14 persons, prior to enrollment, a catalog or brochure containing at a minimum the following 15 16 information .... [a]ll []material facts concerning the institution and the program or course of instruction that are reasonably likely to affect the decision of the student to enroll, as prescribed by
17 rules and regulations adopted by the council. 18 19 20 21 26. Pursuant to 94816(b), each institution offering a degree program designed to prepare
students for a particular vocation, trade, or career field ... shall provide to each prospective student a statement in at least 12-point type that contains the following statement which must be signed by the institution and the student and be dated. "NOTICE CONCERNING TRANSFERABILITY OF UNITS AND DEGREES EARNED AT OUR SCHOOL Units you earn in our (fill in name of program) program in most cases will probably not be transferable to any other college or university. For example, if you entered our school as a freshman, you will still be a freshman if you enter another college or university at some time in the future even though you earned units here at our school. In addition, if you earn degree, diploma, or certificate in our (fill in name of
22
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6
\\Fileserver\shareddocs\BLG\DEVRY\~LD-WPD\FAC.wpd
.... . . ...
I
2
program) program, in most cases it will probably not serve as a basis for obtaining a higher level degree at another college or university." 27. Defendants violated 94832, 94814 and 94816 of the California Education Code
3 4
because they did not make adequate disclosure about the transferability of the school's credits. 28.
A prevailing student alleging a violation of the Education Code shall be entitled to the
6 recovery of damages, equitable relief, and reasonable attorneys' fees and costs. Moreover, if a Court 7 finds that a violation was willfully committed, upon a student's.written demand, the court shall
. 8 award a civil penalty of up to two times the amount of the damages sustained by the student.
9
SECOND CAUSE OF ACTION
10
Violations of the Consumer Legal Remedies Act (Against All Defendants) 29. paragraphs. 30. The Consumer Legal Remedies Act establishes a nonexclusive statutory remedy for Plaintiff realleges and incorporates herein by reference each of the foregoing
11
12 13 14
15
unfair methods of competition and unfair or deceptive acts or practices undertaken by any person or
16 company in a transaction intended to result or which results in the sale of goods or services to any
17 consumer. 18 31. Plaintiff and the members of the Class are consumers who purchased goods and
19 services intended for sale from Defendants. 20 21

22 23
32.
By advertising to prospective students that the school's credits are easily transferable
to other schools, and in failing to.adequately disclose information required by the Education Code, defendants misrepresented their services as having characteristics, benefits, or qualities which they do not have, all of which are prohibited acts under 1770(a)(5) of the California Legal Remedies Act. 33. Section 1780 of the Consumer Legal Remedies Act specifically defines damages as
24 25
26 any damage. Plaintiff and members of the Class were monetarily damaged in the form of tuition and 27 costs of attendance. 28 7
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From: To:
Robert MacArthur <nnacarthur@altresearch com> Robert MacArthur 4/22/2010 12:40:12 PM Frontline press release
CC:
Date: Subject:
PRESS RELEASE
FRONTLINE INVESTIGATES THE RISE OF FOR-PROFIT UN1VERSITIES AND THE TENSIONS BETWEEN THEIR WALL STREET BACKERS AND REGULATORS FRONTL1NE Presents
College, Inc.
Tuesday, May 4, 2010, at 9 P.M. ET on PBS www pbs.org/frontline/collegeinc www.facebook.com/frontlinepbs Twitter @frontlinepbs Even in lean times, the $400 billion business of higher education is booming. Nowhere is this more true than in one of the fastest-growing-and most controversial- sectors of the industry: for-profit colleges and universities that cater to non-traditional students, often confer degrees over the Internet, and, along the way, successfully capture billions of federal financial aid dollars. In College, Inc. , airing Tuesday, May 4, 2010, at 9 P.M. ET on PBS (check local listings), FRONTLINE correspondent Martin Smith investigates the promise and explosive growth of the for-profit higher education industry. Through interviews with school executives, government officials, admissions counselors, former students and industry observers, this .film explores the tension between the industry-which says it's helping an underserved student population obtain a quality education and marketable job skills-and critics who charge the for-profits with churning out worthless degrees that leave students with a mountain of debt. At the center of it all stands a vulnerable population of potential students, often working adults eager for a university degree to move up the career ladder. FRONTLINE talks to a former staffer at a California-based for-profit university who says she was under pressure to sign up growing numbers of new students. "I didn ' t realize just how many students we were expected to recruit," says the former enrollment counselor. " They used to tell us, you know, ' Dig deep. Get to their pain. Get to what' s bothering them. So, that way, you can convince them that a college degree is going to solve all their problems."' Graduates of another for-profit school-a college nursing program in California-tell . FRONTLINE that they received their diplomas without ever setting foot in a hospital. Graduates at other for-profit schools report being unable to find a job, or make their student loan payments, because their degree was perceived to be of little worth by prospective employers. One woman who enrolled in a for-profit doctorate program in Dallas later learned that the school never acquired the proper accreditation she would need to get the job she trained for. She is now sinking in over $200,000 in student debt. The biggest player in the for-profit sector is the University ofPhoenix-now the largest college in the US with total enrollment approaching half a million students. Its staggering $2 billion in profits last year has made it the darling of Wall Street. Former top executi ve of the University of Phoenix Mark DeFusco told FRONTLINE how the company' s business-approach to higher education has paid off: " If you think about any business in America, what business would give up two months of business-just essentially close down?"
he asks. " [At the University of Phoenix], people go to school all year round. We start classes every five weeks. We built campuses by a freeway because we figured that's where the people were." " The education system that was created hundreds of years ago needs to change," says Michael Clifford, a major education entrepreneur who speaks with FRONTLINE. Clifford, a former musician who never attended college, purchases struggling traditional colleges and turns them into for-profit companies. " The big opportunity," he says, " is the inefficiencies of some of the state systems, and the ability to transform schools and academic programs to better meet the needs of the people that need jobs." "From a business perspective, it's a great story," says Jeff Silber, a senior analyst at BMO Capital Markets, the investment bankjng arm of the Bank of Montreal. " You' re serving a market that's been traditionally underserved .... And it's a very profitable business-it generates a lot of free cash flow." And the cash cow of the for-profit education industry is the federal government. Though they enroll l 0 percent of all post-secondary students, for-profit schools receive almost a quarter of federal financial aid. But Department of Education figures for 2009 show that 44 percent of the students who defaulted within three years of graduation were from for-profit schools, leading to serious questions about one of the key pillars of the profit degree college movement: that their degrees help students boost their earning power. This is a subject of increasing concern to the Obama administration, which, last month, remade the federal student loan program, and is now proposing changes that may make it harder for the for-profit colleges to qualify. " One of the ideas the Department ofEducation has put out there is that in order for a college to be eligible to receive money from student loans, it actually has to show that the education it's providing has enough value in the job market so that students can pay their loans back," says Kevin Carey of the Washington think tank Education Sector. "Now, the for-profit colleges, I think this makes them very nervous," Carey says. " They're wonied because they know that many of their members are charging a lot of money; that many of their members have students who are defaulting en masse after they graduate. They ' re afraid that this rule will cut them out of the program. But in many ways, that's the point." FRONTLINE also finds that the regulators that oversee university accreditation are looking closer at the for-profits and, in some cases, threatening to withdraw the required accreditation that keeps them eligible for federal student loans. " We've elevated the scrutiny tremendously," says Dr. Sylvia Manning, president of the Higher Learning Commission, which accredits many post-secondary institutions. "It is really inappropriate for accreditation to be purchased the way a taxi license can be purchased ....When we see any problematic institution being acquired and being changed we put it on a short leash."
College, Inc. is a FRONTLINE co-production with RAIN Media, Inc., produced by Chris Durrance and John Maggio and written by John Maggio and Martin Smjth. The conespondent is Martin Smith. FRONTLINE is produced by WGBH Boston and is broadcast nationwide on PBS. Funding for FRONTLINE is provided through the support of PBS viewers. Major funding for FRONTLINE is provided by The John D. and Catherine T. MacArthur Foundation. Additional funding is provided by the Park Foundation and by the FRONTLINE Journalism Fund. Major funding for College, Inc. is provided by the Bill & Melinda Gates Foundation. FRONTLINE is closed-captioned for deaf and hard-of-hearing viewers and described for people who are blind or visually impaired by the Media Access Group at WGBH. FRONTLINE is a registered trademark ofthe WGBHEducational Foundation. The senior
producer of FRONTLINE is Raney Aronson-Rath. The executive producer ofFRONTLINE is David Fanning.
pbs.org/pressroom Promotional photography can be downloaded from the PBS pressroom. Press contact Diane Buxton (617) 300-5375 diane buxton@wgbh org
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Rob MacArthur <rmacartbur@altresearch com> Rob MacArthur 11/4/2009 12:21:30 AM FW: (BN) Apollo Weakness for Phoenix Revenues Spuning Short I assume you saw this
-----Original Message----From: DAN GOLDEN, BLOOMBERG/ NEWSROOM: [mailto:dlgolden@bloomberg.net] Sent: Friday, October 30, 2009 9:53AM To: rmacarthur@altresearch.com Subject: (BN) Apollo Weakness for Phoenix Revenues Spurring Shott
Hi Rob,
Here's my story. Sorry it took so long. Thanks so much for the help. Yours, Dan
+-----------------------------------------------------------------------------+ Apollo Weakness for Phoenix Revenues Spuning Short Sellers 2009-10-30 04:00:01.2 GMT
By Daniel Golden Oct. 30 (Bloomberg)- The University ofPhoenix, the largest for-profit college in the U.S., may have set off on a collision course with the federal government and investors in 2001. That's when its founder, John Sperling, urged executives at his 80th birthday party to boost enrollment fivefold to half a million students, a goal it has almost accomplished. Now, Phoenix's parent, Apollo Group Inc., is facing challenges to its growth. The Securities and Exchange Commission is investigating how Apollo books revenue, the company said Oct. 27. Apollo recorded a charge of$80.5 million to cover costs it expects to pay to settle a lawsuit alleging that it violated federal student recruitment rules. Profit in the quarter ended Aug. 31 fell 60 percent largely because of that charge. Apollo shares, which had more than doubled since 2006, may have difficulty rebounding from an 18 percent decline the day after the SEC probe was disclosed. Phoenix may also face scrutiny as the U.S. Education Department examines for-profit universities that rely heavily on taxpayer-supported financial
aid. In fiscal 2009, Phoenix derived 86 percent of its $3.77 bi llion in revenue from federal grants and loans, up from 48 percent in 2001, and approaching a federal limit of90 percent. "The outlook for Apollo next year has definitely become a lot tougher," said Robert Wetenhall, an analyst for RBC Capital Markets in New York, who lowered his rating on Apollo shares on Oct. 28 to "underperform." Axia's Growth Phoenix's enrollment has almost doubled to 443,000 from 227,800 in fiscal 2004. About 90 percent of that growth has come from a two-year online coll ege call ed Axia, created in 2004. While Phoenix originally focused on bachelor's degree and graduate degree programs for managers whose employers paid their tuition, Axia attracts students with lower income and less academic preparation, the majority of whom depend on federal financial aid. Apollo's revenue was $1.1 billion during the three months ended Aug. 31, five times the amount during the same period in 2001 . Net income rose almost threefold to $91.5 million. The company's shares fell $1 .91, or 3.2 percent, to $58.15 on Oct. 29 in New York Stock Exchange composite trading. Before the close on Oct. 27, the stock had fallen 4.8 percent this year, compared with an 18 percent ri se in the Standard & Poor's 500 Index. Investors have bet against Apollo, with 10 percent of its shares sold short as of Oct. 15, compared with 3.5 percent for the New York Stock Exchange as a whole. Apo1lo's short interest has ri sen to 13.4 million shares from 6.6 million a year ago. Obama Administration Phoenix now has to deal with the Obama administration, which is tightening review of for-profits and has close ties to community colleges that compete with Axia. Driven in part by the shift to Axia, Phoenix's growing reliance on taxpayer funds is drawing government attention. The average annual tuition is $10,350, $500 less than what federal aid will pay for a lowincome freshman under age 24. By comparison, annual tuition at public community colleges this year averages $2,544, according to the College Board, the New York-based nonprofit organization that owns the SAT college admissions test. "It makes sense to examine institutions that rely heavily on federal aid," Robert Shireman, Deputy Undersecretary of Education, said in an interview without singling out any university. "Certainly, one of the data points we look at for triggering possible program reviews is a large growth in the use of federal financial aid."
Uncover Problems Such a program review would be designed to uncover problems with financial management or signing up students who are unqualified or aren't fully aware they're taking out loans, and may result in fines, suspensions or terminations from eligibility for financial aid, Shireman said. Students are reliant on aid because of the recession and rising college costs, said Sara Jones, an Apollo spokeswoman. Phoenix expanded into online two-year degrees to continue its shift from a niche institution for degree completion into a comprehensive university, not to obtain more financial aid dollars, she said. The 90 percent limit on federal revenue, enacted in 1992, penalizes schools for having low-income students, said Gregory Cappelli, Apollo Co-ChiefExecutive Officer. "We want to help people," Cappelli said in a Sept. 9 interview at the company's Phoenix headquarters. "They need to be able to read and write and compete at the college level. Know what? We don't want your money otherwise." The company believes the revenue recognition policies being investigated by the SEC are appropriate, Brian Schwartz, Apollo's chief financial officer and treasurer, said in an Oct. 27 conference call. Few Graduate While Phoenix has succeeded in drawing students, most don't graduate, leaving them without degrees and often burdened by loans. Only 8.9 percent ofPhoenix students without prior college experience complete a degree in six years, including 5 percent of those who attend classes online, according to the National Center for Education Statistics, in Washington. The national graduation rate is 56.1 percent for four-year schools and 30.9 percent for two-year schools. Besides leaving school prematurely, many students aren't able to pay their bills, with U.S. taxpayers picking up the balance. OfPhoenix students who should have begun repaying loans in 2007, 9.3 percent have defaulted, up from a 7.2 percent rate a year earlier and more than the national average of6.7 percent, according to the Education Department. The university works closely with lenders and delinquent students to stave off defaults, said Robert Collins, Apollo's vice president for financial aid. 'Replacement Curve' Phoenix's dropout rate means the school needs to recruit
250,000 new students a year-- equivalent to six University of Michigans --to maintain current enrollments, said former Apollo manager Mark DeFusco, now an education investment banker at Berkery, Noyes & Co. in New York. "The replacement curve is astronomical," DeFusco said. "You have to feed the beast." Phoenix's growth is hardly uncontrolled, said Jones, the Apollo spokeswoman. The university has "more than 200 campuses and learning centers" which means it can add 1,000 students a day by enrolling five at each one, she said. Phoenix gained 102,000 new students in the quarter ended Aug. 31, according to Charles B. Edelstein, Apollo Co-CEO. The question of whether recruiters sign up unqualified students is the focus of the lawsuit that Phoenix said it expects to settle for $80.5 million. The 2003 suit brought by two former employees in federal court in California alleges that Phoenix violated a 1992 ban on paying recruiters on the basis of enrollment numbers. The company has denied wrongdoing. 'Dumb as Doornail'
In a deposition in the lawsuit, Jennifer Kahn, a recruiter
who left Phoenix in 2006, said she complained to her boss about a prospect who couldn't handle college. "I had a student, let's refer to him as dumb as a doornail," Kahn said. "And my manager told me, 'Enroll him. It's not our call to say who has a right to an education.' As a consequence, he started, he went to the first night, he knew he was in deep doo-doo, and dropped. He never should have been there." Tom Corbett, a fonner director of online enrollment at Phoenix who provided an affidavit in the lawsuit, said in an interview that the school's recruiters were like brokers peddling subprime mortgages. "The University ofPhoenix's management culture is fueled by greed, the same as the housing scenario," Corbett said. "There was no emphasis on the student's actual values, goals, background, experiences." Compensation Methods Timothy Hatch, an outside counsel for Phoenix and a partner in the Los Angeles office of Gibson, Dunn & Crutcher, said the school enrolled the student mentioned by Kahn because he had completed an associate's degree at another for-profit coll ege. Phoenix's compensation methods are legal because teamwork and student retention figure into its salary adjustments along with enrollment expectations, he said. The criticisms by Corbett and other former employees don't reflect the views ofPhoenix
recruiters and managers in general, he said. The Education Department may tighten 2002 rules that let colleges pay recruiters partly on the basis of enrollment, according to Shireman, the deputy undersecretary. The department announced on Sept. 9 that it may prohibit misrepresentations of information provided to students and prospective students. The move was prompted partly by reports the department received about Axia recruiters, according to a federal official familiar with the matter. Prospective Students ln tape-recorded telephone calls heard by Bloomberg News, Axia recruiters told Wall Street researchers posing as potential applicants that its credits could be transferred to Harvard University and Columbia University. Those schools don't grant transfer credit for onli ne undergraduate courses, the universities' spokesmen said in e-mails. Cappelli said he isn't aware of the alleged misrepresentations. "There's not a mandate or a directive from anyone in the management team to fool or hurt people," he said. "Traditional colleges make errors, too." Phoenix has a pilot program to improve student readiness for college, Cappelli said during a conference call with analysts on Oct. 27. Lower retention rates and extra remedial instruction and other support services for Axia students have damped Apollo profits, he said in September. 'Concerted Effort' "We are making a conce1 effort to get back our focus on ted bachelor's and master's degrees," said Cappelli, a former Credit Suisse research analyst who joined Apollo in 2007. "The return to the student is better if they stay in school and complete their bachelor's degree. The return to us is better, too. Not all of our growth is coming from Axia anymore." The company supports a proposal in Congress that would allow colleges to exceed the 90 percent ceiling on the portion of revenues from financial aid until2012, and not to count increases in student loan limits as federal revenue. The proposal, which passed the House last month as part of a broader education bill, isn't included in a Senate version, said Mark Kantrowitz, publisher of the FinAid.org and FastWeb.com financial-aid Web sites based in Cranberry Township, Pennsylvania. Phoenix officials said the 8.9 percent graduation rate measured by the government counts only first-time students. Including transfer students, 27 percent of Axia students
graduate, according to the university's 2008 Academic Annual Report. Of those pursuing bachelor's degrees, Phoenix said 38 percent graduate. No Placement Phoenix doesn't help graduates land jobs, nor does it track where they find employment, Jones, the Apollo spokeswoman, said. She said most Phoenix students already have jobs. Simon Saffery, 30, a Hawaii resident, transferred to Phoenix's online program as a junior in 2006 and graduated last year with a 3.9 average out of 4.0 in computer science. He said he has applied for 25 entry-level information technology jobs without receiving a single interview. Almost half of the openings he sought were at Apollo itself, Saffery said. He is unemployed, owes $45,000 in student loans and may declare bankruptcy, Saffery said. Jones declined to comment on individual students, citing privacy considerations. According to a 2008 smvey by Phoenix, graduates of its associate and bachelor's degree programs earned average increases in personal income of 19 percent and 28 percent, respectively. Founder's Dream Sperling, who has an economic history Ph.D. from Cambridge University in England, founded Phoenix in 1976. His mission was to give working professionals a convenient way to get back to school and boost their academic credentials without having to quit their jobs, according to his 2000 autobiography, "Rebel With a Cause." Students, who learned in teams and took fiveweek courses in business, nursing and other fields, tended to be managers in their mid-30s whose employers reimbursed them for tuition. Richard Chait, a professor of higher education at Harvard in Cambridge, Massachusetts, who has studied Sperling's university, said the school "saves money everywhere" by hiring part-time faculty, leasing real estate, and centralizing administration. "The genius of the University ofPhoenix is that it spends $1 million to develop one course that it gives a thousand times," Chait said in an interview in his office. "Community colleges spend almost nothing developing a thousand courses that they will use once." Expanding Eastward In the 1990s, Phoenix expanded eastward, opening facilities in Michigan, Maryland and Pennsylvania. Today, according to its Web site, the university has campuses in 39 states, the District
of Columbia, Puerto Rico, and two Canadian provinces. From 1995 to 2000, Apollo's stock rose more than 10-fold, making it one of the 30 top-performing stocks in the Russell 3000 Index. When enrollment was about 20,000, Sperling told executives Phoenix would have I00,000 students by 2000, Bob Barker, a former Phoenix executive vice president, said in an interview. At his 80th birthday party in 2001, Sperling raised his sights to 500,000, Defusco said. Apollo never fonnally adopted Sperling's vision, said Jones, the spokeswoman. She said Sperling was unavailable for interviews. As fast as Phoenix was growing, it was drawing from a limited customer base of mid-career managers, fanner Apollo president Brian Mueller, CEO of for-profit Grand Canyon Education Inc. in Phoerux, said in an interview. Students had to be at least 23 years old and have two years of work experience and as many as 60 credits from other colleges. Rapid Growth By 2004, the university had eliminated its credit and age reqwrements, Jones said. Defusco, who worked at Apollo from 1994 to 2003 in academ1c affairs and then opening campuses for Phoenix, said Axia's tWtion was set just under the federal limit for financial aid so government grants and loans could cover most, if not all, of the cost. The college's tuition-pricing "was a financial-aid play," Defusco said. Apollo spokeswoman Jones said that was not the case. Unlike students who came to Phoenix to complete degrees, the company said that three out of five Axia attendees haven't gone to college before. "It's no longer the mid-career manager, it's somebody working a m1nimum-wagejob somewhere and looking to get out of that dead end," said Laura Palmer Noone, a former Phoenix president who is now CEO of Piccolo International University, an online school based in Scottsdale, Arizona. Career Aspirations Sabrina Bogan, 39, a criminal-justice major, said in an interview that Axia has improved her writing. The Richmond, Virginia, mother of three, who has a high school equivalency degree and used to work as an assistant manager at a convenience store, said she has written essays on the death penalty and energy conservation. "The person that I was before I started taking those classes could not have done that," Bogan said. She said she
hopes to land a job in a lawyer's office after she finishes her associate's degree next year. Not all Axia students benefit. Laura Holder, 29, has a diploma from Prairie Grove High School in Prairie Grove, Arkansas, where she took special-education classes, she said. According to her mother, Beatrice McCormack, Holder has an IQ of 65 to 70, within a range the Washington-based American Association on Intellectual and Developmental Disabilities defines as intellectually disabled. Axia Recruiter Holder, who li ves in an apartment with her husband, said she learned about Phoeni x on the Internet and contacted the school in hopes that a college degree would help her find work as a preschool teacher. The Axia recruiter, she said, asked if she had graduated from high school, not whether she was in special education. "They said once I go through the classes, I would get a job in teaching," Holder said. Holder enrolled atAxia in October2006 and realized the classes were too hard for her, she said. She left school amid a payment dispute without completing a course. A collection agency dunned her for a tuition balance of$1,710. Jones, the Phoenix spokeswoman, said the school is aware of a handful of instances in which intellectually disabled students enrolled and soon demonstrated that they didn't have the ability to succeed. In those cases, she said, Phoenix worked to help the students withdraw without financial obligation. Community Colleges Axia may soon face more competition for students. The Obama administration has proposed allocating $12 billion to publicly run community colleges, which also give two-year degrees. While Sally Stroup, a former Apollo lobbyist, oversaw post-secondary education in the George W. Bush administration, former community-college leader Martha Kanter plays a similar role now. "Some in the administration, if they were advising students who had a choice of going to a community college or a for-profit college, would say, 'Pick the community college,"' said Scott Fleming, a Washington lobbyist who represents Apollo. The Education Department isn't out to "shut down or maim" for-profits, Cappell i said. "IfObama means what he says, that he wants everyone to have one year of college, how do you accomplish that without for-profit higher ed?" he said. For Related News and Information:
Stories about education: NI EDU U.S. colleges and universities: USUV Education organizations: EDOR Stories about technology: {NI TEC} --With assistance from Robin D Schatz and Jeffrey Tannenbaum in New York. Editors: Jim Aley, Jonathan Kaufman To contact the reporter on this story: Dan Golden in Boston at + 1-617-21-4610 or dlgolden@bloomberg.net. To contact the editor responsible for this story: Jonathan Kaufman at+l-617-210-4638 or jkaufmanl7@bloomberg.net
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To: CC:
Date: Subject:
Rob MacArthur <rmacartbur@altresearch com> Rob MacArthur 11/4/2009 12:21:30 AM FW: (BN) Apollo Weakness for Phoenix Revenues Spuning Short I assume you saw this
-----Original Message----From: DAN GOLDEN, BLOOMBERG/ NEWSROOM: [mailto:dlgolden@bloomberg.net] Sent: Friday, October 30, 2009 9:53AM To: rmacarthur@altresearch.com Subject: (BN) Apollo Weakness for Phoenix Revenues Spurring Shott
Hi Rob,
Here's my story. Sorry it took so long. Thanks so much for the help. Yours, Dan
+-----------------------------------------------------------------------------+ Apollo Weakness for Phoenix Revenues Spuning Short Sellers 2009-10-30 04:00:01.2 GMT
By Daniel Golden Oct. 30 (Bloomberg)- The University ofPhoenix, the largest for-profit college in the U.S., may have set off on a collision course with the federal government and investors in 2001. That's when its founder, John Sperling, urged executives at his 80th birthday party to boost enrollment fivefold to half a million students, a goal it has almost accomplished. Now, Phoenix's parent, Apollo Group Inc., is facing challenges to its growth. The Securities and Exchange Commission is investigating how Apollo books revenue, the company said Oct. 27. Apollo recorded a charge of$80.5 million to cover costs it expects to pay to settle a lawsuit alleging that it violated federal student recruitment rules. Profit in the quarter ended Aug. 31 fell 60 percent largely because of that charge. Apollo shares, which had more than doubled since 2006, may have difficulty rebounding from an 18 percent decline the day after the SEC probe was disclosed. Phoenix may also face scrutiny as the U.S. Education Department examines for-profit universities that rely heavily on taxpayer-supported financial
aid. In fiscal 2009, Phoenix derived 86 percent of its $3.77 bi llion in revenue from federal grants and loans, up from 48 percent in 2001, and approaching a federal limit of90 percent. "The outlook for Apollo next year has definitely become a lot tougher," said Robert Wetenhall, an analyst for RBC Capital Markets in New York, who lowered his rating on Apollo shares on Oct. 28 to "underperform." Axia's Growth Phoenix's enrollment has almost doubled to 443,000 from 227,800 in fiscal 2004. About 90 percent of that growth has come from a two-year online coll ege call ed Axia, created in 2004. While Phoenix originally focused on bachelor's degree and graduate degree programs for managers whose employers paid their tuition, Axia attracts students with lower income and less academic preparation, the majority of whom depend on federal financial aid. Apollo's revenue was $1.1 billion during the three months ended Aug. 31, five times the amount during the same period in 2001 . Net income rose almost threefold to $91.5 million. The company's shares fell $1 .91, or 3.2 percent, to $58.15 on Oct. 29 in New York Stock Exchange composite trading. Before the close on Oct. 27, the stock had fallen 4.8 percent this year, compared with an 18 percent ri se in the Standard & Poor's 500 Index. Investors have bet against Apollo, with 10 percent of its shares sold short as of Oct. 15, compared with 3.5 percent for the New York Stock Exchange as a whole. Apo1lo's short interest has ri sen to 13.4 million shares from 6.6 million a year ago. Obama Administration Phoenix now has to deal with the Obama administration, which is tightening review of for-profits and has close ties to community colleges that compete with Axia. Driven in part by the shift to Axia, Phoenix's growing reliance on taxpayer funds is drawing government attention. The average annual tuition is $10,350, $500 less than what federal aid will pay for a lowincome freshman under age 24. By comparison, annual tuition at public community colleges this year averages $2,544, according to the College Board, the New York-based nonprofit organization that owns the SAT college admissions test. "It makes sense to examine institutions that rely heavily on federal aid," Robert Shireman, Deputy Undersecretary of Education, said in an interview without singling out any university. "Certainly, one of the data points we look at for triggering possible program reviews is a large growth in the use of federal financial aid."
Uncover Problems Such a program review would be designed to uncover problems with financial management or signing up students who are unqualified or aren't fully aware they're taking out loans, and may result in fines, suspensions or terminations from eligibility for financial aid, Shireman said. Students are reliant on aid because of the recession and rising college costs, said Sara Jones, an Apollo spokeswoman. Phoenix expanded into online two-year degrees to continue its shift from a niche institution for degree completion into a comprehensive university, not to obtain more financial aid dollars, she said. The 90 percent limit on federal revenue, enacted in 1992, penalizes schools for having low-income students, said Gregory Cappelli, Apollo Co-ChiefExecutive Officer. "We want to help people," Cappelli said in a Sept. 9 interview at the company's Phoenix headquarters. "They need to be able to read and write and compete at the college level. Know what? We don't want your money otherwise." The company believes the revenue recognition policies being investigated by the SEC are appropriate, Brian Schwartz, Apollo's chief financial officer and treasurer, said in an Oct. 27 conference call. Few Graduate While Phoenix has succeeded in drawing students, most don't graduate, leaving them without degrees and often burdened by loans. Only 8.9 percent ofPhoenix students without prior college experience complete a degree in six years, including 5 percent of those who attend classes online, according to the National Center for Education Statistics, in Washington. The national graduation rate is 56.1 percent for four-year schools and 30.9 percent for two-year schools. Besides leaving school prematurely, many students aren't able to pay their bills, with U.S. taxpayers picking up the balance. OfPhoenix students who should have begun repaying loans in 2007, 9.3 percent have defaulted, up from a 7.2 percent rate a year earlier and more than the national average of6.7 percent, according to the Education Department. The university works closely with lenders and delinquent students to stave off defaults, said Robert Collins, Apollo's vice president for financial aid. 'Replacement Curve' Phoenix's dropout rate means the school needs to recruit
250,000 new students a year-- equivalent to six University of Michigans --to maintain current enrollments, said former Apollo manager Mark DeFusco, now an education investment banker at Berkery, Noyes & Co. in New York. "The replacement curve is astronomical," DeFusco said. "You have to feed the beast." Phoenix's growth is hardly uncontrolled, said Jones, the Apollo spokeswoman. The university has "more than 200 campuses and learning centers" which means it can add 1,000 students a day by enrolling five at each one, she said. Phoenix gained 102,000 new students in the quarter ended Aug. 31, according to Charles B. Edelstein, Apollo Co-CEO. The question of whether recruiters sign up unqualified students is the focus of the lawsuit that Phoenix said it expects to settle for $80.5 million. The 2003 suit brought by two former employees in federal court in California alleges that Phoenix violated a 1992 ban on paying recruiters on the basis of enrollment numbers. The company has denied wrongdoing. 'Dumb as Doornail'
In a deposition in the lawsuit, Jennifer Kahn, a recruiter
who left Phoenix in 2006, said she complained to her boss about a prospect who couldn't handle college. "I had a student, let's refer to him as dumb as a doornail," Kahn said. "And my manager told me, 'Enroll him. It's not our call to say who has a right to an education.' As a consequence, he started, he went to the first night, he knew he was in deep doo-doo, and dropped. He never should have been there." Tom Corbett, a fonner director of online enrollment at Phoenix who provided an affidavit in the lawsuit, said in an interview that the school's recruiters were like brokers peddling subprime mortgages. "The University ofPhoenix's management culture is fueled by greed, the same as the housing scenario," Corbett said. "There was no emphasis on the student's actual values, goals, background, experiences." Compensation Methods Timothy Hatch, an outside counsel for Phoenix and a partner in the Los Angeles office of Gibson, Dunn & Crutcher, said the school enrolled the student mentioned by Kahn because he had completed an associate's degree at another for-profit coll ege. Phoenix's compensation methods are legal because teamwork and student retention figure into its salary adjustments along with enrollment expectations, he said. The criticisms by Corbett and other former employees don't reflect the views ofPhoenix
recruiters and managers in general, he said. The Education Department may tighten 2002 rules that let colleges pay recruiters partly on the basis of enrollment, according to Shireman, the deputy undersecretary. The department announced on Sept. 9 that it may prohibit misrepresentations of information provided to students and prospective students. The move was prompted partly by reports the department received about Axia recruiters, according to a federal official familiar with the matter. Prospective Students ln tape-recorded telephone calls heard by Bloomberg News, Axia recruiters told Wall Street researchers posing as potential applicants that its credits could be transferred to Harvard University and Columbia University. Those schools don't grant transfer credit for onli ne undergraduate courses, the universities' spokesmen said in e-mails. Cappelli said he isn't aware of the alleged misrepresentations. "There's not a mandate or a directive from anyone in the management team to fool or hurt people," he said. "Traditional colleges make errors, too." Phoenix has a pilot program to improve student readiness for college, Cappelli said during a conference call with analysts on Oct. 27. Lower retention rates and extra remedial instruction and other support services for Axia students have damped Apollo profits, he said in September. 'Concerted Effort' "We are making a conce1 effort to get back our focus on ted bachelor's and master's degrees," said Cappelli, a former Credit Suisse research analyst who joined Apollo in 2007. "The return to the student is better if they stay in school and complete their bachelor's degree. The return to us is better, too. Not all of our growth is coming from Axia anymore." The company supports a proposal in Congress that would allow colleges to exceed the 90 percent ceiling on the portion of revenues from financial aid until2012, and not to count increases in student loan limits as federal revenue. The proposal, which passed the House last month as part of a broader education bill, isn't included in a Senate version, said Mark Kantrowitz, publisher of the FinAid.org and FastWeb.com financial-aid Web sites based in Cranberry Township, Pennsylvania. Phoenix officials said the 8.9 percent graduation rate measured by the government counts only first-time students. Including transfer students, 27 percent of Axia students
graduate, according to the university's 2008 Academic Annual Report. Of those pursuing bachelor's degrees, Phoenix said 38 percent graduate. No Placement Phoenix doesn't help graduates land jobs, nor does it track where they find employment, Jones, the Apollo spokeswoman, said. She said most Phoenix students already have jobs. Simon Saffery, 30, a Hawaii resident, transferred to Phoenix's online program as a junior in 2006 and graduated last year with a 3.9 average out of 4.0 in computer science. He said he has applied for 25 entry-level information technology jobs without receiving a single interview. Almost half of the openings he sought were at Apollo itself, Saffery said. He is unemployed, owes $45,000 in student loans and may declare bankruptcy, Saffery said. Jones declined to comment on individual students, citing privacy considerations. According to a 2008 smvey by Phoenix, graduates of its associate and bachelor's degree programs earned average increases in personal income of 19 percent and 28 percent, respectively. Founder's Dream Sperling, who has an economic history Ph.D. from Cambridge University in England, founded Phoenix in 1976. His mission was to give working professionals a convenient way to get back to school and boost their academic credentials without having to quit their jobs, according to his 2000 autobiography, "Rebel With a Cause." Students, who learned in teams and took fiveweek courses in business, nursing and other fields, tended to be managers in their mid-30s whose employers reimbursed them for tuition. Richard Chait, a professor of higher education at Harvard in Cambridge, Massachusetts, who has studied Sperling's university, said the school "saves money everywhere" by hiring part-time faculty, leasing real estate, and centralizing administration. "The genius of the University ofPhoenix is that it spends $1 million to develop one course that it gives a thousand times," Chait said in an interview in his office. "Community colleges spend almost nothing developing a thousand courses that they will use once." Expanding Eastward In the 1990s, Phoenix expanded eastward, opening facilities in Michigan, Maryland and Pennsylvania. Today, according to its Web site, the university has campuses in 39 states, the District
of Columbia, Puerto Rico, and two Canadian provinces. From 1995 to 2000, Apollo's stock rose more than 10-fold, making it one of the 30 top-performing stocks in the Russell 3000 Index. When enrollment was about 20,000, Sperling told executives Phoenix would have I00,000 students by 2000, Bob Barker, a former Phoenix executive vice president, said in an interview. At his 80th birthday party in 2001, Sperling raised his sights to 500,000, Defusco said. Apollo never fonnally adopted Sperling's vision, said Jones, the spokeswoman. She said Sperling was unavailable for interviews. As fast as Phoenix was growing, it was drawing from a limited customer base of mid-career managers, fanner Apollo president Brian Mueller, CEO of for-profit Grand Canyon Education Inc. in Phoerux, said in an interview. Students had to be at least 23 years old and have two years of work experience and as many as 60 credits from other colleges. Rapid Growth By 2004, the university had eliminated its credit and age reqwrements, Jones said. Defusco, who worked at Apollo from 1994 to 2003 in academ1c affairs and then opening campuses for Phoenix, said Axia's tWtion was set just under the federal limit for financial aid so government grants and loans could cover most, if not all, of the cost. The college's tuition-pricing "was a financial-aid play," Defusco said. Apollo spokeswoman Jones said that was not the case. Unlike students who came to Phoenix to complete degrees, the company said that three out of five Axia attendees haven't gone to college before. "It's no longer the mid-career manager, it's somebody working a m1nimum-wagejob somewhere and looking to get out of that dead end," said Laura Palmer Noone, a former Phoenix president who is now CEO of Piccolo International University, an online school based in Scottsdale, Arizona. Career Aspirations Sabrina Bogan, 39, a criminal-justice major, said in an interview that Axia has improved her writing. The Richmond, Virginia, mother of three, who has a high school equivalency degree and used to work as an assistant manager at a convenience store, said she has written essays on the death penalty and energy conservation. "The person that I was before I started taking those classes could not have done that," Bogan said. She said she
hopes to land a job in a lawyer's office after she finishes her associate's degree next year. Not all Axia students benefit. Laura Holder, 29, has a diploma from Prairie Grove High School in Prairie Grove, Arkansas, where she took special-education classes, she said. According to her mother, Beatrice McCormack, Holder has an IQ of 65 to 70, within a range the Washington-based American Association on Intellectual and Developmental Disabilities defines as intellectually disabled. Axia Recruiter Holder, who li ves in an apartment with her husband, said she learned about Phoeni x on the Internet and contacted the school in hopes that a college degree would help her find work as a preschool teacher. The Axia recruiter, she said, asked if she had graduated from high school, not whether she was in special education. "They said once I go through the classes, I would get a job in teaching," Holder said. Holder enrolled atAxia in October2006 and realized the classes were too hard for her, she said. She left school amid a payment dispute without completing a course. A collection agency dunned her for a tuition balance of$1,710. Jones, the Phoenix spokeswoman, said the school is aware of a handful of instances in which intellectually disabled students enrolled and soon demonstrated that they didn't have the ability to succeed. In those cases, she said, Phoenix worked to help the students withdraw without financial obligation. Community Colleges Axia may soon face more competition for students. The Obama administration has proposed allocating $12 billion to publicly run community colleges, which also give two-year degrees. While Sally Stroup, a former Apollo lobbyist, oversaw post-secondary education in the George W. Bush administration, former community-college leader Martha Kanter plays a similar role now. "Some in the administration, if they were advising students who had a choice of going to a community college or a for-profit college, would say, 'Pick the community college,"' said Scott Fleming, a Washington lobbyist who represents Apollo. The Education Department isn't out to "shut down or maim" for-profits, Cappell i said. "IfObama means what he says, that he wants everyone to have one year of college, how do you accomplish that without for-profit higher ed?" he said. For Related News and Information:
Stories about education: NI EDU U.S. colleges and universities: USUV Education organizations: EDOR Stories about technology: {NI TEC} --With assistance from Robin D Schatz and Jeffrey Tannenbaum in New York. Editors: Jim Aley, Jonathan Kaufman To contact the reporter on this story: Dan Golden in Boston at + 1-617-21-4610 or dlgolden@bloomberg.net. To contact the editor responsible for this story: Jonathan Kaufman at+l-617-210-4638 or jkaufmanl7@bloomberg.net
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Robert MacArthur <nnacarthur@altresearch com> Woodward, Jennifer Wittman, Donna Melvin.Goldberg@oag state.ny.us 5/4/2010 9:56:50 AM FW: (BN) Obama Plans New Rules as For-Profit Colleges Mobilize
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-----Original Message----From: ROB MACARTHUR MACARTHUR, ROB [mailto:rmacarthurl@bloomberg.net] Sent: Tuesday, May 04, 2010 9:54AM Subject: (BN) Obama Plans New Rules as For-Profit Colleges Mobilize
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Obama Plans New Rules as For-Profit Colleges Mobilize for Fight 2010-05-04 04:02:00.0 GMT
By Jolm Heclunger, Daniel Golden and John Lauerman May 4 (Bloomberg) --The Obama Administration is gearing up to produce tougher regulations that may reduce the amount of federal fmancial aid flowing to for-profit colleges, cutting the companies' annual revenue growth by as much as a third. In response, the $29 billion industry and its supporters including Republican Senators have enlisted top Washington lobbyists and are courting black and Hispanic legislators to fight the proposed rules scheduled to be released as early as t11is month. The companies draw students from low-income and minority communities. Federal aid to for-profit colleges has become an issue as it has jumped to $26.5 billion in 2009 from $4.6 billion in 2000, according to the Education Department, prompting concern that these students are taking on too much debt. Twelve highereducation stocks fell an average of 7.4 percent for the week ended April 30, according to Bloomberg data, following an April 28 speech by an Education Department official critical of forprofit colleges. In the same period, the Standard & Poor's 500 Index dropped 1.7 percent. "There's an attempt to manage" for-profit colleges by the Obama administration, Robert Wetenhall, an analyst with BMO Capital Markets in New York, said in a telephone interview. The
education companies' influence in Washington has "radically changed," from the years oftheBush administration, he srud. The tougher rules, which are expected to be released for public comment in the next several weeks, would reqwre TIT Educational Services lnc., Career Education Corp. and Apollo Group lnc.'s University ofPhoenix to show that their graduates earn enough money to pay off their student loans. Iffor-profit colleges can' t meet the standard, they could lose federal financial rud, which typically makes up three-quarters of their revenue. Tuition Increases The proposed rules may disqual ify for-profits from receiving federal financial aid if their graduates must spend more than 8 percent of their starting salaries on repaying student loans. The regulations may slow or even halt tuition increases at ITT, Education Management Corp., Lincoln Educational Services, Universal Technical Institute, and Career Education because many graduates take low-paying jobs in criminal justice, cooking and medical office work, Trace Urdan, an analyst at Signal Hill Capital Group in San Francisco, said in an interview. Education companies have increased revenue by as much as 15 percent and enrollment by 8 to 10 percent on an annual basis, while raising tuition about 4 to 6 percent a year, Urdan said. The new rules may slow their revenue growth by one third by limiting their ability to rruse tuition. Pricing Power "The days of 4 to 6 percent annual tuition price increases are over," Urdan said. "The new proposed rules will bring some school's power to increase prices down to zero." Apoll o closed at $58.32, up 91 cents, or 1.6 percent, in New York Stock Exchange composite trading yesterday. ITT closed at $104.22, up $3.09, or 3.1 percent. Career Education rose $97 cents or 3.3 percent to $30.24. The Education Department plans to issue the regulations without Congressional approval, unlike student-loan legislation which passed in March. "Congress has not held a single hearing on these new enforcement mechanisms," Alexa Marrero, spokeswoman for John Kline, the ranking Republican on the House education committee, said in an e-mrul. "No research has been offered by the department to justify the controversial proposal." U.S. Senator Lamar AJexander, who chairs the Senate Republican Conference, is trying to persuade U.S. Education Secretary Arne Duncan to reconsider the regulations, said a Republican aide on the education committee. If that doesn't work,
Alexander, who is on the education and appropriation committees, would try to kill the regulations by cutting off funding, the aide said. Enrollment in for-profit colleges increased to 1.8 million in 2008 from 673,000 in 2000. Lndustry revenue will rise to $29.2 billion this year from $9 billion in 2000, said Jeffrey Silber, an analyst for BMO Capital Markets in New York. The industry has grown in part by marketing to low-income students, including the homeless, who qualify for federal grants and loans. Regulations' Impact The new regulations would shut 300,000 students out of classes and eliminate 2,000 educational programs, according to a study commissioned by the Washington-based Career College Association, which represents more than 1,400 for-profit coll eges. The proposal would reduce opportunities for women and racial minorities who want to go to college, the group said. For-profit colleges have proposed alternative regulations that would require companies to disclose more information about students' debt and job prospects. The Career College Association has retained the Podesta Group, a Washington lobbying flfm headed by Anthony Podesta, whose brother, John, was President Bill Clinton's chief of staff, according to federal filings. Clinton will be a keynote speaker at the association's annual meeting in June. Podesta's Paul Brathwaite, fonner executive director of the Congressional Black Caucus, is also lobbyi ng on the association's behalf, records show. Phoenix Scholarships The University of Phoenix, the largest for-profit college in the U.S. by enrollment, awarded 25 full-tuition scholarships worth $1.25 mill ion in the fi seal year ended August 31 to the Congressional Black Caucus Foundation, which selects the recipients, Apollo spokeswoman Sara Jones said in an e-mail. More minority students earn degrees from Phoenix than from any other U.S. university, she said. In March, several members of the Congressional Black Caucus sent a letter to Duncan, saying the regulations would reduce educational opportunity. Regulators need more tools to oversee publicly-traded education companies receiving increasing amounts of federal money, Robert Shireman, deputy undersecretary of the education department, said in a speech on April 28. "I don't think we have the firepower that we need," he said, according to a transcript of his remarks.
The speech was "highly negative" and was "drawing inappropriate and unwarranted parallels between developments in higher education and the causes of the recent financial crisis," Harris Miller, president of the Career College Association wrote in an April 29letter to Duncan. For Related News and Information: Stories about education: NI EDU U.S. colleges and universities: USUV Education organizations: EDOR Stories about the Department ofEducation: NIEDN
--Editors: Robin D. Schatz,Jonathan Kaufinan To contact the reporters on this story: John Hechinger in Boston at +1-617-210-4614 or jhechinger@bloomberg.net; Daniel Golden in Boston at + 1-617-210-4610 or dlgolden@bloomberg.net; John Lauerman in Boston at +1-617-210-4630 or jlauerman@bloomberg.net. To contact the editor responsible for this story: Jonathan Kaufman at + 1-617-210-4638 or Jkaufman 17@bloomberg.net.
Rose Charlie To: Miller Tony Cunningham, Peter Kanter. Martha Martin, Cannel Rogers, Margot Gomez Gabtiella CC: Yuan, Georgia Date: 5/27/2010 10:27:30 AM Subject: Fw: "Socially Destructive and Morally Bankrupt"
From:
Charlie Sent using BlackBerry
From: Yuan, Georgia To: Rose, Charlie Sent: Thu May 27 09:17:13 2010 Subject: Fw: "Socially Destructive and Morally Bankrupt"
From: Woodward, Jennifer To: Yuan, Georgia; Jenkins, Harold; Marinucci, Fred; Siegel, Brian; Wolff, Russell; Sann, Ronald; Finley, Steve; Wanner, Sarah; Morelli, Denise Sent: Thu May 27 09:13 :10 2010 Subject: "Socially Destructive and Morally Bankrupt"
Included below the article that Brian sent earlier this morning is the text of the speech by Steven Eisman mentioned in the article.
http://www. insidehighered. com/news/20 10/05/27/qt#228602 High-Profile Trader's Harsh Critique ofFor-Profit Colleges Steven Eisman, the Wall Street trader who was mythologized in Michael Lewis's The Big Short as that rare person who saw the sub prime mortgage crisis coming and made a killing as a result, thinks he has seen the next big explosive and
exploitative financial industry-- for-profit higher education-- and he's making sure as many people as possible know it. In a speech Wednesday at the Ira Sohn Investment Research Conference, an exclusive gathering at which financial analysts who rarely share their insights publicly are encouraged to dish their "best investment ideas," Eisman started off with a broadside against Wall Street's college companies. "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," said Eisman, ofFront.PointFinancial Services Fund. "I was wrong. The For-Profit Education Industry has proven equal to the task." Eisman's speech lays out his analysis of the sector's enormous profitability and its questionable quality, then argues that the colleges' business model is about to be radically transformed by the Obama administration's plan to hold the institutions accountable for the studentdebt-to-income ratio of their graduates. "Under gainful employment, most of the companies still have high operating margins relative to other industries," Eisman said. "They are just less profitable and significantly overvalued. Downside risk could be as high as 50 percent. 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." Stocks of the companies appeared to fall briefly in the last hour of trading Wednesday, after news ofEisman's speech made the rounds.
I I I I 1++++++++++++++++++++++++ 1 I I I I I I I+++++++++++++++++++++
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 sub prime 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% of the enrolled students but claimed nearly 25% of the $89 billion ofFederal 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 this 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 administration 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 growtl1. [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, liT Educational Services (ESI), one of the larger 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. Oftllat amount, $1.1 billion came from Title IV federally-funded student loans and grants. More tllan 100% of the revenue growth came from the federal government. But of iliis 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, fan1ilies oflesser 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 fom1Ula 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 neruing 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. 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 ftrst look at drop out rates. Companies don't fully disclose graduation rates, but using both DOE data, companyprovided 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%-100% 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 costs, compensate employees based on enrollment, influence key regulatory bodies and manipulate reported statistics- ALL TO MAINT AlN 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 ofBPI.
"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 also go after GI bill money and currently have separate teams set up to specifically target military students. [fa 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 willie 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 of2009 it had 54,000 students. SOLUTIONS While the conduct of the industry is egregious and similar to the sub prime 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? It 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 tbis rule because it knows that to comply, it will probably have to reduce tuition. [Before I tum 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 ofEducation in charge ofthis 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 of the 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 infmmation 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 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, l show the results under the two scenarios and the corresponding P/Es. Needless to say, the P/E multiples look quite a bit different under either scenario. 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 fiscal 2010 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 1, fiscal 2009 turns slightly negative and the fiscal 2010 estimate gets cut by 74%. Under scenario 2, fiscal 2009 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, fiscal2009 turns negative and thefiscal2010 estimate gets cut by 94%. Under scenruio 2, fiscal2009 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, fiscal2009 and the fiscal2010 estimate turns massively negative. Under scenario 2, fiscal2009 and the fiscal2010 estimate are also massively negative, just less massively than scenario 1. 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. In 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 companies stilJ 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. 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 all 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% ofTitle 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. If the 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 speech.]
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http:!/dealbook.blogs.nytimes.corn/2010/05/26/live-from-the-ira-sohn-2010-conference/?src=busln Hedge Funds Live From the Ira Sohn 2010 Conference
May 26, 2010, 3:28pm 8:29p.m. ! Updated Unlike previous years, this year's Ira Sohn Investment Research Conference didn' t have any blockbuster revelations- certainly nothing on the order of David Einhorn's bet against Lehman Brothers or William A. Ackman's assault on MBIA, the bond insurer. But several themes emerged from the conference, one of the most heralded in the investing world, where top-name executives deliver 15-minute presentations of their top trading ideas. (Or in Mr. Ackman 's case this year, a little closer to 30 minutes.) Chief among them was the idea that the credit ratings agencies have yet to face an overhaul that addresses their weaknesses. (For the full rundown, check out my Twitter coverage of the conference.) Mr. Einhorn, the head ofGreenlight Capital reiterated his short bet against the Moody's Corporation. He argued- as did others like Mr. Ackman of Pershing Square Capital Management and Seth Klarman ofBaupost the Group- that the credit ratings agencies remain beholden to the banks whose products they are supposed to analyze independently. Nearly every fund manager who spoke at the conference expressed a bearish position on Western economies, arguing that they are simply too over-leveraged and unable to address their liabilities to stay on top. A few executives, including Daniel Arbess of Perella Weinberg Partners, expressed instead a deep interest in China. "We like shaking hands with China," Mr. Arbess said. Gold also proved popular with the likes ofMr. Arbess and Mr. Einhorn, who said he had acquired shares in African Barrick Gold, a spinoff of gold miner Barrick Gold. A memorable bearish bet came from Steve Eisman, tl1e FrontPoint Financial Services Fund founder who gained fame with Michael Lewis's book "The Big Short." Mr. Eisman devoted much of his presentation to a highly critical analysis of for-profit education companies, showing his hand with the very title of his PowerPoint deck: "For Profit Education: Subprime Goes to College." Original post DeaiBook is on hand for the Ira W. Sohn Investment Research Conference, the famous annual meeting of high-profile investors where some of the biggest trades of the year are discussed. (It's where David Einhorn of Greenlight Capital delivered his polemic against Lehman Brothers, for example.) Below is Dea!Book's live twittering of the goings on at the conference, being held in Midtown Manhattan.
From:
To: CC:
Date: Subject:
Yuan, Georgia Rose Charlie 5/27/2010 10:17:14AM Fw: "Socially Destructive and Morally Bankrupt"
From: Woodward, Jennifer To: Yuan, Georgia; Jenkins, Harold; Marinucci, Fred; Siegel, Brian; Wolff, Russell; Sann, Ronald; Finley, Steve; Wanner, Sarah; Morelli, Denise Sent Thu May 27 09:13:10 2010 Subject: "Socially Destructive and Morally Bankrupt"
Included below the article that Brian sent earlier this morning is the text of the speech by Steven Eisman mentioned in the article.
http :1/www.insidehighered. com/news/20 10/05/27Iqt#228602 High-Protile Trader's Harsh Critique ofFer-Profit Colleges Steven Eisman, theWall Street trader who was mythologized in Michael Lewis's The Big Short as that rare person who saw the subprime mortgage crisis coming and made a killing as a result, thinks he has seen the next big explosive and exploitative financial industry-- for-profit higher education-- and he's making sure as many people as possible know it. In a speech Wednesday at the Ira Sohn Investment Research Conference, an exclusive gathering at which financial analysts who rarely share their insights publicly are encouraged to dish their "best investment ideas," Eisman started off with a broadside against Wall Street's college companies. "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 subprimemortgage industry," said Eisman, ofFronfPointFinancial Services Fund. "I was wrong. The For-Profit Education Industty has proven equal to the task." Eisman's speech lays out his analysis of the sectors enormous profitability and its questionable quality, then argues that the colleges' business model is about to be radically transformed by the Obama administration's plan to hold the institutions accountable for the studentdebt-to-income ratio of their graduates. "Under gainful employment, most of the companies still have high operating margins relative to other industries," Eisman said. "They are just less profitable and significantly overvalued. Downside risk could be as high as 50 percent. 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." Stocks of the companies appeared to fall briefly in the last hour of trading Wednesday, after news ofEisman's speech made the rounds.
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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 spealcing 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 of 2009, the industry had almost 10% of the enrolled students but claimed nearly 25% of the $89 billion ofFederal 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 l 0 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 this 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 administration 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 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 fiscal2009, 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 ofthjs 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 actuaJ 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 traditionaJ 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 rve 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. HospitaJs refuse to even interview graduates. But let's leave aside the anecdotal evidence of this poor quality of education. After all the industry constantly argues that there will aJways 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, companyprovided 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 annuaJ drop out rates of Apollo, ESI and COCO are 50%-100% How good could the product be if drop out rates are so stratospheric? These statistics are quite alarming, especiaJly 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 sub prime- 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 500/o-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 costs, compensate employees based on enrollment, influence key regulatory bodies and manipulate reported statistics- ALL TO MAJNTAJN 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 ofBPI.
"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 also go after GI bill money and currently have separate teams set up to specifically target military students. [fa 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! quoted worked at Ashford.] On the date of purchase, Franciscan (now Ashford) had 312 students. BPI took that school online and at the end of2009 it had 54,000 students. SOLUTIONS While the conduct of the industry is egregious and similar to the sub prime 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? It 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 wiii probably have to reduce tuition. [Before I tum 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 ofEducation 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 of the 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 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 cotTesponding PIEs. Needless to say, the PIE multiples look quite a bit different under either scenario. 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 fiscal 2010 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 fiscal2010 is $11.05. Under scenario 1, fiscal 2009 turns slightly negative and the fiscal 2010 estimate gets cut by 74%. Under scenario 2, fiscal 2009 declines by 75% and the 20'1 0 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, fiscal2009 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 fiscal201 0 is $1.51. Under scenario 1, fiscal 2009 and the fiscal 2010 estimate turns massively negative. Under scenario 2, fiscal 2009 and the fiscal 20 I 0 estimate are also massively negative, just less massively than scenario 1. 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. In 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 tum 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 companies 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. 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 all 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. If the 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 biltion 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 speech.]
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http://deal book. bl ogs.nytimes. com/20 10/05/26/live-from-the-ira-sohn-2010-conference/?src=busl n Hedge Funds Live From the Ira Sohn 2010 Conference May 26, 2010, 3 :28 pm 8:29p.m. I Updated Unlike previous years, this year's Ira Sohn Investment Research Conference didn' t have any blockbuster revelations- certainly nothing on the order ofDavid Einhorn's bet against Lehman Brothers or William A. Ackman's assault on MBIA, the bond insurer. But several themes emerged from the conference, one of the most heralded in the investing world, where top-name executives deliver 15-minute presentations oftheirtop trading ideas. (Or in Mr. Ackman 's case this year, a little closer to 30 minutes.) Chief among them was the idea that the credit ratings agencies have yet to face an overhaul that addresses their weaknesses. (For the full rundown, check out my Twitter coverage of the conference.)
Mr. Einhorn, the head of Greenlight Capital reiterated his short bet against the Moody's Corporation. He argued- as
did others li ke Mr. Ackman of Pershing Square Capital Management and Seth Klarman ofBaupost the Group- that the credit ratings agencies remain beholden to the banks whose products they are supposed to analyze independently. Nearly every fund manager who spoke at the conference expressed a bearish position on Western economies, arguing that they are simply too over-leveraged and unable to address their liabilities to stay on top. A few executives, including
Daniel Arbess of Perella Weinberg Partners, expressed instead a deep interest in China. "We like shaking hands with China," Mr. Arbess said. Gold also proved popular with the likes of Mr. Arbess and Mr. Einhorn, who said he had acquired shares in African Barrick Gold, a spinoff of gold miner Barrick Gold. A memorable bearish bet came from Steve Eisman, the FrontPoint Financial Services Fund founder who gained fame with Michael Lewis's book "The Big Short." Mr. Eisman devoted much of his presentation to a highly ctitical analysis of for-profit education companies, showing his hand with the very title of his PowerPoint deck: "For Profit Education: Subprime Goes to College." Original post: DealBook is on hand for the Ira W. Sohn Investment Research Conference, the famous annual meeting of high-profile investors where some of the biggest trades of the year are discussed. (It's where David Einhorn of Greenlight Capital delivered his polemic against Lehman Brothers, for example.) Below is Dea!Book's ljve twittering of the goings on at the conference, being held in Midtown Manhattan.
From:
To: CC:
Date: Subject:
Yuan, Georgia Fine Stephanie

4/ 14/2010 10:36:36 AM FW: Another article on gainful employment
CREDIT SUISSE
13 April 2010 Americas/United States Equity Research Education Services (Business & Professional Services) I MARKET WEIGHT
Education Services
Research Analysts Kelly Flynn, CFA 617 556 5752 keny.nynn@credit-suisse.com Patrick Elgrably, CFA 312 750 2974 patrick.elgrably@ credit-suisse.com Adam Shatek, CPA 312 750 3317 adam.shatek@credit-suisse.com
Upgrade DeVry and ITT On New Gainful EmpIoyment Ins1g hts .
We are upgrading ITI (ticker ESI} and DeVry (ticker DV} to Outperform from Neutral due to new insights on the DOE's Gainful Employment stance. We are raising our ITT 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 of this report. Investors should consider this report as only a single factor in making their investment decision.
CRCDITSUISSE
13 April 2010
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, LING 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 $75 DV price target is derived from our DCF analysis. We summarize our DCF assumptions below: 2010-2020 revenue Compound Annual Growth Rate (CAGR) of 10.7%. 2009 operating margin of 19.7% going to 20.2% by 2020. A Weighted Average Cost of Capital (WACC) of 14%. Terminal free cash flow growth of 3%. Working capital changes and capital expenditures that remain in-line with historical ratios.
Company DeVry Inc. (DV) ITI Educational Services (ESI
Price ccy US$ US$
Price 09 Apr 10 65.06 108.78
Rating Prev. N N Cur. 0 O IV I
Target Price Prev. Cur. 55.00 75.00 105.00 135.00
Year' End Jun 09 Oec09
EPS Ccy US$ US$
Outperform, N- Neutral, Underperform, R- Restricted Source: COmpany data, Credit Suisse estimates.
o-
u-
EPS FY2E EPS FY1E EPS FY3E Prev. Cur. Prev. Cur. Prev. Cur. 3.41 4.05 4.65 10.50 11.69 12.63 [VJ = StOCk considered volatile (see DISclosure Appendix).
Education Services
CRCDIT SUISSE
13 April 2010
Companies Mentioned (Price as of 09 Apr 10) American Public Education, Inc. (APEI, $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 $19.00)
Disclosure Appendix
Important Global Disclosures
I, Kelly Flynn, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specnic recommendations or views expressed in this report. See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for DV
DV Date Closing Price {USS} Target Price Initiation/ {USS) Rating Assumetion
4/27/07 6/ 18/07 2/21/08 6/20/08 7/30/08 10/8/08 12/5/08 4/21/09 8/14/09 10/28/09 1/27/ 10
34.52 35.22 43.86 58.54 56.75 45.19 58.37 42.12 51 .89 56.13 63.32
29
NC
65
0
N
R
52
--------~~P+--~~~~~~L-~----~~,~~-----
47 --------1---~~~------~----~~~~-----------
42 --------4---~~--------~------~~------------37 --~~~~--------------------------------------21feb{)8 0
52 53 44 50 52 55
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T atgeiPri::e
lniliai on/Assuf11llioo
Rating
Cl=OUiperloml: l'l=Ne<Jtrat UUndefpertorm: R Reslrcle<l; NR Not Rated: NC.Not CO<oered
3-Year Price, Target Price and Rating Change History Chart for ESI
ESI Date Closing Price (US$) Target Price Initiation/ (US$) Rating Assumption
165 --------------------------~~~----------------145 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
4/27/07 6/18/07 2/21/08 2/25/08 6/20/08 10/24/08 2/2/09 4/21/09
97.9 113.52 60.17 54.02 88.4 74.1 129.43 101.31
110 65 61 81 84 165 105

NC N
0
N
OosngPrire
Tatge1 Pri::e
<>
lniliai on/AssulllJiion
Rating
Cl=OUiperloml: l'l=Ne\Jirat U:Undefpertorm: RRestri:le<l: NR Not Rated: NC.Not CO<oered
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Education Services
CRCDITSUISSE
13 April 2010
Underperform (U): The stock's total return is expected to underpertorm the relevant benchmark* by 10-15% or more over the neX112 months. Relevant benchmark by region: As of 2gh May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock's absolute total return potential to its current share price and (2) the relative attractiveness of a stock's total return potential within an analyst's coverage universe .., with Outperforms representing the most attractive, Neutrals the less attractive, and Underpertorms the least attractive investment opportunities. Some U.S. and Canadian ratings may tall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock's total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock's total return relative to the analyst's coverage universe ... For Australian and New Zealand stocks a 22% and a 12% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively, subject to analysts' perceived risk. The 22% and 12% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively, subject to analysts' perceived risk. ..An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in atleast8 of the past 24 months or the analyst expects significant volatility going forward.
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See the Companies Mentioned section for full company names. 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: 2009-19 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.
Education Services
CRCDIT SUISSE
13 April 2010
See the Companies Mentioned section for full company names. 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 months. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada}, Inc.'s policies and procedures regarding the dissemination of equ~y research, please vis~ httpJ/www.csfb.com/legal_terms/canada_researchJ>olicy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
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Education Services
CREDIT SUISSE
13 April 2010 Americas/United States Equity Research
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and DV Upgrade.doc
From: Kvaal , James To: Kanter Martha Yuan, Georgia CC: Date: 8/3/2010 3:41:42 PM Subject: FW: Bloomberg on GAO
For-Profit Colleges Fall on Concern About Recruiting Tactics By Nikolaj Gammeltoft Aug. 3 (Bloomberg)-- For-profit education stocks declined in the U.S. after a Government Accountability Office probe of the industry found recmiters lied to entice students and encouraged them to commit fraud to qualifY for aid. Education Management Corp. and Bridgepoint Education Inc. helped send an index of 12 education companies to a 2.9 percent loss at 10:52 a.m. New York time. Recruiters at 15 unidentified colleges studied by the GAO, Congress' s investigational arm, misled potential students about the costs, duration and quality of their programs, according to a report obtained by Bloomberg News that will be released publicly tomorrow. The shares retreated in six of the last seven days, losing 4.7 percent since July 20, on concern the government will reduce student aid for some programs. Apollo Group Inc., owner of the biggest for-profit university in the U.S., has lost half its value since Jan. 16, 2009, data compiled by Bloomberg show. "The main bear case is that they're fraudulently recruiting people," said Robert Kean, a trader at Kern Suslow Securities Inc. in New York. "Whenever you' re going in front of Congress you have a huge overhang for your stock." The 30-page report examined colleges in Arizona, California, Florida, illinois, Pennsylvania, Texas and Washington, D.C. Both privately held and publicly traded education companies were included. Share Movers Education Management dropped 5. 3 percent to $14.92. Bridgepoint Education fell 5.4 percent to $17.92. DeVry Inc. lost 1.9 percent to $53.44. Corinthian Colleges Inc. declined 3.7 percent to $8.91 . Apollo Group retreated 3.6 percent to $45.43. Career Education Corp. decreased 2.7 percent to $24.19. Capella Education Co. fell2.3 percent to $91.38. ITT Educational Services Inc. slumped 2.8 percent to $80.34. The Washington Post Co., which operates Kaplan Higher Education, declined 1.9 percent to $425.62. The Senate Health, Education, Labor and Pensions Committee, which commissioned the report, will hold a hearing tomorrow to examine how for-profit colleges attract students. GAO investigators posed as prospective recruits to investigate practices in the education industry, which received at least $4 billion in U.S. grants and $20 billion in Department ofEducation loans last year, the report said. "While the GAO findings are serious, we note that no public companies are cited for the most egregious ones (i.e., fraud)," New York-based BMO Capital Markets analysts Jeffrey Silber and Paul Condra wrote in a note today. "While
no spec1fic schools were named, based on the data prov1ded, we believe two are owned by Apollo, two by Corinthian Colleges, and one by Washington Post. These schools were not accused of fraud, but rather misleading marketing." To contact the reporter on this story: Nikolaj Garnmeltoft in New York at ngammeltoft@bloomberg.net .
From:
6/4/2010 11 :50:56 AM Subject: FW: Can you share this with This was the article I told you about.
To: CC: Date:
Macias Wendy Finley, Steve
From: Smith, Kathleen Sent: Friday, June 04, 2010 11:40 AM To: OPE-PPI Subject: FW: Can you share this with
FYI- this is the article Dan spoke about this morning.
From: Madzelan, Dan Sent: Friday, June 04, 2010 11:32 AM To: Smith, Kathleen Subject: Can you share this with
PPI staff? Outlook is successfully hiding my PPI email list.
Thanks
http://www.chicagobusiness.com/cgi-bin/maglarticle.pl?articleld=33444
Looks like you might have to register at the site, so I've included a pdf of the article.
Tuesday, June 1st, 2010
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MAY 31, 2010
DeVry, Career Education join push against new rules designed to limit student-loan defaults
By:
~M ay
Past Weeks
31, 2010
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The threat of an Obama administration crackdown on federal tuition aid for students of for-profit schools is roiling publicly held education firms such as Chicago's DeVry Inc. and Career Education Corp., mobilizing an all-out lobbying blitz against the proposal. Described as another subprime debacle wa~ing to happen, regulators are aiming to cut off federal student loans and tu~ion grants for classes that don't lead to jobs paying enough to avoid a default on that debt. There are signs the administration's resolve may be eroding, however, as the industry pushes back hard, hiring lobbyists, upping campaign contributions and commissioning research to discredit the idea. "At a certain moment. you've got to understand that maybe you're at war with the department," says Toby Moffett, a former Democratic congressman from Connecticut who is lobbying for Career Ed, based in Hoffman Estates. "By war, what I specifically mean is getting members of Congress who are impacted by this to ask the department a lot of questions." For-profit schools account for 7% of the nation's post-secondary students but 44% of the loan defaults, according to the Department of Education. The administration's remedy could force widespread tu~ion cuts or curtail subjects offered by for-proftt schools. But non-prom public and private colleges and universities are exempt from showing that their classes lead to "gainful employment" to qualify for federal tu~ion aid. It's become a front-and-center issue for U.S. Education Secretary Arne Duncan. The former head of Chicago Public Schools met privately two weeks ago w~h more than a dozen riled-up Democratic and Republican House members, including Rep. Judy Biggert, R-Hinsdale, a member of the House Education and Labor Committee. "No specific comm~ments were made. but I think we made a solid case. and that the divers~y of
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the members present- representing all ends of the political spectrum- made a strong impression on the secretary," she says in a statement. "Our message was simple: We don't want these new rules to limit student access to unique career opportunities delivered by strong vocational programs, like those in our area. I think the secretary understood that." RATING RISK New York-based Morgan Stanley Research analyst Suzanne Stein estimates the rule would have a "moderate/high" impact on Career Ed due to its relatively high tuition and student-loan default rates. DeVry was rated only a "moderate" risk, given its emphasis on "higher-paying occupations (business, IT, medical/veterinary/nursing)," Ms. Stein wrote, "but tuition is not inexpensive and we expect some programs won't qualify." Spokesmen at both firms decline to talk about the potential impact of the new rules. Career Ed President and CEO Gary McCullough told analysts in early May that he "personally spent a great deal of time in Washington over the (last) two months. I'm encouraged by the willingness and the interest of members of Congress to understand the impact of the proposed rules on students." But there's also support for the administration. "It concerns me greatly that students from for-profit institutions are more likely to default on their student loans," Rep. Danny Davis, D-Chicago, says in a statement. "I support the Department of Education's efforts to define gainful employment so that we can better distinguish the good actors from the bad." So far this year, DeVry is on track to match the $320,000 it spent on lobbying last year. more than three times what it has spent annually in the past. DeVry executives contributed more than $52,000 to federal candidates and party fundraising efforts in the 2007-08 election cycle and almost $39,000 since then, including $13,860 to President Barack Obama's campaign fund, according to the Washington, D.C.-based Center for Responsive Politics. LOBBYING, CONTRIBUTING Career Ed spent $90,000 on lobbying in the first quarter, compared with $270,000 in all of last year. Execs contributed $12,555 in the last election and $5,800 since then, including $1 ,500 to the political action committee of the Career College Assn., a Washington industry group that has contributed $175,511 to federal candidates and other PACs since last year. Combined, the PACs of DeVry and Career Ed contributed more than $31 ,000 since January 2009. DeVry's PAC contributed $5,700 in the last election, and Career Ed launched its PAC in May 2009. The Department of Education is still expected to issue a proposed regulation in the next few weeks, but some of the most controversial provisions circulating for the past six months may be dropped for further study. "We are deciding how to move forward with areas of disagreement," a department spokesman says in a statement. "We may go forward with some or regulate others on a separate timeline ." The administration hasn't said that publicly before. "There have been quiet hints that they're considering that option," says Harris Miller, president and CEO of the Career College Assn., which represents about half of the estimated 2,900 for-profit schools in the U.S. "That would be very productive."
C2010 by Crain Communications Inc.
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ROBERT M. wrote:
The previous poster misses the point the schools in question are not, in general, issuing art history degrees. Instead, they focus on career-oriented fields: IT, culinary arts, nursing, etc. The art history degrees are the pUiv iew of non-profit inst~utions-who IMluld not be subject to the regulatory restnctions that the legoslation proposes. If the Department of Ed and Congress want to pass legislation that links borrowing to the earning power of the degree being soughl they should make the legislation apply to for-profit and non-profit inst~uti ons alike. 6/112010 9:24 AM COT Reoommend Report A buse
Pete P. wrote :
This change is long overdue. Students should NOT be allowed to rack up $ 100,000 worth of taxpayer-backed loans to get an art history degree. The default risk is simply too high, and too many questiOnable educational institutions are making a killing on loose lending, 5/30/2010 9:20 PM COT Reoommend Report A buse
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Finley Steve Macias, Wendy 8/26/2010 8:55:14 AM FW: Chronicle ofHigher Ed-- two articles on prop. schools-- (1) Info due to Harkin today; (2) Stopping admittance of ATB students
fyi -- (b)(5) From: Siegel, Brian Sent: Thursday, August 26, 2010 8:36AM To: Jenkins, Harold; Marinucci, Fred; Finley, Steve Subject Chronicle of Higher Ed-- two articles on prop. schools- (1) Info due to Harkin today; (2) Stopping admittance of ATB students 2 For-Profits Dump Basic-Skills Test Over Concerns About Loan Defaults By Michael Sewall As federal scrutiny of for-profit colleges tightens, two prominent proprietary institutions have decided to discontinue the practice of enrolling students who do not have a high-school diploma or aGED but who pass a basic-skills test that allows them to qualify for federal student aid. Corinthian Colleges announced last week that it would stop using the tests, known as "ability-to-benefit" tests. In doing so, college officials cited the tendency of students who qualify by passing the tests to have higher default rates on their loans than their peers who didn't take the test, as well as new federal rules that will change how colleges are held accountable for those defaults. Corinthian's decision follows a similar move by Kaplan University, which discontinued use of the tests last fall. The ability-to-benefit tests aren't widely used in higher education as a whole, but a number of colleges allow students who pass them to enroll.
In explaining Corinthian's decision, Kent Jenkins Jr., a spokesman for the institution, said students who take the abilityto-benefit test tend to default on their loans at twice the rate of other students. For-profit colleges like Corinthian and Kaplan will need to manage their default rates better, because starting in 2014, the Education Department will hold colleges accountable for defaults of student cohorts for three years after the students graduate or leave college, a full year longer than under current law.
Peter C. Waller, chief executive of Corinthian, announced the decision to drop the test during a conference call to discuss quarter.ly earnings last Friday. He said the shift to a three-year measurement, as well as changes in student lending that have put more responsibility on colleges for default management, left them "no choice" but to discontinue enrollment of students who do not have a high-school degree or aGED. "We're in a better position today to take the steps that will help us reduce risk and preserve our ability to succeed in the future," Mr. Waller said. "Current public policy on cohort default rates has the unfortunate effect of creating disincentives to serve [ability-to-benefit] students." About 15 percent of Corinthian students in the last academic year used the ability-to-benefit test. The college estimates it
will lose 16,000 potential students and about $120-million in the next fiscal year as a result of this decision, but it will also lose the risk these students bring in the way of higher default rates. The 15-percent enrollment of ability-to-benefit students was a decrease from 24 percent the previous year, credited to a greater focus on default management at Corinthian, as well as the growth of its online division, which doesn't enroll these students. For Kaplan, meanwhiJe, Michele Mazur, a spokeswoman, said discontinuing ability-to-benefit enrollment was neither a financial decision nor one that was based on the new three-year window for measuring default rates. Ms. Mazur said many of Kaplan's campuses stopped enrolling students who passed the test before the three-year window was approved by Congress. She said the systemwide decision, made in October, was mostly about Kaplan's overall concerns with ability-to-benefit, or ATB, students. "Although we initially began admitting ATB students several years ago as a way to serve this most-underserved student population, over time we developed serious concerns about ATB students' performance," she said. Ms. Mazur said the decision to stop enrolling them has benefited both Kaplan and people who would have been those students."No one gains when students do not successfully complete their programs and get a job," she said. Worries About Students' Success and Defaults The Education Department released data showing what institutions' cohort-default rates would be if a three-year measurement period were already in place. An analysis of that data shows that rates at 183 for-profit colleges were at least 15 percentage points higher in a three-year period than a two-year window, which is the government's current tracking period. In that same period, onJy 20 nonprofit colleges had increases that large. Deborah Cochrane, program director at the Institute for College Access and Success, a group that advocates for college atfordability, said colleges have a responsibility to make sure that students can succeed after graduation, and the threeyear period helps hold institutions more accountable.
"If ability-to-benefit students are of a particular concern, I think the colleges can give them the support they need to succeed at the same level as other students," Ms. Cochrane said. "On the other hand, if they know these students aren't able to succeed at the same rate and they can't offer the support needed to help them, they shouldn't be loading up students who they know are more likely to fail."
Earlier this summer, the Education Department proposed a number of new rules that affect for-profit colleges and abilityto-benefit tests, including those that would establish new requirements for student-aid eligibility and put in place further checks to ensure that tests are being administered fairly and properly. These rules were proposed because of Government Accountability Office concerns that there hasn't been enough oversight of the ability-to-benefit tests, which must be approved by the Education Department before they are used. Private publishers certify and monitor test administrators. In October, the Education Department said it was putting in place better monitoring practices, a move that was deemed necessary after a GAO report found that testing officials at a for-profit college helped students cheat on an ability-to-benefit test. In general, widespread cheating was not found at colleges that use the tests, but the report cautioned that the lapse in oversight was allowing unqualified students to get federal aid. "To decrease the likelihood that students will default on their loans, it is critical that [the Education Department[ increase its oversight of federal student-aid eligibility requirements to make sure that only students who have the ability to benefit receive federal funds to attend college," the report stated.
August 26, 2010 For-Profit Colleges Are Set to Deliver Data to Sen. Harkin By Kelly Field At a hearing on for-profit colleges earlier this summer, the chairman of the Senate education committee, Sen. Tom Harkin, lamented that lawmakers know too little about for-profit higher education, a sector that receives nearly a quarter of all federal student aid. "There is much that we don't know," the Iowa Democrat said, citing gaps in the data surrounding graduation and employment rates, spending, and student-loan defaults. "More broadly, we don't know exactly what risk we are taking by investing an increasing share of our federal financial aid in this sector." By the end of the day Thursday, the senator may know a lot more. Thursday is the first deadline for 30 for-profit colleges to provide mountains of data about their finances, recruiting practices, and student outcomes to the senator. A second installment is due in mid-September. Some of the data Mr. Harkin is seeking are already reported to federal agencies and private accrediting organizations, but not made public, or not uniformly repmted. In other cases, he is delving deeper, seeking e-mail exchanges and internal documents that the companies may consider proprietary. Grover J. (Russ) Whitehurst, the former director of the Education Department's research division, called the request "extraordinary." "This is the sort of information that you would not want to have divulged to your competitors," he said. But an analyst with Credit Suisse predicted that stocks of for-profit education companies could actually benefit from the disclosure, because many investors have "assumed the worst" about the coll eges' finances and student outcomes. The data could also help lawmakers determine whether the sector's problems are widespread, or limited to a few "bad actors," as for-profit colleges insist. Right now, "we don't know how many good schools there are and how many bad schools there are," said Margaret Reiter, a former prosecutor with the California Attorney General's Office. "There isn't enough data to tell us." For-profit colleges, like nonprofit institutions, already report reams of data to the Education Department, the U.S. Securities and Exchange Commission, and accrediting agencies. Defenders of proprietary institutions argue that the data deficit is no worse for for-profit colleges than nonprofit ones, and point out that for some measurements-job-placement rates in particular-for-profits actually disclose more. "The irony" ofMr. Harkin's request, said Michael Goldstein, a lawyer who helps for-profit colleges comply with federal reporting requirements, "is that the for-profit, nationally-accredited schools actually report considerably more information than the regionally accredited private, public, and for-profit coll eges."
Mr. Goldstein says that there are plenty of data available, but that agencies and accreditors lack the resources to use it
effectively.
"There's a whole lot of data and not a lot of infonnation," he said Harris N. Miller, president of the Career College Association, said he welcomes greater transparency, but believes the standard should apply to nonprofit colleges as well. "I would argue that all parts of higher-education need to be more transparent," he said. So what do we know about how for-profit and nonprofit colleges compare on spending and student outcomes, and where are there gaps? Here's what the colleges now report in four key areas-spending, revenue, graduation rates, and placement rates-and what more Senator Harkin wants to know. Spending Under federal Jaw, publicly traded for-profit colleges must file quarterly and annual reports with the Securities and Exchange Commission. The colleges' reports provide detailed infonnation about the companies' finances, and some break down spending into broad categories like instruction and marketing. According to an analysis by the Senate education committee, the eight publjcly-traded institutions that categorize their spending devoted an average of 50 percent of spending to education, 31 percent to recruiting and marketing, and 16 percent to "undefined admjnistrati ve expenses." Not all for-profit companies break down their spending, however, and those that do categorize their expenses in different ways, making comparisons across companies difficult. What one company considers "marketing," another may label "student services," reasoning that recruiters are counseling students, Mr. Miller says. "One of the shortcomings is that there's no standardization," he said.
In addition, all colleges provide some information about their spending to the Department ofEducation. In 2008-9, for-
profits spent, on average, $2,512 educating each student, half of what public universities spent, and a fifth of what private nonprofit institutions spent, according to an analysis by the Center for College Affordability and Productivity. Not surprisingly, for-profits also lag behind nonprofits in spending on research and public service. The only category in which for-profits appear to outspend public and nonprofit private colleges is "student services" and "academic and institutional support," which represents 62.5 percent of the sector's spending, according to the center's analysis. That category, however, includes spending on marketing, which can account for a large share of some proprietary colleges' budgets. It's also impossible to tell how much of the sector's money is going to the different areas within the category because for-profit colleges, unlike nonprofit institutions, are allowed to aggregate the data. Jane V. Wellman, executive director oftheDeltaProject on Postsecondary Education Costs, Productivity, and Accountability, which tracks college spending, says that's one of the main reasons her organization excludes for-profits from its studies. "They collapse categories in ways that make them not comparable" to nonprofits, she said.
In his request, Senator Harkin is asking for-profit colleges to provide spreadsheets detailing spending on categories as
diverse as advertising, furniture and fixtures, and litigation. Revenue Cross-sector comparisons are easier when it comes to revenue. While for-profit colleges receive less direct government support than private nonprofits-and far Jess than public colleges-they are much more dependent than nonprofit
colleges on federal student aid, Education Department data and company filings show.
In 2009, federal student aid accounted for an average of77 percent of revenue at the five largest for-profit colleges, according to the Senate education committee's analysis. For-profit colleges enroll roughly 10 percent of students but receive almost a quarter of student-aid dollars.
National accreditors ask colleges for information about their spending and revenues, but not at the level of detail Senator Harkin is requesting, said Judith S. Eaton, president of the Council for Higher Education Accreditation, an umbrella group for accreditors. While an accreditor may ask a college how it tracks revenue, Mr. Harkin is seeking all "policies, plans, and practices for tracking revenues" as well as spreadsheets detailing revenue received from more than a dozen federal and state grant and loan programs. He is also requesting all documents, including e-mails, "concerning the possibility, likelihood or risk" that a college or campus "is approaching or could exceed" the 90 percent cap on revenue derived from federal aid. Graduation Rates The Education Department collects extensive data on graduation and completion rates through its Integrated Postsecondary Education Data System, or Ipeds, with breakdowns by gender, race and ethnicity, and institution type. Prospective students and their parents can compare colleges on these measurements using the department's College Navigator Web site. But the database has one major limitation: It often reflects first-time, full-time students only, a category that excludes many students attending for-profit and community colleges. In fact, only 43 percent of students who entered a four-year, for-profit program in the fall of2008 were first-time, full-time students, and only 32 percent of community-college students were, according to Thomas Weko, associate commissioner for postsecondary, adult, and career education at the National Center for Education Statistics, the statistical arm of the Education Department. It's also difficult to figure out what becomes of students who enroll after colleges report their fall enrollment. While colleges are required to repott the total number of students they enroll during a 12-month period, only students who enroll in the fall are counted in the graduation-rate cohort. Some institutions self-report transfer-out rates, but many rely on student surveys, an unreliable instrument.
Mr. Whitehurst says the only way to measure the true graduation rate is through the creation of a "unit record" system that would anonymously track individual students' progress-an idea Congress has nixed.
"Ipeds is broken," he said, "and the only way to fix it is through a student identifier." Some additional information about student outcomes can be gleaned from the SEC filings of the handful of publicly traded companies that report detailed enrollment figures. In its analysis, the Senate education committee added the number of new students at four publicly-traded colleges to the number of continuing students and subtracted the ending enrollment to arrive at the number of students who left the institutions during the year. However, there is no way to determine how many of those students graduated, transferred, or dropped out.
Mr. Harkin suspects that many of those students are "churning" through for-profit colleges, taking on large amounts of debt and leaving without a degree. To test this theory, he's asking for-profit colleges to document, for the past three years, the total number of students who enrolled, graduated, or left the college each month, along with detailed "outcome" information for each student enrolled during a two-year period.
Mr. Mjller, the career-college group's president, says he's "fairly confident" that the data will show that a maj01ity of
students who leave an institution during an academic year are not "churning out into the ether," but "completing and starting their career." Job Placement One area where for-profit colleges disclose more than nonprofit institutions is in placement rates. Under federal regulations, any college that advertises job-placement rates as a means of attracting students must disclose to prospective students the latest employment and graduation statistics. In addition, some for-profit colleges (those with programs lasting between 300 and 600 credit hours) are required to prove to their accreditors that they have completion and placement rates of at least 70 percent.
In practice, though, some colleges have buried their placement rates in remote comers of their Web sites, and some have
stretched the definition of placement, counting as employment unpaid internships and jobs that are only remotely related to the credential earned. Some colleges have even been sued for falsifying their numbers. "There's nothing to prevent schools from misrepresenting" their placement rates, said Ms. Reiter, the former prosecutor with the California Attorney General's Office who was a party in a state lawsuit against Corinthian Colleges in 2007 over its job-placement claims. Senator Harkin has also raised doubts about the validity of the data that for-profit colleges report to accreditors and students. "Statistics can be self-serving when they're produced by the entities that are getting taxpayer dollars," he said at the first oftwo hearings held by his committee this summer. "I have serious questions about these placement rates and how they calculate them."
In his request, Mr. Harlcin is seeking "all documents" concerning placement, employment, and salaries of former students provided to an accreditor, along with copies of materials and disclosures provided to prospective students. He is also requesting details of all "policies, plans, practices and procedures" used to track job placement and graduates' salaries.
Ms. Eaton, of the accreditors' group, said peer reviewers scrutinize colleges' graduation- and placement-rate figures, and will raise questions "if the numbers look funny." "There is a tendency to assume that ifit's peer review, it's weaker than a standardized compliance approach, and with all respect, rchallenge that," she said. Still, it's hard to learn much about individual programs from accrediting reports, which typically state graduation and placement rates in the aggregate, across institutions. Some publicly-traded companies also report placement rates in their SEC filings. The latest numbers are quite high, ranging from 73 percent to 88 percent. The data cover different time periods, however, from between six months to two years after graduation, and are not verified.
From:
To: CC:
Date: Subject:
Rose Charlie Yuan, Georgia 4/29/2010 3 :27:00 PM Fw: Comparing Higher Ed to Wall Street
Char.ie l Sent using BlackBerry
From: Miller, Tony To: Rogers, Margot; Cunningham, Peter; Kanter, Martha; Martin, Carmel; Gomez, Gabriella; Rose, Charlie Cc: Yale, Matt Sent: Thu Apr2914:10:16 2010 Subject: FW: Comparing Higher Ed to Wall Street
FYI
From: Rothkopf, Arthur J. [mailto:ajrothkopf@USChamber.com] Sent: Thursday, April29, 2010 3:05PM To: Private- Miller, Anthony Cc: Fine, Stephanie; Ritsch, Massie Subject: Fw: Comparing Higher Ed to Wall Street
Tony1assume you have read this piece in Inside Higher Ed today. It certainly looks as though open warfare has broken out. Too bad! Arthur
From: Johnson, Stephanie To: Rothkopf, Arthur J. Sent: Thu Apr2914:52:55 2010 Subject: Comparing Higher Ed to Wall Street
Comparing Higher Ed to Wall Street
Inside Higher Ed
April29, 2010 Whenever worried leaders of for-profit colleges have implied in recent months that the U.S. Education Department is gunning for the institutions, officials of the federal agency have discouraged such talk, offering evenhanded rhetoric about treating all sectors the same in their push for increased accountability. The words have provided little reassurance to the colleges, since they haven't always seemed to square with the aggressive approach the Obama administration is taking in rewriting federal rules governing vocational and other programs. On Wednesday, in a speech to state regulators who oversee for-profit colJeges, the chief architect of the Education Department's strategy, Robert Shireman, offered a much more critical assessment of the private sector institutions than he has in his public comments to date, according to accounts given by several people who were in the room. He compared the institutions repeatedly to the Wall Street firms whose behavior led to the financial meltdown and called them out individually, one by one, for the vast and quickJy increasing sums of federal student aid money they are drawing down. While Shireman's comments were aimed most directJy at the for-profit colleges themselves, they may be most noteworthy for his indictment of accreditation, higher education's system of institutional peer review. In Shireman's narrative before the rumual meeting of the National Association of State Administrators and Supervisors of Private Schools, the accrediting agencies are to the for-profit colleges what the Wall Street ratings agencies were to the misbehaving financial finns: entities charged with regulating an industry that has grown too quickJy and too complex for them to control, and that have an "inherent conflict of interest" because their existence depends on financial contributions from those they regulate. Accreditors lack the "firepower" to regulate the for-profit sector, and the states and the federal government don't necessarily have all the tools they need to do it either, Shireman said, according to the notes of several in the audience. That, he suggested, is why the Education Department must toughen its rules in the way it is now proposing. Shireman could not be reached for comment, and an Education Department spokesman said its officials did not wish to comment on this article. To several people in the audience, Shireman's comments represented a much more candid (and critical) appraisal of the for-profit sector than he has offered publicly since he became deputy under secretary of education almost exactly a year ago. Many supporters of the education companies feared his appointment because they believed his track record as an advocate for low-income students and a foe of student debt would result in a crackdown on the institutions, whose students are disproportionately needy and disproportionately go into heavy debt to finance their educations. But with Wall Street analysts hanging on his every word looking for snippets that might threaten the publicly traded companies' stock prices, Shireman has often seemed to go out of his way to avoid singling the institutions out for criticism.
A typical quotation, from last summer: "Our overall goal at the Department of Education in postsecondary education is to make sure that students ... have the information they need to make good choices, and that they have good quality postsecondary education that serves both them as students and taxpayers as well," Shireman said. "...lf there is not quality, we want to know about it and if we can, we want to do something about it. Whether that involves a public institution, a nonprofit, a for-profit, a two-year, a four-year, a trade program, whatever type or sector of institution, we want to do all we can to make sure that we have good quality." Different Tone In his comments Wednesday, Shireman laid out the context underlying the Obama administration's elevation of higher education as a central focus of its domestic policies. The economic slide created in part by the collapse of the credit markets has sent Americans streaming back to college in record numbers, and has made it more imperative than ever that more Americans get a higher education to strengthen the country's economic base for the future, Shireman said. The administration has poured tens of billions of dollars into Pell Grants and restructured the federal student loan programs to try to ensure that Americans have access to higher education, Shireman said Wednesday. Many public institutions, facing cuts in their state funding, have had to Limit or even cut their enrollments, reducing their ability to meet the increasing demand from students. The for-profit colleges, by contrast, have stepped up, seeing their enrollments explode -- and with them, the amount of Pell Grant money that follows the students to the institutions, Shireman said. Anyone in the audience from Corinthian Colleges? Shireman asked the assembled audience Wednesday. A hand went up. The California-based for-profit higher ed company has seen its revenue from Pell Grants grow by 38 percent in the first three quarters of this fiscal year compared to the last one, he said. Anyone from DeVry? Forty-two percent, Shireman said. Strayer? ITT? One by one, he ticked through a list of publicly traded companies, pointing out the increasing amounts of federal money the institutions were collecting ("It was like fourth grade, with a teacher scolding students over their grades," said one person who was in the room). What are taxpayers and students getting in return for that investment? Shireman asked. It has histmically been up to the "triad" --the three-headed regulatory scheme involving the federal government, state governments and accrediting agencies --to ensure access, quality and integrity in higher education, he said. But is that regulatory system up to the job? To draw a parallel, Shireman noted that as this meeting was unfolding in St. Paul, politicians back in Washington were debating possible reforms of Wall Street, to try to fix the "flawed" regulatory process that allowed Goldman Sachs and other purveyors of sub prime mortgages to engage in misbehavior that helped devastate the economy. One major reason the process was flawed, Shireman said, was because the bond rating agencies that were supposed to be judging the riskiness of the financial instruments were supported in large part by fees from the companies that were asking the agencies to rate the financial instruments- "a clear, inherent conflict of interest," Shireman said, according to the accounts of several in the room. On top ofthat inherent conflict, the ratings agencies have been struggling to keep tabs on industries that grew quickly and adopted increasingly complex practices, Shireman said, suggesting that the ratings agencies lacked the "firepower" to regulate the financial markets.
In case anyone missed it, Shireman drove his point home, pointing out that higher education accrediting agencies are
made up of(and financially supported by) their member colleges, and see it as their mission both to help the institutions
"improve" and also to ensure, in what is essentially a subcontract from the federal government, that they are of sufficient quality. The peer review nature of higher education accreditation has an inherent conflict of interest similar to the ratings agencies, Shireman said. Given that, he suggested, it is crucial for state and federal agencies, as the other two parts of the triad, to step up their role in regulating higher education. But do state regulators think they have the "firepower" to keep tabs on the big, growing and complex private market college sector? Shireman asked the state officials in the room. The response was underwhelming. The federal government's own powers may be insufficient to do the job, too, Shireman suggested, according to members of the audience. That is why the department needs new approaches to ensuring integrity in the financial aid programs, he said, such as requiring most for-profit colleges and non-degree vocational programs at nonprofit colleges to show that they are preparing students for gainful employment. Several people who heard the speech said they viewed it as a much more strident critique of for-profit colleges, and of higher education accreditation, than Shireman has delivered before. But David Dies, who heads the Wisconsin Educational Approval Board and just finished a term as president of the national group of state regulators, didn't hear it quite that way. "I think Bob was explaining why we need state regulation and [Education] Department oversight to be part of this threelegged stool, not just accreditation, and why we all need to work together," said Dies. "He was pointing out some limitations of accreditation, but I didn't really see it" as highly critical of accreditors or for-profit colleges. -Doug Lederman Post a Job Copyright 2010 Inside Higher Ed
Stephanie Johnson U.S. Chamber of Commerce 1615 H Street, NW Washington, DC 20062 p: (202) 463-5938
f: (202) 463-5863
www.uschamber.com
From: To:
Rose Charlie Yuan, Georgia 5/3/2010 12:17:20 PM FW: DeVry Inc. OMB Packet
CC: Date:
Subject:
From: Thomas Parrott, Sharon [mailto:stparrot@devry.edu] Sent: Monday, May 03, 2010 12:16 PM To: Duncan, Arne; Miller, Tony; Rose, Charlie Cc: Hamburger, Daniel; Babel, Tom; Thomas Parrott, Sharon Subject: FW: DeVry Inc. OMB Packet
Gentlemen, We are pleased to provide you with copies ofDeVry Inc.'s submission to the Office ofManagement and Budget in advance of our meeting this afternoon. We look forward to continuing the conversation with the Department to come up with regulatory solutions that protect students while assuring access to quality educational opportunities.
Sharon Thomas Parrott Senior Vice President Government and Regulatory Affairs Chief Compliance Officer DeVry Inc. 3005 Highland Parkway Downers Grove, IL 60615-5799
p: 630.515.3146
f: 630-353-3968
e: stparrot@devry.edu
www.devryinc.com
DeVry ~
OeVry Inc.
3005 Highland Parkway Downers Grove Illinois 60515-5799 630-515-7700 800-733-3879 www.devryinc.com
May 3, 2010 Kevin Neyland Deputy Administrator Office of Information and Regulatory Affairs Office ofManagement and Budget 725 17th Street, NW Washington, DC 20503 Re: Proposed Rule Involving Institutional Eligibility Under The Higher Education Act Of 1965; Student Assistance General Provisions
De ry Inc. and its subsidiary educational institutions (Apollo College, Chamberlain College ofNursing, De ry University, Keller Graduate School of Management and Western Career College), which serve more than 100,000 students, submit this letter regarding the proposed rule recently submitted by the Department of Education ("ED") addressing Institutional Eligibility under the Higher Education Act of 1965; Student Assistance General Provisions (RIN 1 40-AD02). We appreciate the opportunity to present our views as OMB reviews the rulemaking proposal.
In connection with this rulemaking, ED held three separate negotiation sessions. Our comments below address two issues that failed to reach consensus as a result of that process- "gainful employment" and "incentive compensation." These issues are offundamental importance to students. We are obviously unaware of the contents of the proposed rule pending at OMB and therefore cannot provide comments on any specific regulatory proposals. Our comments are instead based on ED 's proposed regulatory approach that it set forth during the negotiation sessions. It is important that OMB carefully review the regulatory provisions pertaining to gainful employment and incentive compensation and keep in mind the considerations mentioned below.
Gainful Employment President Obama, in his inaugural state of the union address, laid out a new vision for higher education in the United States- to "once again have the highest proportion of college graduates in the world." He also laid out a goal for the creation of3.5 million new jobs, many of which will be in emerging industries requiring new skills and new knowledge. These goals cannot be accomplished without adding new programs and new capacity in order to educate the millions of additional students that would be required to meet the President's goals.
Yet, ED is proposing new rules to regulate proprietary institutions and some programs of study in private non-profit and public institutions, whose sole purpose, is to eliminate programs and constrict educational opportunities. These rules, would introduce a definition of"gainful employment" in relationship to Sections 101(b)(1), 102(b)(I)(A)(i) and 102(c)(l)(A) ofthe Higher Education Act of 1965 that require proprietary and vocational colleges to provide "an eligible program of training to prepare students for gainful employment in a recognized occupation." The phrase "gainful employment" has been in use for more than 300 years. It has been defined by other federal agencies 1 and interpreted by numerous U. S. courts. It has consistently been interpreted to refer to employment for which one receives more than token compensation. ED' s attempt to include a measure of a student' s debt burden as part of that definition is inconsistent with any other definition and, if successfu~ would represent a new burden on institutions that, for the last 35 years have used the broader definition in developing and delivering their educational programs. We understand and share ED' s concerns regarding graduates' increasing debt burden. We have proposed a robust disclosure process that would inform every student, prior to enrolling, of the costs and debt burden assumed by the typical graduate. We have also proposed the inclusion of a warning, to be inserted with that disclosure, that would alert students when they are choosing a program that may require a high level of borrowing in relationship to their expected earnings. Enclosed are copies of two letters sent to Deputy Secretary Anthony Miller which include our proposals for a robust disclosure with warnings for high debt programs. We think both of these actions will better inform our students of the dangers of over-borrowing and help to reduce the instances of such. Using debt burden as a measure of"gainful employment" is an arbitrary standard. It has no relationship with the quality of the program (in fact, there is more likely to be an inverse relationship - longer-term programs like associate and bachelor degree programs have hjgher costs which leads to greater borrowing) and is subject to external factors on which the institution has no control. Those factors include student socio-economic factors as well as accrediting requirements within each program and the availability of state grant aid. U nder the proposed rule, a program in a middle-income metropolitan suburb within a state with a substantial state grant program may pass the test, whereas a program in a low-income urban setting with no state grant program to assist students may fail, regardless of actual employment outcomes.
See Social Security Administration definition for 'gainful activity" at 20 CFR 416.972 and Railroad Retirement Board reg11lations at 20 CFR 220.29
We would like to continue to work with ED to develop sound strategies to combat unnecessary and over-borrowing. We are willing to test alternative disclosures, monitoring methods and communications to best help graduates minimize their debt.
Although we provide a more detailed overview of the incentive compensation issue in the accompanying attachment, we would like to highlight a few points in this letter. There are certain long-standing principles that are essential to understanding the issue of incentive compensation. First, school employees play a critical role in helping students to identify beneficial educational opportunities and navigate the admissions and financial aid processes. Accordingly, Congress through its legislative actions in this area has sought to preserve the ability of schools to compensate their employees for effectively providing these services to students. Second, in the late 19 Os and early 1990s, some less than reputable institutions engaged in unethical practices of admitting unqualified students simply to obtain federal financial aid funding. This led to increased legislative scrutiny on issues such as eligibility requirements for schools to participate in Title I fmancial aid programs and the ability of schools to admit unqualified students. Included within this legislative review was the use of improper financial incentives by schools with their employees to enroll unqualified students.
In order to further the interests noted above, Congress in 1992 enacted a prohibition against institutions participating in Title I funding programs from "provid[ing] any commission, bonus, or other incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or admission activities or in making decisions regarding the award of student financial assistance."2 This was part of a broader legislative and regulatory effort to reduce Title I abuse and protect students from unsavory recruiting practices. Although enforcement efforts did not focus on the incentive compensation provision, this crackdown proved immensely successful. The average cohort default rate for all schools has declined to less than 1/3rd of what it was in 1990, numerous schools have been excluded from participating in Title I due to their lack of compliance with the more stringent requirements, and the type of abuse that prevailed earlier is, according to ED, "no longer possible today." 3 Significantly, a
20 U.S. C. l 094(aX20) Federal Student Aid Programs, 67 Fed. Reg. 67,04 , 67,054 (Nov. 1, 2002)
comprehensive review of enforcement of the incentive compensation provision during this same period of time indicated that substantiated violations were infrequent and were relatively minor in scope. 4 With that backdrop in mind, ED in 2002 adopted clarifying regulations that better defined the scope of certain permissible forms of compensation through the use of twelve safe harbor provisions. In effect, Congress in 1992 legislated what institutions could not do in terms of their compensation practices~ in 2002 ED took the added step of providing further regulatory guidance and clarifying what institutions could do under this statutory scheme. In fact, the safe harbors were developed in order to address well-recognized deficiencies with the incentive compensation regime. Relying solely on the statutory language had provided insufficient clarity to interested parties. Accordingly, confusion abounded on the part of higher education institutions and on the part of ED itself. The regulatory experience with the safe harbors since their adoption reveals that they have been successful in alleviating this confusion and have facilitated the implementation of compensation practices that comport with Congress' s statutory directive. During the recent negotiation sessions, though, ED proposed to eliminate all existing safe harbors that provide guidance as to permissible and impermissible forms of compensation. ED instead proposed reverting to the bare statutory language to provide meaning to the incentive compensation ban. But that approach would simply bring back the same regulatory confusion that prevailed before adoption of the current regulations. It would amount to going backward and that would not be good for students or the institutions that serve them. Reinstating the murky status quo from 2002 would impose significant burdens and risks on institutions for encouraging their employees to help students identify and pursue beneficial educational opportunities. That stands at odds with President Obama' s goal for the United States to have the highest percentage of college graduates in the world by 2020. De ry supports the legitimate purpose of the compensation ban enacted by Congress. But we want to move forward . We would like to continue working with ED and other interested parties in identifying ways in which the existing regulations and safe harbors can be improved to provide even more effective guidance and better serve students and schools. When ED publishes the proposed rule for public comment, we look forward to reviewing it carefully and, as appropriate, presenting additional feedback and potential
Govemment Accotmtability Oftlce, Higher Education: Information on Incentive Compensation Violations Substamiated by the US. Department ofEducation , Feb. 2 3, 2010
alternative regulatory approaches that would further the interests of students and provide greater regulatory certainty in this area.
We believe that maintaining an open dialogue between ED, OMB, and interested stakeholders will facilitate a more complete understanding of the issues under review. Therefore, to the extent that OMB has additional questions or needs further information to aid its review, we would welcome the opportunity to discuss these matters further and provide any such additional requested information.
Sincerely,
Sharon Thomas Parrott Senior ice President, Government & Regulatory Affairs and Chief Compliance Officer
Cc:
Arne Duncan, Secretary, U. S. Department ofEducation Anthony G. Miller, Deputy Secretary, U. S. Department ofEducation Charles P. Rose, General Counsel, U. S. Department ofEducation
Enclosures:
1.
11.
111.
April 12, 2010 Letter to Anthony G. Miller Aprill9, 2010 Letter to Anthony G. Miller Written Submission to OMB Regarding The Department of Education's Potential Regulatory Changes Governing Incentive Compensation That Are Currently Under OMB Review
Written Submission To OMB Regarding The Department Of Education's Potential Regulatory Changes Governing Incentive Compensation That Are Currently Under OMB Review
De ry and its affiliate institutions ("DeVry") submit the following analysis to help the Office of Management and Budget in its review of the recent submission by the Department of Education ("ED" or "the Department") involving a proposed rulemaking for Title I financial aid programs. ED held negot1ation sessions in conjunction with this rulemaking, but negotiators were unable to reach consensus on several issues. That unsuccessful result permitted the Department to craft its own proposed rules for issues discussed during the negotiations. Department of Education, Team !- Program Integrity Issues, Session Three Meeting Summary (2010), available at http://www2.ed.gov/policy/highered/reg/hearulemaking/2009/integrity.html . De ry has been actively monitoring these regulatory efforts and has had discussions with the Department about the regulatory changes under consideration. Although we are obviously unaware of the contents of the draft. rule, De ry believes that OMB may benefit from our general, preliminary views concerning one topic in particular that may be included in the rulemaking package: proposed changes to the exist1ng regulations governing incentive compensation for employees involved in recruiting, admissions, and financial aid.
Executive Summary
Since the 1992 Higher Education Amendments, Congress has forbidden all institutions that wish to participate in Title I fund ing from " provid[i ng] any commission, bonus, or other
incentive payment based directly or indirectly on success in securing enrollments or financial aid to any persons or entities engaged in any student recruiting or adm ission activities or in making decisions regarding the award of student financial assistance." 20 U.S.C. 1094(a)(20). In
response to compelli ng evidence that the bare statutory text by itself provided insufficient clarity as to what compensation practices were and were not permissible, the Department since 2002 has
maintained regulations that clearly define the scope of certain permissible forms of compensation through the use of twelve safe harbors. Under this approach, if a compensation system fits within the contours of one of the safe harbors, it is deemed compliant with the statutory ban on incentive compensation. See 34 C.F.R. 66 .14(b)(ii)(22)(A)-(L).
The incentive compensation issue is one that affects every school, whether private, nonprofit, or public, that participates in Title I funding. Accordingly, how ED modifies the current regulations will determine whether schools of every type will be able effectively to compensate their recruiting, admissions, and financial aid personnel for doing their jobs-locating qualified students who want to further their careers and helping them identify and finance educational opportunities that can improve their quality of life. These issues are of fundamental importance. The jobs of tomorrow will require continued educational achievement, which underscores the importance of the educational opportunities offered by De ry and other higher education institutions. A recent report commissioned by the Department acknowledged this very point, stating that "postsecondary education will be ever more important for workers hoping to fill the fastest-growing jobs in our new economy." The Secretary ofEducation' s Commission on the Future ofHigher Education, A Test of Leadership: Charting the Future ofU.S. Higher Education ix (Sept. 2006) ("Commission Report"). In addition, President Obama has stated "whatever the training may be, every American will need to get more than a high school diploma" to thrive in the new economy, and he recently announced a broad and ambitious goal for the United States to have the highest percentage of college graduates in the world by 2020. President Barrack Obama, Remarks to a Joint Session ofCongress (Feb. 24, 2009).
It is with this context in mind that we make this submission. Contemplated changes to
incentive compensation regulations could unduly impede the ability of schools, including De ry, to educate and train future classes of students for advancement within their chosen professions. De ry strongly believes that whatever regulations the Department adopts to enforce the incentive compensation prohibition must provide clear, workable guidance to the industry. As explained more fully below, the 2002 regulations provided much needed clarity to schools. This has enabled schools to identify and appropriately compensate good employees for their work, who in turn provide high quality student services. As a result of these efforts, prospective students are better informed of the myriad of educational opportunities that potentially fit their lives and can prepare them for higher-paying careers. Without clear guidance from the Department, all institutions of higher education will face increased risk from costly enforcement actions and profit-driven, private qui tam litigation that will compromise their outreach efforts. As a result, prospective students would be less likely to learn about (and pursue) educational opportunities. Therefore, clear rules that preserve effective compensation arrangements will allow higher education institutions to continue to focus their resources and efforts where they should be focused-on the education of their students. In connection with this review of the incentive compensation regulations, we would support efforts to provide even more clarity to affected stakeholders. We believe it is important, for example, to maintain clear standards with respect to compensation tied to students making significant progress in the academic program; provided as a part of a general profit-sharing plan; paid to supervisory employees not directly involved with recruiting or admissions activities; and paid to third party internet vendors either for distributing information or enabling prospective students to apply on-line. The current safe harbors, codified at 34 C.F .R. 66 .14(b)(ii)(22),
address these issues in a clear manner that is consistent with the statute, and provide the necessary regulatory certainty to allow De ry to compensate its employees effectively and to run its schools in a way that benefits its students. To the extent that the Department proposes regulatory changes that provide even more regulatory certainty surrounding these beneficial practices and more clearly distinguish them from unsavory and fraudulent activities, De ry would support such efforts. In considering modifications to the existing regulations governing incentive compensation, the Department's proposal must satisfy certain legal requirements. First, like the current regulations, the new regulations must themselves be consistent with the statutory text. Second, the new rules must be the product of a reasoned decision-making process; the Department must consider all relevant information and articulate its reasons for altering the status quo. See Motor Vehicle Mfrs. Ass 'n of the United States, Inc. v. State Farm Mut. Auto.
Ins. Co. , 463 U.S. 29, 43 (19 3). In other words, after considering all the facts, "the agency must
show that there are good reasons for the new policy." FCC v. Fox Televisions Stations, Inc. , 129 S. Ct. 1 00, 1 11 (2009). Third, any rules adopted by the Department must offer sufficient guidance to regulated parties so that they can conform their conduct to the requirements of the prohibition. See, e.g. , R.L. Sanders Roofing Co. v. Occupational Safety & Health Review
Comm 'n, 620 F.2d 97, 100-01 (5th Cir. 19 0) (noting that an agency must " provide a reasonably
clear standard of culpability to circumscribe the discretion of the enforcing authority"). To be a "meaningful exercise" of agency authority, rulemaking activity must provide clarity; it "is certainly not open to an agency to promulgate mush and then give it concrete form only through subsequent" interpretations and enforcement. See Paralyzed Veterans ofAm. v. D. C. Arena L.P. , 117 F .3d 579, 5 4 (D.C. Cir. 1997).
As we describe in greater detail below, given the text and history of the incentive compensation statute and the Department's previously expressed rationale for adopting the existing regulations, De ry believes that any effort to remove the current safe harbors, to limit them significantly, or to create new safe harbors that do not provide adequate guidance, will not satisfy those legal requirements.
Development Of Existing Regulatory Approach Towards Incentive Compensation

To better understand the implications of repealing the governing incentive compensation
regulations, we first review the statutory authority and background behind the current regulations as they apply to private sector institutions and the broader higher education community. These issues have a well-chronicled history. In the late 19 Os and early 1990s some less than reputable institutions engaged in the unethical practices of admitting unqualified students simply to obtain federal financial aid funding. At the time, schools were allowed to keep federal financial aid money even if students dropped out or never enrolled. As part of the 1992 Higher Education Amendments, Congress sought to bar these practices by reducing schools' ability to admit unqualified students, requiring schools to return federal aid money allocated to students who dropped out or never attended, and permitting the Department to disallow schools with high cohort dropout rates from participating in the Title I program.
In addition, Congress restricted the practice of compensating recruiting and financial aid personnel with "commission[s], bonus[es], or other incentive payment[s] based directly or indirectly on success in securing enrollments or financial aid." 20 U.S. C. 1094(a)(20). As recognized by ED, the purpose of the incentive compensation prohibition is to prevent "an institution from providing incentives to its staff to enroll unqualified students." Federal Student Aid Programs, 67 Fed. Reg. 67,04 , 67,053 (Nov. 1, 2002).
Even though initial enforcement efforts did not focus on the incentive compensation provision, ED' s broader efforts to reduce Title I abuse proved successful. By 2002, " most of
[the] unscrupulous institutions" had been "terminated from participating in the Title I , HEA programs because of their high cohort default rates," and the type of abuse of Title IV funding that led to the enactment of the 1992 reforms is "no longer possible today. " !d. at 67,054. In fact, more than 1100 schools lost their ability to participate in Title I programs during this
period oftime. Press Release, Dept. ofEducation, Accountability for Results Works: College Loan Default Rates Continue to Decline (Sept. 19, 2001). As a result ofthese and other reforms, the average cohort default rate for all schools which was over 22 in 1990 decreased to 6.7 by
2007, the last year with available data for comparison. Dept. of Education, National Student Loan Default Rates, http :1/www2 .ed.gov/offices/OSFAP/defaultmanagement/defaultrates. html. During that same time period between 1992 and 2002, significant regulatory uncertainty about the meaning of the incentive compensation prohibition persisted, as ED failed to adopt specific regulations. Without regulatory guidance, it remained unclear whether merit-based salaries paid to recruiters could be based in part upon enrollment success and whether meritbased salaries could be adjusted up or down within a year without contravening the prohibition. fnstitutions were also confused over other issues such as whether compensation paid to recruiters and financial aid officials as part of a profit-sharing plan was permissible and whether incentive compensation restrictions applied to supervisory employees and to compensation arrangements with third-party vendors. As a result, higher education institutions frequently sought guidance from ED as to whether their compensation structures were compliant. This "informal guidance" approach led to its own inconsistencies and regulatory uncertainty. For example, in response to certain
inquiries, ED advised schools that mid-year adjustments to salaries paid to recruiters and financial aid officials were permissible provided they occurred only once per year; other times ED held that adjustments twice in a year were acceptable. See Letter from Brian Kerrigan, ED, to Charles Galland, Corporate Counsel, Computer-Ed, Inc (July , 1997) (only annual adjustment allowed); Letter from Jeffrey Baker, ED, to Alice Kurz, Arthur Andersen & Company SC (Jan. 23, '1996) (onJy annual adjustment permitted); Letter from Brian Kerrigan, ED, to StanJey Freeman, Powers, Pyles, Sutter & erville (Apr. 3, 1996) (biannual adjustment permitted).
Similarly, ED provided guidance that salaries paid to recruiters and financial aid officials were permissible provided they were only adjusted upward-seemingly at odds with separate guidance that made no distinction between upward or downward adjustments. See Letter from Brian Kerrigan, ED, to StanJey Freeman, Powers, Pyles, Sutter & erville (Apr. 3, 1996)
(upward adjustment only); Letter from Jeffrey Baker, ED, to Alice Kurz, Arthur Andersen & Company SC (Jan. 23, 1996) (failing to distinguish between upward and downward adjustments). At times, the guidance seemed to indicate that the Department would consider certain forms of merit-based salaries as non-compliant, notwithstanding the law's utter silence on restricting such forms of compensation. As a result, there was no uniform approach being applied. In fact, although the statutory provision enacted in 1992 clearly prohibited the payment of commissions, a ED regulation that remained in effect until 2000 encouraged schools " with a high default rate" to implement a "compensation structure" under which recruiters could earn "progressively greater commissions for students who remain in school for substantial periods." 34 C.P.R. pt. 66 , Appendix D (emphasis added). The regulatory uncertainty made it hard for higher education institutions to know whether their compensation structures violated the law, possibly subjecting them to catastrophic liability
and regulatory sanctions. It also had implications for prospective and current students who were adversely affected by the murky enforcement regime. The consequences of that lack of clarity came to a head in December, 2000, when ED issued a Final Program Review Determination ("FPRD") to Computer Leaning Centers ("CLC") that found the institution to have violated the incentive compensation prohibition and ordered the return of more than $1 7 million in Title I funding. The penalty forced CLC into bankruptcy, left its thousands of students and employees in the lurch, and obliged the Government to assume the students' discharged debts. The Department based its enforcement action on the fact that in paying its student recruiters, CLC did not consider "other substantial performance factors that are not related to recruiting, enrolling, or awarding Title IV aid." Final Program Review Determination Letter from ictoria Edwards, Acting Director of Case Management and Oversight, ED, to John L.
Corse, CEO, Computer Learning Centers, Inc. , at 3 (Dec. 15, 2000). Alarmingly, this "other substantial performance factors" test had not appeared in any of the Department's previous guidance letters. The CLC enforcement action signaled to schools that their inability to understand and predict the case-by-case enforcement of the statutory prohibition could put them out of business. Before the CLC case, many schools believed that restrictions on fixed salaries were beyond the scope of the statute. The enforcement action, however, suggested that the incentive compensation restrictions could potentially apply to fixed salaries and raised a host of additional questions. In light of all of this confusion, the substantial disruption to students and taxpayer cost associated with the CLC bankruptcy, the Department decided to address the issue through a negotiated rulemaking. The rulemaking process itself was extensive and originated with the Department compiling "a list of proposed regulatory changes from advice and recommendations
submitted by individuals and organizations" regarding ways to improve the Title I
programs.
Postsecondary Education; Federal Perkins Loan Program, et al. , 67 Fed. Reg. 51,71 , 51 ,71 (Aug. , 2002). Negotiation sessions followed and included representatives from stakeholders that would be potentially affected by changes to the incentive compensation rules-including students, independent public and private sector schools, lenders, accrediting agencies, and Department officials. Following the completion of the negotiation sessions, the Department issued a proposed rule in the Federal Register for public comment before subsequently adopting its final rule. Notably, that rulemaking and the reasonjng supporting it were of course subject to OMB review. ED adopted these regulatory changes, in part, because it concluded that its informal approach had provided " problematic" and "unclear guidance" to schools and recognized that more uniform standards were necessary to allow educational institutions to effectively carry-out their missions. Letter from Jeffrey R. Andrade, ED, to Leigh M. Manasevit and Jonathan D. Tarnow, Brustein and Manasevit (Dec. 4, 2002). Responding to these concerns, the final regulations adopted by ED fully interpreted the incentive compensation prohibition, identifYing what conduct was not (and never had been) covered by the provision. See 34 C.F.R. 66 .14(b)(22)(ii); Federal Student Aid Programs, 67 Fed. Reg. at 67,049 (purpose of rulemaking was to "clarify the statutory program participation agreement provision concerning incentive payment restrictions"). In the final regulations, ED adopted twelve safe harbor provisions expressly permitting various forms of compensation. The safe harbors, among other things, allow educational institutions to pay their recruiting and financial aid employees a fixed salary or hourly wage that may be adjusted (upward or downward) at most twice per any twelve month period, as long as
the adjustment is not based solely on the number of students recruited, admitted, enrolled, or awarded financial aid. 34 C.F .R. 66 .14(b)(22)(ii)(A). The safe harbors also permit
compensation based on recruited students successfully completing the education program or one academic year, whichever is shorter. ld 66 .l4(b)(22)(ii)(E). Compensation paid as a part of
a profit-sharing plan that is available to other employees at the same organization level is also expressly permitted. ld 66 .14(b)(22)(ii)(D). In addition, payments made to management
officials not directly involved with recruiting or financial aid activities and compensation for internet-based activities that provide information to prospective students or allow such students to apply for admission on-line do not run afoul of the incentive compensation ban. Jd 66 .14(b)(22)(ii)(G), (J). Since their adoption, the various safe harbor provisions have reduced the uncertainty surrounding regulatory compliance and have allowed educational institutions to reward highcaliber enrollment officials through permissible compensation plans. These safe harbors expressly limit the incentive compensation prohibition from extending beyond what Congress intended and aJJow schools to manage their operations effectively to the benefit of their students.
11.
Considerations In Modifying The Existing Regulations

With that background in mind, we now turn to ED' s reexamination of the safe harbor
provisions as part of this rulemaking proceeding. We are unaware what, if any changes, were ultimately proposed by ED to incentive compensation provisions in the draft rule submitted to OMB. However, in conjunction with the third negotiation session, ED released an issue paper stating its belief " that the specific language of the statute is clear, and that the elimination of all of the regulatory ' safe harbors' would best serve to effectuate congressional intent." Department ofEducation, Team I-Program Integrity Issues, Issue Paper 4 (201 0), available at http://www2.ed .gov/ policy/highered/reg/hearulemaking/2009/integrity.html (emphasis added) . 10
That proposal, if maintained in the draft rule under consideration, is mistaken and unsupportable. 1 The Department's suggestion that the language of the statute is clear without any need for regulatory guidance is contradicted by the ten-year history of confusion that prevailed before the Department adopted the current safe harbors. This experience demonstrates that the statutory language alone fails to give regulators or the regulated community enough guidance to discern which compensation practices are permissible and which violate the law. The entirely foreseeable result of eliminating the safe harbor provisions-in effect, reverting to the status quo of the 1990s-is to force all parties, including the students who would be harmed as a result, to relive that unfortunate history. Second, the Department' s apparent belief that repealing the safe harbors will better serve congressional purposes is also mjstaken. The current regulatory approach is-as the Department recognized in 2002-entirely consistent with the statutory language and the underlying legislative intent. By enacting the incentive compensation prohibition, Congress did not intend to forbid educational institutions from providing merit-based salaries and other similar forms of permitted compensation to their enrollment and financial aid personnel. The statute does not prohibit schools from compensating admissions advisors and financial aid officers for doing their jobs, which include recruiting and helping students pursue their educational goals. Nor does the legislative history support a contrary reading of the text. Both the language of the statute and its legislative history are clear that compensation should not be "de-linked" from enrollment and
Similarly, to the extent that any regulatory changes proposed by the Department would be equivalent to outright repeal of the safe harbors in terms of their adverse effects on schools and students alike and the regulatory uncertainty that would ensue, the same analysis and concerns set forth below would apply.
11
other recruiting factors altogether; and forms of compensation that bear little, if any, relationship l to recruiting or financial aid activities are entire.y beyond the scope of the statutory prohibition. The current regulations specify that schools will not be subjected to liability for engaging in these statutorily permissible activities. The text of20 US.C. 1094(a)(20) bans only "commission[s], bonus[es], or other
incentive payment[s] based directly or indirectly on success in securing enrollments or financial aid." According to sound principles of statutory construction, "other incentive payment [s]," in this context, should be understood to mean payments in the nature of a commission or bonus based on success in securing enrollments or financial aid. See Hall Street Associates, LLC v.
Mattei, Inc. , 552 US. 576, 586 (2008) (noting that under the "old rule of ejusdem generis" a
general term following a series of specific terms "is confined to covering subjects comparable to the specifics it follows"). The legislative history confirms that the exclusion of merit-based salaries from this provision was intentional. In the Conference Report, Congress clarified that the statute should not be understood to "imply that schools cannot base employee salaries on merit," but rather that "such compensation cannot solely be a function of the number of students recruited, admitted, enrolled, or awarded financial aid. " H.R. Rep. No. 102-630, pt. G, at 499 (1992) (Conf. Rep.),
as reprinted in 1992 US.C.C.A.N. 334 (emphasis added). The use of the word "solely" in this
context strongly suggests that Congress never intended to prohibit schools from basing salary and wage rate determinations, at least in part, on job performance-i.e., success or failure in identifying qualified students and helping them pursue their educational goals. Similarly, this language suggests that supervisors, recruiters and financial aid officials could receive forms of
12
compensation otherwise normally provided in the workplace setting, if not directly linked to, or primarily based upon, recruiting or financial aid metrics-including through profit-sharing plans. The judicial branch has also confirmed that the law does not prohibit merit-based salaries and these other forms of permitted compensation. The only appellate court to have interpreted 20 U.S. C. 1094(a)(20) held that it does not prohibit merit-based salaries or "salary reviews
generally." United States ex rei. Bott v. Silicon Valley Colleges, 262 F. App'x. 10, 11 (9th Cir. 200 ) (mem.). The court stated that the statutory provision only prohibits the payment of a '" commission, bonus or other incentive payment' solely on the basis of recruitment success." !d. (emphasis added) . In adopting the current regulations, the Department shared that view as well. ED acknowledged that the statute does not prohibit merit-based salaries and other similar permitted forms of compensation. Yet, in I ight of the CLC-enforcement action, which appeared to place those forms of compensation at risk, it was clear that some regulatory guidance was necessary to help ensure that schools would not be deterred from statutorily permissible compensation systems. As a result, ED developed the safe harbors using "a purposive reading" of the law with the express purpose of"clarifying' what the incentive compensation provision did not prohibit, and had never prohibited. Institutional Eligibility Under the Higher Education Act of 1965, 67 Fed. Reg. 51,71 , 51,723 (Aug. , 2002)~ Federal Student Aid Programs, 67 Fed. Reg. at 67,049 (emphasis added)~ see also id. at 67,053 (" [T]he conference report resolving the different House and Senate versions of the Higher Education Amendments of 1992 indicated that the statutory words "directly" and " indirectly" in section 4 7(a)(20) of the HEA did not imply that institutions could not base salaries or salary increases on merit.") . At the time, the Department understood that giving effect to the language and intent of the statute requires drawing a bright line between
l3
permitted compensation regimes, including merit-based salaries, and impermissible incentive compensation. The safe harbors draw that line consistent with the text and purpose of20 U.S.C. 1094(a)(20). Assuming that ED persists in seeking to repeal all the safe harbors, De ry does not believe that drastic policy shift. would satisfy applicable legal requirements. Basic principles of administrative law dictate that ED must provide a reasoned explanation for its decision to rescind the safe harbors. Nat '/ Cable & Telecoms. Ass 'n v. FCC, 567 F.3d 659, 667 (D.C. Cir. 2009) ("[I]t is axiomatic that agency action must either be consistent with prior action or offer a reasoned basis for its departure from precedent." (internal quotation marks omitted)). The Supreme Court has recently emphasized that the requirement of reasoned decision-making is particularly acute where, as here, the " new policy rests upon factual findings that contradict those which underlay its prior policy." Fox Television Stations, Inc. , 129 S. Ct. at 1 11. The Department cannot satisfy those demands because, as noted above, the safe harbors themselves were a response to plain regulatory failure and serve to effectuate congressional intent. To satisfy the requirements of reasoned decision-making, the Department will hav e to explain for each safe harbor why it was wrong in 2002 when it concluded that the provision helped give the law a permissible "purposive reading. " Institutional Eligibility Under the Higher Education Act of 1965, 67 Fed. Reg. 51,71 , 51,723 (Aug. , 2002). In addition, the Department's actions will have to square with the well-documented history of confusion that existed before the safe harbors and the Department' s own explicit recognition of the need for those regulatory provisions to mitigate the uncertainty that prevailed. To satisfy Fox Television
Stations, the Department will have to elucidate why it now thinks in the face of that
14
overwhelming evidence to the contrary that the bare statutory language does in fact provide sufficient clarity to regulators, regulated part1es, and courts. It should be clear from the history of the incentive compensation prohibition that stripping the law of the clarifying safe harbor regulations will only create more confusion among all interested parties. Eliminating the safe harbors will simply force higher education institutions, the Department, and courts to evaluate each compensation scheme on a factintensive basis, leading once again to significant regulatory uncertainty and high compliance costs. This will likely lead to a reduction in enrollment services for prospective students, including non-traditional and low-income students who may benefit from the flexible educational opportunities available at a private sector school like De ry . See Lytle, et al. , Parthenon Perspectives on Private Sector Post-Secondary Schools, Mar. 12, 2010, at ("Parthenon Study") (showing that private sector schools serve a greater proportion of nontraditional students than comparable two-year non-profit and public institutions). Private sector schools help large numbers of individuals each year advance in their careers and improve the quality of life for themselves and their families. And because private sector schools are less reliant on government subsidies than public sector schools, they can help achieve broader educational goals and minimize the financial burden to taxpayers. The importance of private sector schools to serving the needs of students, including non-traditional and low income students, is likely only to increase given the significant budgetary pressures confronting many state-operated colleges and universities. In addition, the concerns raised by repeal of the safe harbors may affect other educational institutions that receive Title I funding. Indeed, according to a recent GAO report,
substantiated vio lations of the incentive compensation prohibition, as infrequent as they are, have
15
involved private, non-profit, and public schools alike. Government Accountability Office,
Higher Education: Information on Incentive Compensation Violations Substantiated by the US. Department o_fE ducation, Feb. 23, 2010, at 6 nn.l4-l5 ("GAO Report"); see also Jodi S. Cohen, Bonuses at U of l Questioned; President Defends Payments to Global Campus Employees, Chi.
Trib., May 22, 2009, at C6 (describing controversy over bonus payments paid by the University of Illinois to employees based on various factors including "their success in enrolling students") . Therefore, schools in all segments throughout the country-and their students-will suffer the consequences of any misguided changes to the regulations. Indeed, even with the safe harbors, the prohibition on incentive compensation still engenders harmful confusion that subjects schools to significant enforcement and litigation risks, which jeopardize the ability of schools to provide beneficial enrollment services. It is therefore not difficult to predict how those risks will increase if the Department eliminates the safe harbors. For example, schools have no assurance that the Department will continue to "treat a violation of the [incentive compensation] law as a compliance matter"-thereby ruling out potentially ruinous CLC-type penalties-rather than as "resulting in monetary loss to the Department." See Memorandum from William D . Hansen, Deputy Secretary ofEducation, ED, to Terri Shaw, COO for Federal Student Aid, ED (Oct. 30, 2002) ("Hansen Memo"). The safe harbors give schools some measure of protection from the very real possibility that the Department will attempt to revisit that policy through sub-regulatory means and once again impose severe and punitive sanctions for purported non-compliance. Without the safe harbors, private qui tam litigants will, with increased frequency, advance arguments that lead to absurd results under the statute. For example, even with the safe harbors in effect, such litigants have tried to seize on the words " indirect .. . incentive payments"
16
contained within the statute and distort its meaning to prohibit any compensation that rewards enrollment professionals for doing their jobs-regardless oftype, amount, or method of adjustment. See, e.g. , United States ex rei. Hendow v. Univ. ofPhoenix, 461 F.3d 1166, 1175 (9th Cir. 2006) (noting relators' theory that "higher salaries" and "benefits" violated the incentive compensation prohibition). Because almost every form of compensation is meant to incentivize performance, such a reading would make just about any conceivable method of compensating enrollment personnel fall within the prohibition. The safe harbors rightly rule such arguments out ofbounds. Without the benefit of robust regulatory guidance, the added compliance costs, increased confusion, and amplified litigation risks identified above could lead educational institutions to reconsider payment of merit-based salaries and other similar forms of permitted compensation altogether. This would frustrate congressional intent and harm prospective students who may not be informed or otherwise able to take full advantage of the available educational opportunities, if they are denied the services of qualified, professional admissions advisors and financial aid officers. Indeed, according to one report, quality "policies and practices in the area[] of recruitment . . . are critical to supporting student persistence" in pursuit of a degree. Watson Scott Swail, Graduating At-Risk Students: A Cross-Sector Analysis, Imagine America Foundation (2009) (citation omitted). And recruiting and financial aid personnel can help prospective students cut through "the complex interplay of inadequate preparation, lack of information about college opportunities, and persistent financial barriers," that often prevent people from seeking out beneficial educational experiences. Commission Report at l. Limiting these beneficial enrollment and financial aid services therefore would have significant adverse
17
consequences, particularly for economically disadvantaged students who may not have the same exposure to, or awareness of, the educational opportunities available and would most benefit from the assistance of school officials. Educational institutions would also be harmed because they, like any employer, use merit-based pay to run their operations and manage their workforce efficiently. Recruiters' primary job is to recruit qualified students; financial aid officers are responsible for helping qualified students identify financing opportunities that may extend beyond the financial assistance available under Title I . Separating salary determinations entirely from these performance factors would adversely affect the ability of schools to retain their best employees. fn addition, it would be entirely inconsistent with the principle of rewarding merit that is at the core of any profession or job performance. Employees in any field that meet or exceed the goals and objectives of their jobs are rightfully compensated based on that excellent performance, and employees working at schools are no different. Eliminating these financial rewards for job performance for school employees could affect employee morale and yield an unsatisfied and unmotivated workforce, thereby putting schools at risk. By all indications, the safe harbors are working as intended and have benefited schools and students alike. But if what the Department is attempting to accomplish is to put in place stronger safeguards against admitting unqualified students, the more sensible approach would be to target admissions standards and retention statistics directly rather than legitimate and worthwhile compensation structures. Indeed, ED exercises regulatory supervision over eligibility standards and could take steps to strengthen these requirements to prevent unqualified students from enrolling at schools. It should be noted that the current standards reflect a policy
determination that barriers to higher education should be kept to a minimum to facilitate greater access, and that any readjustment of admission standards may run counter to that policy goaL The Department may try to claim that concerns about consumer protection warrant limiting school outreach and enrollment efforts in order to prevent students from incurring "unnecessary" debt. We support weU -grounded efforts to root out fraud and abuse in higher education. But the Department has not shown that its proposed regulatory shift is based on any meaningful correlation between existing compensation practices allowed under the safe harbors and Title I abuse or harm to students. See generally GAO Report (indicating infractions are
mostly minor and have not increased in scope under the current regulations); Hansen Memo (stating that incentive compensation violations do not financially harm the Department). Indeed, even when there was a greater prevalence of Title I funding abuse by rogue institutions in the
early 1990s, the incentive compensation prohibition was never the focus ofDepartment enforcement efforts and played only a minor role, if at all, in addressing the problem. Nor are these consumer protection concerns valid with respect to private sector schools as a whole. Not only do private sector colleges attract more non-traditional students, but they also help them graduate and achieve meaningful professional advancement at higher rates. The Parthenon study shows that students at private sector colleges graduate at rates roughly 50 percent higher than comparable public schools and realize higher percentage wage increases (54 vs. 36 ) after completing their education. Students themselves care "little about the
distinctions" between a school' s "private sector or non-profit status" or "whether its classes are offered online or in brick-and-mortar buildings. Instead, they care ... about results. " Commission Report at xi. Instead of deterring these beneficial educational practices by repealing the safe harbors, ED should maintain clear incentive compensation standards that facilitate
19
regulatory compliance by legitimate schools and make it easier to identify the bad actors unable or unwilling to comply with the governing standards. At a minimum, the facts recounted above caution restraint on behalf of the Administration if it does move fOTward with significant changes to the safe harbors. To the extent the Department does conclude that additional protections are necessary to safeguard Title
I
funds from fraud and abuse, the Department should adopt clear, bright line rules expressly
allowing for merit-based salaries and other forms of permissible compensation to all employees, including recruiting and financial aid officials. Murky rules will make enforcement and compliance more difficult and costly and will come at the expense of legitimate forms of meritbased compensation-policies which improve the ability ofbona fide schools to identify qualified prospective students and help them achieve their educational and career goals.
ill.
Regulatory Impact Analysis Should Be Carefully Weighed Regarding Any Significant Change In Regulatory Approach
In addition to determining whether ED' s proffered explanation for any change in its regulatory approach is adequate, OMB must also carefully examine the regulatory burdens that would be imposed on higher education institutions and the students they serve. As stated above, we are not currently aware of the precise contents of the Department's proposed rule, but we would expect that the rulemaking package constitutes a "significant regulatory action" under Executive Order 12, 66. See Exec. Order No. 12, 66, 3(f), 5 Fed. Reg. 51,735 (Oct. 4, 1993)
(defining a "significant regulatory action," in relevant part, as having "an annual effect on the economy of$100 million or more, . . . materially alter[ing] the budgetary impact of ... loan programs or the rights and obligations of recipients thereof ... or rais[ing] novel legal or policy issues."). Pursuant to section 6(a)(3)(C) ofExecutive Order 12,866, in conjunction with proposing a signjficant regulatory action that imposes costs of this magnitude, ED would have to
20
prepare a detailed regulatory impact analysis assessing the costs and benefits of its proposal, as well as identifying feasible alternatives to the planned regulation. De ry believes that the required regulatory impact analysis is particularly important here because deviating from the existing safe harbor regime may impose significant costs (as described above)-including costs on state governments and educational systems-with few, if any, countervailing benefits. For example, under the Regulatory Flexibility Act, 5 U.S .C. 601 et
seq. , ED would have to assess the impact of its regulatory proposal on " small entities." The
regulatory burdens described above may be particularly acute for smaller educational institutions. Although some schools have thousands of employees, others potentially affected by the regulation are much smaller. Smaller schools may not be able to benefit from advertising, referrals, or brand recognition to the same degree as larger schools, and therefore may rely even more heavily on highly qualified recruiting personnel to inform prospective students of the benefits of their programs. In addition, smaller schools may be less able to absorb the increased compliance costs described above. These effects should be properly accounted for and examined as part of the required Regulatory Flexibility Act analysis. Finally, it is worth noting that because many higher education institutions are operated by state governments, proposed changes to the safe harbor regulations may implicate federalism concerns, as defined in Executive Order No. 13,132, 64 Fed. Reg. 43,225 (Aug. 4, 1999). Under that order, the Department must ensure that state officials are given a meaningful and timely opportunity to comment on the proposed rule changes, and must also provide OMB with a federalism impact statement describing state concerns about the regulation and any efforts the Department has made to mitigate those concerns. ld. 6(a), (c). Failure to comply with these
21
requirements could force the federal government to incur the burden of states' direct compliance costs. Jd 6(b).
Given these factors, OMB should closely examine ED's explanation for any suggested changes to the safe harbors and carefully review the supporting economic analysis.
We appreciate the opportunity to present our views as OMB reviews the rulemaking proposal. To the extent that OMB has additional questions or needs further information to aid its review, we would welcome the opportunity to discuss these matters further and provide any such additional requested information.
22
From:
To: CC:
Date: Subject:
Woodward Jennifer Wolff, Russell

6/ 18/2009 11:55:08 AM
FW: Draft of my APOL speech I intend to make in Philadelphia Monday assuming I am allowed to make it
FYI.
From: rob@altresearch [mailto:rmacarthur@altresearch.com] Sent: Thursday, June 18, 2009 11 :20 AM To: rob@altresearch Subject: Draft of my APOL speech I intend to make in Philadelphia Monday assuming I am allowed to make it

203-244-5174
This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleacling. The inforn1ation upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This infom1ation is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from tlus report without the express written consent of Alternative Research Services Inc. is forbidden . This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.
Ladies and Gentlemen: My name is Rob MacArthur. I am a research consultant in tl1e investment industry. I have been following the for-profit education sector for over a decade. Over the many years I have watched the cat and mouse game between the Department of Education and the industry. Sadly, despite claims of being heavily regulated this industry has been largely unregulated under the Bush Administration. With a former APOL lobbyist at the helm of Post-Secondary Education, enforcement was lax despite numerous inspector general reports urging better enforcement. This disservice to tax payers has enriched the managements of the for-profit industry and left in its wake tl1ousands of students who bought into the hopes of a finer future only to be overrun with student debt. I personally have no investment in the industry. I am here before you today to bring to your attention an issue which has received some press but has yet to be properly addressed by the Depart1nent; that is the cmruption and chronic misbehavior of the for-profit education industry. There are many issues that the Department needs to address including: transferability of credits, default prevention, higher graduation rates, and of course, incentive compensation. Apollo Group, parent company of University of Phoenix, is largest school in the cotmtry. Its enrollments increased to 157,800 at August 31 , 2002 from approximately 71 ,400 at August 31, 1998. At the end of February 2009, that number had grown to 397,000 students. How is this possible? In FY08 the company spent $322 million on advertising, most of which was on the internet. At the present rate of growth advertising will likely reach over $400 million dollars in 2009. They spent an additional $385 million in fy08 on enrollment counselor compensation.
In fiscal 2008, 82% of University of Phoenix's $2.9 billion of revenue came from Title IV programs. And total revenue companywide was $3.1 billion in fy08. That's nearly $2.4 billion dollars of taxpayer money flowing through the company. In 2001, UOP received only 10% of its revenue from Title IV programs with $770 million of revenue in fyOl. By 2001 that percentage of participation increased to 36o/o followed by 52%, up to the present. Clearly, there has been a massive n1sh to raid the student financial aid program.
How is the industry doing this?
In 2000, the Department shut down Computer Learning Centers based on violations of incentive compensation regulations. In early 2004, the DOJ raided ITT Education for similar violations. However, through heavy industry lobbying efforts and a friendly administration, the so called "Safe Harbor" provisions were established that effectively nullified the ban on incentive compensation for enrollment counselors due to one word "solely" based on incentive compensation.
This devious loophole allowed the industry to bypass the regulation leading them to establish internal systems designed to prove that bonuses were based on factors other than the number of enrollments made. This loophole has created the disaster we find ourselves in today. One need look no further than SLM whose stock prices has dropped from the high 50's to 3 in the last year and a half. This is not just a function of the credit markets but the massive increase in defaulted loans and the wave loans about to come off forbearance and deferment; loans that emanate from the for-profit industry. Why? Enrollment counselors are overly incentivized to bring in students with no chance succeeding or paying off loans. There are many, many sad stories I can recount from direct interviews I have conducted with both fonner UOP students and enrollment cotmselors documenting the true horrific outcome for unsuspecting students. Similar stories are widely available in public depositions in the qui tam suit against UOP's parent. In the now famous February 2004 program review of UOP, the author begins, "This report contains a serious finding regarding the school's substantial breach of its fiduciary duty; specifically that the University of Phoenix (UOP) systematically engaged in actions designed to mislead the Department of Education and to evade detection of it improper incentive compensation system ... " According to testimony from the qui tam, management deliberately removed posters from the walls of one school just prior to the anival of Department investigators to hide their quota system. Is that corporate behavior the new Administration wants to allow? "The reviewers interviewed more than 60 present and former recntiters of students (called "enrolhnent counselors" by UOP) prior to, and after the site visit ... most of the recruiters said that when hired, UOP told them that the job had tremendous financial potential, and that they "could make a lot of money." UOP promised to double or triple their salary in 3 to 6
months ... "
In one deposition a former manager said, "h1 my experience as a

manager, there was no discernible difference in the way enrollment counselors were compensated prior to 2005 as compared to during and after 2005 .... As director of enrollment, approximately once a month, I attended director level meetings. At one of these meetings, at least one Vice President said that UOP was changing the matrix so "no one will ever prove its based on regs [registrations] ... the matrix is "all just smoke and mirrors," and "we're flying under the radar."
In a deposition from the stock options backdating suit, Chainnan and

Founder John Sperling said, "So I saw as my job to protect the company, and I told the people, "You run the business. Don' t wony about negative publicity. Don't worry about being called a diploma mill." I11 the prior paragraph Sperling arrogantly boasts: "For example, today I think we have some 36 political lobbyists at the state level, we have six at the national level, and there's a nLle or I cal it Sperling's law that no innovation, educational innovation can exist beyond the political power to protect it." I suspect many of those lobbyists are here today seeking to spin the industry in a positive light as they have always done. Buried on its web site UOP reports a graduation rate of only 9.77%. Is that what the taxpayer deserves? Is this how we want to invest in America's future? Last summer the Department raised the federal loan limits by $2000 on July 151 . What did Apol1o do? They raised their tuition by 10% to roughly $22,000. In another deposition an enrollment counselor stated, "A: I was told to enroll students no matter what their qualifications? Not matter what .... there were certain qualification levels. When enrollments were down, my manager was telling me I shouldn't worry about that ... " Another enrollment counselor complained that the potential student was illiterate but was force to admit that person regardless. While the incentive compensation issue remains unresolved, at the very least, the Department must take linmediate steps to protect unsuspecting students from predatory marketing practices of this industry. Refund Calculations
In an OIG report dated December 2005 the department found, "UOP applied inappropriate methodologies to detennine the "percentage of Title aid earned" for calculation ... " This quote references the return of
Title IV money. The report continues, "UOP did not have a policy to review tl1e accuracy of payment period end dates for the purpose of calculating Title IV aid. When the department issued guidance for determining payment period completion dates, UOP did not implement the guidance for over 9 months." In the department' s report two-thirds of the records examined showed students as having reached the 60/o mark for attendance allowing the school to keep 1OOo/o of the money. In 7 6% of files examined, the Inspector General determined, the company failed to make timely refund payments for students that were charged lOOo/o. In a January lOth 2008 letter the IG wrote another repmt saying, "UOP systematically monitored students' status and progress, readjusting tl1e beginning and ending dates of payment period to accommodate leaves of absence, "no shows", failed courses or repeat courses. Referring to this process as "remapping", UOP readjusted payment period end dates and rescheduled second disbursement dates to assure tl1at students actually completed their first payment periods and were eligible for a second disbursement." And the issues at Apollo are proliferating. In November, 2008 Grand Canyon University came public with for APOL president Brian Mueller at the helm. Mr. Mueller left Apollo in July. In August the Office of the Inspector General issues a subpoena related to enrollment practices and in September a lawsuit was filed citing enrollment violations. Having been in the investment for 15 years I can tell you it is extreme rare for a company to go public while under such legal burdens. Their revenues were up 66% in the March quarter to $59 million-not bad for a company whose revenue in 2005 was $51 million. On May 26 2005, John Higgins, the Inspector General testified in Congress " Violations of this requirement occur when refunds are not paid timely, when incorrect calculations result in returning insufficient funds, and when institutions fail to pay refunds at all, which is a criminal offense under HEA. Higgins went on to testify that 74% of their institutional fraud cases involve proprietary schools. Another company Bridgepoint, is filled with former UOP employees, came public in April of 2009. They also came public with an OIG audit tmder way. Their 2007 revenue was $85 million and $218 in 2008 and $84 million alone in
the March 09 quarter. program.
This is the California Gold Rush of Title IV
In March of 2005 the SF A office of the department wrote a letter UOP
regarding its audit of WIU, a division of UOP. In that report, the Department found that 3/8 37 .5o/o of refunds were not made within the 30 day legal limitation . They also found inaccurate refunds and refunds not paid at all. WIU incorrectly calculated refunds 25% of the time. Included at the end of the report is a spreadsheet showing many refunds made not 30 days late but up to 800 days late. At what point are refunds no longer considered repaid? Why does this matter? From an investment perspective I have long been highly suspicious of the reported numbers. Strong growth is one thing but having nearly 400k students is something else. According to a Department of Ed report, "Loan vohune at proprietary institutions grew tremendously at over 32% between 2007 and 2008 and has almost quadntpled since FYOO. At $19 .9B in FY08, proprietary school loan volume represents 23o/o of total volume, compared to 13.4% in FYOO." That means APOL is roughly 17% of proprietary school loan volume. In summary, the US Deprutment of Education is ill-preprued through no fault of its own to deal with such n1thless sophistication and distain for the law. Current regulations that are obsolete or have been softened by industry lobbying over years need to be improved. Incentive compensation for enrollment counselors should be suspended or at the very least based on graduates going out the door not wann bodies coming. The Department should rol1 back the 90/10 n1le to 80/20. Program reviews should be done annually. Lower the cohort default rate loss of eligibility threshold from 30% to 15%. Move the proposed "3rd default rate" calculation change to apply retroactively not starting with the 2009 cohort but with current default rate data. Starting with the 2006 default rate data the government would better protect itself against default rate manipulation through the use of defennents and forbearance as laid out in detail in the IG's December 2003 report. I am submitting my text for the record and would gladly provide supporting documentation for any of the facts referenced in my comments upon request.
Yuan Georgia To: Shireman Bob CC: Finley Steve Jenkins Harold Date: 4/20/2010 3:01:58 PM Subject: FW: Follow-up to Meeting on 4-15
From:
FYI
From: Pelesh, Mark [mailto:MPelesh@cci.edu] Sent: Tuesday, April20, 2010 2:01PM To: Private- Miller, Anthony Cc: Yale, Matt; Yuan, Georgia Subject: Follow-up to Meeting on 4-15
Attached please find a letter from Jack Massimino and me as a follow-up to our meeting last week. We appreciated the opportunity to discuss the gainful employment issue, and have put together some ideas on how best to address the concerns and risks you identified.
We are available, of course, for addjtional dialogue, and would be happy to answer any questions you may have on our proposals.
MarkPelesh Executive Vice President Corinthian Colleges
202-682-9494
1350 I Street , N.W., Suite 1270 Washi ngton, D.C. 2ooos
u l (202) 682-9494
fo (2o2) 682-9170
www.cci.edu
April 20, 2010
The Honorable Anthony W. Miller Deputy Secretary of Education U.S. Department of Education 400 Maryland Avenue, S.W. Washington, D.C. 20202
Re:
Program Integrity Rulemaking- Gainful Employment
Dear Secretary Miller: Thank you for meeting with us on April IS, 20 I 0, to discuss the gainful employment issue in the Program Integrity rulemaking. Your articulation of the issue, the Department' s concerns, and the risks that the Department is attempting to mitigate was extremely helpful. We were heartened especially to hear that Secretary Duncan and you believe there is an impOiiant role for private capital in achieving the President's goals and in meeting the nation's education and workforce training needs. In this letter, we want to follow up on our conversation and provide a package of alternatives to the negotiated rulemaking proposal on gainful employment. We have tried to frame our proposals to be responsive to the concerns and risks you described. As explained below, we are suggesting that instead of the debt-to-earnings formula presented at neg reg, the Depatiment pursue a broader return on investment approach. First, it should adopt a set of immediate measures on (a) enhanced disclosure; (b) a more focused definition of gainful employment; (c) earnings gains from educational investments over time compared to debt costs; and (d) a student bill of rights. Second, it should have a study conducted on return on educational investment to serve as a foundation for an improved regulatory regime for higher education.
Corinthian Colleges- Workforce Education

As one of the largest private sector providers of postsecondary education preparing individuals to enter and advance in the workforce, we too have a keen interest in seeing that the Department, as the Secretary has put it, gets the gainful employment issue right. With over I 00,000 students at I J7 campuses and in our online division, Corinthian is serving principally young adults that the educational system has failed . Our typical student is a single minority mother who is unemployed or in a dead end job. Our mission is to help change her life by providing the education, training and support to graduate - often the first success she and her family have experienced -and to obtain employment that launches her in a career with material income gains. Clearly, any debt
~ Memlxr of the Corinthian CoU Inc. tges,
Jm Global Network
The Honorable Anthony W. Miller April 20, 20 J 0 Page 2 of5 that she incurs to invest in her education must be manageable and appropriate in relation to the income increase that she receives from that education and training. Our data show a good value proposition for our students. The completion rates in the programs at our schools are generally in the 60-70% range. Our company-wide placement rate in the fields for which we trained our students last year was 78. I%. Our alumni report a 27% increase in their incomes compared to their incomes prior to enrollment. And their loan repayments represent 6% of their monthly incomeapproximately $ 150 per month.
Gainful Employment Research

We want to bring to your attention research we commissioned last year because of its relevance to our discussion and its implications for a way forward on the gainful employment issue. Recognizing the critical issue of the value proposition in postsecondary education, we asked the Parthenon Group and its Center for Education Excellence to examine the delivery of value to students by private sector postsecondary institutions. Parthenon principally used the Depattment's own data in the BPS longitudinal studies, !PEDS and NPSAS, as well as sector data and primary research. Owing to the availability of data as well as our own focus as a postsecondary education and workforce training organization, the Parthenon research principally examined institutions offering two-year and Jess than two-year programs, We have given an overview ofParthenon's findings to Special Assistant Greg Darnieder and Deputy Assistant Secretary Glenn Cummings, and we left a copy of the Pa11henon report with Matthew Yale at the end of our meeting. Some of the key findings are: The private sector is investing $ 1 bil lion per year in capital in postsecondary education to expand capacity and access. The private sector serves a riskier student population as defined by the Department. The private sector is producing better graduation rates even when the broader purposes of public institutions- mainly transfer- are considered. The full economic cost of producing these graduation outcomes in the private sector is comparable to that of the public sector.
Private sector students realize income gains of $8,000, or 54%, from their educational investment- $250,000 over a 30-year working life. Private sectoa students' average debt burden is 7.6% at two-year institutions and 4. 7% at Jess than two-year institutions - monthly payments of $162 and $92 respectively.
It is also noteworthy that Patthenon found that students' awareness of the debt that they were taking on was actually better in the private sector than in the public or independent sectors.
The Honorable Anthony W. Miller April 20, 20 I 0 Page 3 of5 The findings in the Pmthenon research are highly pe1tinent to the gainful employment issue. The latter two findings above indicate that for certificate, diploma, and associate degree programs, students in the private sector are 1tot taking on disproportionate debt for value received. Yet, another report on the gainful employment issue prepared by Professor Jonathan Guryan, Associate Professor of Economics at the University of Chicago Booth School of Business, in conjunction with Charles River Associates, shows that the debt-to-earnings formula proposed by the Department to assess gainful employment in the negotiated rulemaking would have impacts far beyond the outliers that Department representatives have claimed. The Guryan-Charles River report estimates that 18% of private sector postsecondary programs would not meet the formula and that 33% of private sector students would be impacted. By 2020, the report estimates that 5.4 million students, including two million black and Hispanic students, would be denied access to postsecondary education as a result of the proposed debt-toearnings formula- impeding rather than helping the achievement of the President's goals. The discontinuity between Parthenon's findings and the impact of the formula proposed in neg reg suggests that the proposed formula is suspect. The Guryan-Charles River report provides an analysis that confirms it is the wrong way to assess student debt, and explains why. In sum, it shows that the choice ofmetrics in the formula to assure students' ability to repay their loans is logically flawed. The formula focuses on recent graduates' ability to pay in the early years after completing their education. However, this is inconsistent with the standard economic analysis of education, which clearly states that the choice of how much to borrow should be based on the gains from education over time and not on the basis of an earnings level at the beginning of a career. All of the components of the proposed formula share this fundamental flaw. And this conceptual problem is in addition to the absence of any data-based rationale for the components of the formula.
Proposal- Return on Investment Study

Accordingly, more research on the value to students from their educational investments is needed to guide sound public policy. This should be a comprehensive look at return on investment across higher education since all students, to one extent or another, pursue postsecondary education for purposes of economic advancement. Debt and earnings gains are plainly key elements that must be examined. But other elements should also be assessed in order to guide a new regulatory approach that would determine comprehensively and without unintended consequences whether the federal investment in postsecondary education is yielding appropriate outcomes. These would include completion, skills and learning achievement, placement, social service costs avoided, and tax contributions. As we noted in our meeting, the national accrediting agencies have done extensive data collection, standards development, and verification on completion and placement as a condition of their recognition by the Department over the last 15 years. We urge that their work be incorporated into the study. We would also be pleased to contribute the Parthenon research to this effort (which again utilized the Department's own data), and to offer our cooperation with additional research, data collection, and experimentation. As we mentioned in our two meetings with you, we have made a
The Honorable Anthony W. Miller April 20, 20 l 0 Page 4 of5 proposal in response to the Department's Experimental Sites Initiative that suggests a return on investment alternative to the 90- l 0 rule.
Proposal - Immediate Pacl{age of Improved Integrity Measures

We recognize from our discussion with you that the Depatimcnt's concerns compel action in the short run to mitigate the risks that it perceives. Accordingly, in addition to proposing a research study on educational ROI, we believe there are meaningful steps that the Depatiment can take now as part of the forthcoming rulemaking that will address those concerns and risks. We propose the following:
Enhanced Disclosure. We are aware that our national association, CCA, has made a proposal for more robust disclosure to the Department, which we endorse. However, we also understand that you believe that this step is necessary but not sufficient. Better Focused Definition of Gainful Employment. In addition to the flaws noted above, the proposed debt-to-earnings formula does not directly address the statutory provision on "gainful employment." Rather, it addresses student debt. Focusing on the gainful employment provision itself, a proposed regulation could specify criteria to show a close nexus between educational programs and gainful, i.e., compensated employment. Again, we understand that CCA is making a proposal for such criteria, which we also endorse. It uti lizes some of the Depatiment's own suggestions in the neg reg - employer affirmations and licensure/certification preparation- to determine program eligibility. Comparison of Earnings Gains .from Education to Debt Costs. In order to address the debt issue directly and on its own terms, a revised quantitative comparison should be formulated, based on standard economic analysis of the returns from education, of the earnings gains that accrue from educational programs and the percentage of debt to income over a period extending beyond the immediate post-graduation time frame. (We suggest a minimum of five years). This is a more conceptually sound approach, as the Guryan-Charles River report demonstrates. An educational program should only be considered suspect if the actual income gains from the program do not exceed debt costs incurred. Most studies show the return from an associate's degree to be at least I 0% per year of schooling. A debt percentage below such a return should be presumptively acceptable.
However, neither institutions nor, we believe, the Department has the data at thJs point to utilize this metric to determine eligibility on this basis alone. Thus, we respectfully suggest a delayed date for implementation while data are collected and the broader study of educational ROI is completed. In the meantime, as sufficient data are collected, a program's fa il ure under the metric could be used to trigger a review of the program's
The Honorable Anthony W. Miller April20, 2010 Page 5 of 5 educational quality and outcomes by a recognized accrediting agency, the state licensing body, or the Department itself using the extensive tools that already exist to ensure program integrity. We call your attention on this score to a memorandum prepared by CCA recently that lists the many measures available under current law and regulations to deal with bad actors.
Student Bill of Rights. Finally, to mitigate the risk you identified involving less-informed consumers, we suggest the adoption of a student bill of rights. A model is attached. Ideally, this should be adopted voluntarily by institutions. We are prepared to do so and to encourage other organizations in the private sector to make the same commitment to educational quality and integrity. A "nudge" fTom the Department could be helpful in this regard. One such incentive that might be made available to institutions concerns the phenomenon we discussed at our meeting. We believe that many student defaulters are those who drop out soon after enrolling and draw down a relatively small amount on a Title IV loan. We suggest that the Department accord institutions that adopt a student bill of rights the option of repaying these students' loans to cure the default. Conclusion
In summary, we propose a short and long-term package of measures to address the concerns and risks you have identified. We believe that enhanced disclosure, a more focused definition of gainful employment, a revamped metric comparing debt costs to eamings gains with a delayed implementation to allow data collection, but utility as a trigger for regulatory reviews, and a student bill of rights with a loan default incentive will be meaningful steps toward greater Title IV program integrity. In the long run, a well-crafted study of educational retum on investment across all of higher education may allow the development of a new outcomes-focused regulatory regime that could make a lasting contribution to the health and efficacy of the Title IV student aid system. Our organization is ready to be partners with you and the Secretary toward these ends. Sincerely,
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Mark L. Pelesh Executive Vice President Legislative & Regulatory Affairs cc: Matthew Yale Carmel Martin Georgia Yuan, Esq.
Proposed Student Bill of Rights Every American has been asked "to commit to at least one year or more of higher education or career training. This can be community college or a four-year school; vocational training or an apprenticeship. But whatever the training may be, every American will need to get more than a high school diploma." In order to achieve this goal, students must have access to the fullest range of education, training, and other learning opportunities. Students should have the following rights: 1. The right to choose the institution of higher education that best meets their needs. 2. The right to receive accurate, relevant, and verifiable information when deciding on which institution to attend and what program of study to pursue. This information should include: Institutional and programmatic accreditation; Cost of attendance; Admission and academic standards; Graduation/completion rates; and Placement information.
3. The right to full and accurate information about all financial aid that is available to the student, including complete infonnation about the terms and conditions of both federal and private student loans. 4. The right to information on the income gains graduates of the institution and its programs realize so that the student may evaluate the return on investment from the education offered by the institution. 5. The right to an enrollment agreement which states in easily understandable language the obligations of both the student and the institution. 6. The right to a suitable, accessible, quality learning environment, physical or virtual, including appropriate instructional materials, equipment, media, and facilities. 7. The right to be taught by qualified and competent instmctors, who are actively engaged in continuing professional development and who possess appropriate subjectmatter knowledge, as well as knowledge and skills relating to the instructional needs of the learners they address. 8. The right to support services to assist the student in achieving his or her educational goals, including academic advising and career services. 9. The right to fair and effective feedback on their performance and the opportunity to raise complaints and concerns that will be promptly addressed.
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Finley Steve Macias, Wendy 6/14/2010 9:32:26 AM FW: FYI- Bloomberg article on gainful employment rule from Friday
From: Siegel, Brian Sent: Monday, June 14, 2010 9:31AM To: Jenkins, Harold; Finley, Steve Subject: FYI-- Bloomberg article on gainful employment rule from Friday
Bloomberg
Obama Said to Delay For-Profit College Loan Rule (Update2)
June 11,2010, 4:36 PM EDT (Updates with closing stock prices in the fifth paragraph.) By John Hechinger June 11 (Bloomberg)-- The Obama administration is delaying the release of a proposed rule that would cut federal financial aid flowing to for-profit colleges, Congressional aides said today. Analysts said the move means the govemment may back away from a regulation the industry is fighting. The proposed rule, known as gainful employment, would disqualify Apollo Group Inc., ITI Educational Services Inc., Career Education Corp. and other for-profit colleges from receiving grants and loans if their graduates spend more than 8 percent of their starting salaries repaying student loans. Analysts said they had expected the rule to be released next week. The aides declined to be named because they said weren' t authorized to release the information. The U.S. Department of Education is seeking to protect taxpayers from loan defaults and to stop students from taking on debt for degrees that don't pay off with higher incomes. For- profit colleges can receive up to 90 percent of their revenue from federal grants and loans. The industry lobbied against the proposed rule, arguing that minority and lowincome students would lose access to college. "We continue to pick up comments that suggest gainful employment may be reconsidered or watered down," Paul Ginocchio, an analyst with Deutsche Bank said in a research note. Education stocks rallied on analysts' reports citing the potential delay. Apollo, based in Phoenix, rose as much as $2.05, or 4.1 percent, to $52.31 in Nasdaq Stock Market composite trading, closing at $51 .10 at 4 p.m. Career Education,
based in Hoffman Estates, Dlinois, gained as much as $1 .55, or 5.9 percent, to $27.72 and later fell to $26.98. ITT, based in Carmel, Indiana, gained as much as $4.44, or4.6 percent, to $100.81 in New York Stock Exchange Composite trading and closed at $97.92. Recruiting Practices The Education Department is postponing the regulation to have time to pull more data together in support of the proposal, one of the Congressional aides said. Education Department spokesman Justin Hamilton declined to comment. The Education Department is still expected to release other rules related to for-profits next week, Ginocchio said. A preliminary version of the rules released in January would tighten regu1ation by restricting recruiting practices. Senator Tom Harkin, chairman of the Health, Education, Labor and Pensions Committee, said yesterday he plans to hold hearings to examine the surge in federal grants and loans flowing to for-profit colleges. Federal aid to for-profit colleges jumped to $26.5 billion last year from $4.6 billion in 2000, according to the Education Department. Students attending for-profit schools are defaulting on their federal loans at a higher rate than those at traditional schools, according to the department. Cooking School Under the proposed gainful employment rule, a student projected to earn $18,000 a year as a starting cook would be able to borrow about $10,000 in 10-year-loans for a cooking school, according to Matt Snowling, an analyst with FBR Capital Markets in Arlington, Virginia. Culinary schools can now leave students with three or four times that level of debt, Snowling said. Eighteen percent offor-profit programs would be out of compliance under the gainful employment rule, meaning they would have to shut down or cut tuition, according to a study commissioned by the Washington-based Career College Association, which represents more than 1,400 for-profit colleges. Those programs enroll300,000 students, a third of those attending career colleges, the study found.
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Finley Steve Macias, Wendy 6/21/2010 9:28:20 AM FW: FYI-- ABC News: How For-Profit Colleges are like Subprime Mortgages
fyi
From: Siegel, Brian Sent: Monday, June 21 , 2010 9:24AM To: Burton, Vanessa; Finley, Steve; Jenkins, Harold; Marinucci, Fred; Morelli, Denise; Sann, Ronald; Scaniffe, Dawn; Vamovitsky, Natasha; Wanner, Sarah; Wolff, Russell; Woodward, Jennifer Subject: FYI-- ABC News: How For-Profit Colleges are like Subprime Mortgages
How For-Profit Colleges Are Like Subprime Mortgages
Report: Both Sub prime-Mortgage Business and For-Profit Colleges Are Built on Giving Loans to People Who Can't Pay Them Back
By MARK GIMEIN
June 19, 2010Ashford University of Clinton, Iowa traces its beginnings all the way back to the end of World War I a fact underlined for visitors to its Web site by the proud "Founded 1918 "that hangs off the bottom of the school's logo. It's an extraordinary and improbable record of longevity. Ninety-nine percent of Ashford's classes are online, yet its founding precedes the birth of the Web by about 75 years. For a 92-year-old school, Ashford is conspicuously obscure. You won't find it in any of the lists of best colleges, though Peterson's college guide does note its "24 acre small town campus with easy access to Chicago."
In the world offor-profit education, though, Ashford is less obscure: It's one ofthe most incredible growth stories of the
past decade. In 2005, a startup company called Bridgepoint Education Inc. (BPI) spent $9 million to buy a struggling 332-student religious school, the Jesuit University of the Prairie, from the Sisters of St. Francis. BPI renamed it Ashford. Now Ashford, together with the University of the Rockies (another tiny school, the former 75-student Colorado School ofProfessional Psychology, which BPE bought in 2007) enrolls more than 65,000 students.
Last year, BPE's two school took in $454 million in tuition and fees from its students. If Ashford's academic reputation has not grown as fast as its enrollment, it is no surprise, considering where all that money went: $145 million was spent on marketing and recruitment, which is $25 million more than the colleges spent on instruction. As striking as how little of Ashford's money is spent on education is how much of it comes from government grants and federally backed loans. 85 percent of BPI's $454 million in revenue last year was funded with federal student aid. Even among for-profit schools, Ashford's growth is exceptional. But Ashford's basic formula of pulling in federal aid dollars and using them to market to ever-more students, however, is much like the template for the entire for-profit higher-education industry. Extolled as a free-market solution to rising education costs, schools like Ashford have instead turned into a study in how to repurpose public resources for private gain. BPE, Ashford's parent company, is one of several corporations featured in a striking report from the investor Steve Eisman. Eisman is well known from Michael Lewis's The Big Short for having anticipated the subprime crash. Now Eisman has turned his attention to for-profit education. He's catalogued how federal education aid is now funneled to forprofit schools that have delivered stellar profits to their owners and dismal graduation rates for students while leaving taxpayers with a bill for billions of dollars in defaulted student loans. Over the past year, there have been reporters, such as Daniel Golden at Bloomberg, who've done extraordinary work detailing the abuses ofthe for-profit education sector. What Eisman brings to the table is a wealth of data and a welltrained eye for the economic underpinnings of the industry and the striking ways in which it resembles the failed subprime loan business. How is for-profit education like subprime mortgages? Three points stand out in Eisman's report: *Both the sub prime-mortgage business and for-profit colleges are built on giving loans to people who can't pay them back. Just as the housing boom was fueled by bad mortgages that could be sold to Fannie Mae and private investors, the for-profit education boom relies on students taking on debt that is guaranteed by the federal government even when students have little realistic hope of repaying it. As Eisman showed in an extraordinary presentation for investors, federal aid mainly loans is essentially the sole driver of the for-profit education industry. The 85 percent of revenue that Ashford gets from federal education programs (it gets another 5 percent from military scholarships like many such schools, it vigorously recruits soldiers and veterans) puts it in the middle of the pack. At the Apollo Group, the owner of the University ofPhoenix, government aid pays 90 percent of tuition. Because the federal loans that students take out are guaranteed by the government, colleges and lenders don't need to wony about whether they are repaid. The Education Department monitors student-loan default rates for two years after students leave school; for-profit colleges make sure that even students who can't pay fill out deferment or forbearance forms to keep the numbers in line. After that, the former students are on their own, and things get worse fast. Eisman estimates the default rate after three years at Corinthian Colleges, a 105,000-student for-profit school group, at a startling 41 percent. *On the ground floor of both the mortgage and for-profit college business, growth is driven by bonuses to marketers. The role that mortgage brokers and bank account representatives played in the sub prime business is held by recruiters in the for-profit education business.
In his presentation for investors, Eisman traces how the for-profit business took off when rules on recruiter compensation
were loosened in 2001. What's more, he catalogues what happened to the officials in the Bush administration Education Department who made that happen and then became lobbyists for the for-profit college industry.
At the end oflast year, BPI had 1,175 recruiters responsible for drumming up business. The company plainly discloses in its annual report that it sets tuition (currently $7,860 a year) to stay within the loan limits of Title IV, the regulations governing financial aid. One Ashford recruiter Eisman quotes is more blunt: "They conveniently price tuition at the exact amount a student can qualify for in federal loan money. If a person has money available for school, Ashford finds a way to go after them. & It's a boiler room, selling education to people who really don't want it."
* Just like the subprime crisis, for-profit education is a slow-moving nightmare, eating up more and more incremental education aid dollars year by year. For-profit colleges are by far the fastest-growing sector of education, with Education Department data showing enrollmentgoingfrom 364,000 to 1,469,000 in the decade from 1998 to 2008.
But if the growth in students has been great, the growth in the volume of federal aid dollars that for-profit education takes in is far greater. For-profit schools now enroll 8 percent of students but as Eisman's report shows, they take in a full 24 percent of federal student aid. Given the rate of student-loan defaults at for-profit schools, Eisman estimates that if they are to keep growing at the present rate, by 2020, students at for-profits will have defaulted on $275 billion in federally backed loans, and a cost to the government of$330 billion. Numbers like that do get folks attention, even in these days when the country has gotten almost used to multibillion-dollar bailouts. There is some good news on the horizon. The Education Department is considering new rules that would clamp down on how college recruiters are paid and put some limits on tuition, based on the salaries graduates could expect. In the short term, Eisman thinks this will seriously cut into the industry's profit margins. But he says that they'll just slow, not stop, the growth of the business. In an interview, Eisman advocated a far more dramatic step to rein in the industry. It's driven by simple economics and would get to the core of the issue. Right now, colleges bear none of the risk of defaulted loans. It's the same separation of risk and reward that Eisman saw in the subprime industry. The solution he'd advocate is simply making the colleges pay back the government a share as much as 50 percent of the loans that go back. "They're so profitable," says Eisman, "they can afford it." Or, more directly, as Eisman puts it: "Let 'em eat it." That's a solution to the for-profit education bubble that's both simpler and more drastic than any of the regulatory changes being considered. It's also a solution that should be an easy one for anyone who might genuinely believes in the role of for-profits in education. As it stands now, for-profit schools are one of the economy's embarrassments for believers in free markets. They have every incentive to skimp on the costs of education (recall how little Ashford spends on instruction) while collecting as much they can in tuition by encouraging students to max out their loans. Making them share the risks of those education loans makes them responsible for their failures. If you want for-profits to deliver a better profit, it's the natural free-market approach. For the moment, though, that's a nonstarter. Legislatures remain filled with ex-lobbyists and future lobbyists for the industry. (As Eisman points out, a former chieflobbyist for the Apollo Group is now a top congressional education policy staffer). What's more, as enrollment grows and for-profit schools grow ever more ubiquitous Wal-Mart (WMT) just announced a partnership with one that will give its employees degrees in fields like "retail management" their political base grows. In this way, too, you might say that for-profit education is a lot like subprime: At some point we'll get to the rational solution. Just don't count on it happening before the taxpayers are already staring at epic losses. Copyright 2010 ABC News Internet Ventures
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Finley Steve Macias, Wendy 4/29/2010 9:50:36 AM FW: FYI-- Inside Higher Ed article on Bob Shireman's speech on for-profit schools and accreditation
FYI -----Original Message----From: Siegel, Brian Sent: Thursday, April29, 2010 7:57AM To: Bwton, Vanessa; Finley, Steve; Jenkins, Harold; Marinucci, Fred; Morelli, Denise; Sann, Ronald; Scaniffe, Dawn; Vamovitsky, Natasha; Wanner, Sarah; Wolff, Russell; Woodward, Jennifer Subject: FYI-- Inside Higher Ed article on Bob Shireman's speech on for-profit schools and accreditation
Comparing Higher Ed to Wall Street April29, 2010 Whenever worried leaders of for-profit colleges have implied in recent months that the U.S. Education Department is gunning for the institutions, officials of the federal agency have discouraged such talk, offering evenhanded rhetoric about treating all sectors the same in their push for increased accountability. The words have provided little reassurance to the colleges, since they haven't always seemed to square with the aggressive approach the Obama administration is taking in rewriting federal rules governing vocational and other programs. On Wednesday, in a speech to state regulators who oversee for-profit colleges, the chief architect of the Education Department's strategy, Robert Shireman, offered a much more critical assessment of the private sector institutions than he has in his public comments to date, according to accounts given by several people who were in the room. He compared the institutions repeatedly to the Wall Street firms whose behavior led to the financial meltdown and called them out individually, one by one, for the vast and quickly increasing sums of federal student aid money they are drawing down. While Shireman's comments were aimed most directly at the for-profit colleges themselves, they may be most noteworthy for his indictment of accreditation, higher education's system of institutional peer review. In Shireman's narrative before the annual meeting of the National Association of State Administrators and Supervisors of Private Schools, the accrediting agencies are to the for-profit colleges what the Wall Street ratings agencies were to the misbehaving financial fmns: entities charged with regulating an industry that has grown too quickly and too complex for them to control, and that have an "inherent conflict of interest" because their existence depends on financial contributions from those they regulate. Accreditors lack the "firepower" to regulate the for-profit sector, and the states and the federal government don't necessarily have all the tools they need to do it either, Shireman said, according to the notes of several in the audience. That, he suggested, is why the Education Department must toughen its rules in the way it is now proposing. Shireman could not be reached for comment, and an Education Department spokesman said its officials did not wish to comment on this article.
To several people in the audience, Shireman's comments represented a much more candid (and critical) appraisal of the for-profit sector than he has offered publicly since he became deputy under secretary of education almost exactly a year ago. Many supporters of the education comparnes feared his appointment because they believed his track record as an advocate for low-income students and a foe of student debt would result in a crackdown on the institutions, whose students are disproportionately needy and disproportionately go into heavy debt to finance their educations. But with Wall Street analysts hanging on his every word looking for snippets that might threaten the publicly traded companies' stock prices, Shireman has often seemed to go out of his way to avoid singling the institutions out for criticism. A typical quotation, from last summer: "Our overall goal at the Department ofEducation in postsecondary education is to make sure that students ... have the information they need to make good choices, and that they have good quality postsecondary education that serves both them as students and taxpayers as well," Shireman said. ".. .lfthere is not quality, we want to know about it and if we can, we want to do something about it. Whether that involves a public institution, a nonprofit, a for-profit, a two-year, a four-year, a trade program, whatever type or sector of institution, we want to do all we can to make sure that we have good quality." Different Tone
In his comments Wednesday, Shireman laid out the context underlying the Obama administration's elevation of higher education as a central focus of its domestic policies. The economic slide created in part by the collapse of the credit markets has sent Americans streaming back to college in record numbers, and has made it more imperative than ever that more Americans get a higher education to strengthen the country's economic base for the future, Shireman said.
The administration has poured tens of billions of dollars into Pell Grants and restructured the federal student loan programs to try to ensure that Americans have access to higher education, Shireman said Wednesday. Many public institutions, facing cuts in their state funding, have had to limit or even cut their enrollments, reducing their ability to meet the increasing demand from students. The for-profit colleges, by contrast, have stepped up, seeing their enrollments explode -- and with them, the amount of Pel! Grant money that follows the students to the institutions, Shireman said. Anyone in the audience from Corinthian Colleges? Shireman asked the assembled audience Wednesday. A hand went up. The California-based for-profit higher ed company has seen its revenue from Pel! Grants grow by 38 percent in the first three quarters of this fiscal year compared to the last one, he said. Anyone from DeVry? Forty-two percent, Shireman said. Strayer? ITT? One by one, he ticked through a list of publicly traded companies, pointing out the increasing amounts of federal money the institutions were collecting ("It was like fourth grade, with a teacher scolding students over their grades," said one person who was in the room). What are taxpayers and students getting in return for that investment? Shireman asked. It has histmically been up to the "triad" --the three-headed regulatory scheme involving the federal government, state governments and accrediting agencies --to ensure access, quality and integrity in higher education, he said. But is that regulatory system up to the job? To draw a parallel, Shireman noted that as this meeting was unfolding in St. Paul, politicians back in Washington were debating possible reforms ofWall Street, to try to fix the "flawed" regulatory process that allowed Goldman Sachs and other purveyors of sub prime mortgages to engage in misbehavior that helped devastate the economy.
One major reason the process was flawed, Shireman said, was because the bond rating agencies that were supposed to be judging the riskiness of the financial instruments were supported in large part by fees from the companies that were asking the agencies to rate the financial instruments-- "a clear, inherent conflict of interest," Shireman said, according to the accounts of several in the room. On top of that inherent conflict, the ratings agencies have been struggljng to keep tabs on industries that grew quickly and adopted increasingly complex practices, Shireman said, suggesting that the ratings agencies lacked the "firepower" to regulate the financial markets.
In case anyone missed it, Shireman drove his point home, pointing out that rugher education accreiliting agencies are made up of (and financially supported by) their member colleges, and see it as their mission both to help the institutions "improve" and also to ensure, in what is essentially a subcontract from the federal government, that they are of sufficient quality.
The peer review nature of higher education accreditation has an inherent conflict of interest similar to the ratings agencies, Srureman said. Given that, he suggested, it is crucial for state and federal agencies, as the other two parts of the triad, to step up their role in regulating higher education. But do state regulators think they have the "firepower" to keep tabs on the big, growing and complex private market college sector? Shireman asked the state officials in the room. The response was underwhelming. The federal government's own powers may be insufficient to do the job, too, Shireman suggested, according to members of the audience. That is why the department needs new approaches to ensuring integrity in the financial aid programs, he said, such as requiring most for-profit colleges and non-degree vocational programs at nonprofit colleges to show that they are preparing students for gainful employment. Several people who heard the speech said they viewed it as a much more strident critique of for-profit colleges, and of higher education accreditation, than Shireman has delivered before. But David Dies, who heads the Wisconsin Educational Approval Board and just finished a term as president of the national group of state regulators, didn't hear it quite that way. "I think Bob was explaining why we need state regulation and [Education] Department oversight to be part of this threelegged stool, not just accreditation, and why we all need to work together," said Dies. "He was pointing out some limitations of accreditation, but I didn't really see it" as rughly critical of accreditors or for-profit colleges. - Doug Lederman
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To: CC:
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Finley Steve Yuan, Georgia 4/29/2010 9:50:24 AM FW: FYI-- Inside Higher Ed article on Bob Shireman's speech on for-profit schools and accreditation
I suspect you have seen this already, but just in case you have not: -----Original Message----From: Siegel, Brian Sent: Thursday, April29, 2010 7:57AM To: Bwton, Vanessa; Finley, Steve; Jenkins, Harold; Marinucci, Fred; Morelli, Denise; Sann, Ronald; Scaniffe, Dawn; Vamovitsky, Natasha; Wanner, Sarah; Wolff, Russell; Woodward, Jennifer Subject: FYI-- Inside Higher Ed article on Bob Shireman's speech on for-profit schools and accreditation
Comparing Higher Ed to Wall Street April29, 2010 Whenever worried leaders of for-profit colleges have implied in recent months that the U.S. Education Department is gunning for the institutions, officials of the federal agency have discouraged such tal k, offering evenhanded rhetoric about treating all sectors the same in their push for increased accountability. The words have provided little reassurance to the colleges, since they haven't always seemed to square with the aggressive approach the Obama administration is taking in rewriting federal rules governing vocational and other programs. On Wednesday, in a speech to state regulators who oversee for-profit colleges, the chief architect of the Education Department's strategy, Robert Shireman, offered a much more critical assessment of the private sector institutions than he has in his public comments to date, according to accounts given by several people who were in the room. He compared the institutions repeatedly to the Wall Street firms whose behavior led to the financial meltdown and called them out individually, one by one, for the vast and quickly increasing sums of federal student aid money they are drawing down. While Shireman's comments were aimed most directly at the for-profit colleges themselves, they may be most noteworthy for his indictment of accreditation, higher education's system of institutional peer review. In Shireman's narrative before the annual meeting of the National Association of State Administrators and Supervisors of Private Schools, the accrediting agencies are to the for-profit colleges what the Wall Street ratings agencies were to the misbehaving financial fmns: entities charged with regulating an industry that has grown too quickly and too complex for them to control, and that have an "inherent conflict of interest" because their existence depends on financial contributions from those they regulate. Accreditors lack the "firepower" to regulate the for-profit sector, and the states and the federal government don't necessarily have all the tools they need to do it either, Shireman said, according to the notes of several in the audience. That, he suggested, is why the Education Department must toughen its rules in the way it is now proposing. Shireman could not be reached for comment, and an Education Department spokesman said its officials did not wish to comment on this article.
To several people in the audience, Shireman's comments represented a much more candid (and critical) appraisal of the for-profit sector than he has offered publicly since he became deputy under secretary of education almost exactly a year ago. Many supporters of the education comparnes feared his appointment because they believed his track record as an advocate for low-income students and a foe of student debt would result in a crackdown on the institutions, whose students are disproportionately needy and disproportionately go into heavy debt to finance their educations. But with Wall Street analysts hanging on his every word looking for snippets that might threaten the publicly traded companies' stock prices, Shireman has often seemed to go out of his way to avoid singling the institutions out for criticism. A typical quotation, from last summer: "Our overall goal at the Department ofEducation in postsecondary education is to make sure that students ... have the information they need to make good choices, and that they have good quality postsecondary education that serves both them as students and taxpayers as well," Shireman said. ".. .lfthere is not quality, we want to know about it and if we can, we want to do something about it. Whether that involves a public institution, a nonprofit, a for-profit, a two-year, a four-year, a trade program, whatever type or sector of institution, we want to do all we can to make sure that we have good quality." Different Tone
The administration has poured tens of billions of dollars into Pell Grants and restructured the federal student loan programs to try to ensure that Americans have access to higher education, Shireman said Wednesday. Many public institutions, facing cuts in their state funding, have had to limit or even cut their enrollments, reducing their ability to meet the increasing demand from students. The for-profit colleges, by contrast, have stepped up, seeing their enrollments explode -- and with them, the amount of Pel! Grant money that follows the students to the institutions, Shireman said. Anyone in the audience from Corinthian Colleges? Shireman asked the assembled audience Wednesday. A hand went up. The California-based for-profit higher ed company has seen its revenue from Pel! Grants grow by 38 percent in the first three quarters of this fiscal year compared to the last one, he said. Anyone from DeVry? Forty-two percent, Shireman said. Strayer? ITT? One by one, he ticked through a list of publicly traded companies, pointing out the increasing amounts of federal money the institutions were collecting ("It was like fourth grade, with a teacher scolding students over their grades," said one person who was in the room). What are taxpayers and students getting in return for that investment? Shireman asked. It has histmically been up to the "triad" --the three-headed regulatory scheme involving the federal government, state governments and accrediting agencies --to ensure access, quality and integrity in higher education, he said. But is that regulatory system up to the job? To draw a parallel, Shireman noted that as this meeting was unfolding in St. Paul, politicians back in Washington were debating possible reforms ofWall Street, to try to fix the "flawed" regulatory process that allowed Goldman Sachs and other purveyors of sub prime mortgages to engage in misbehavior that helped devastate the economy.
One major reason the process was flawed, Shireman said, was because the bond rating agencies that were supposed to be judging the riskiness of the financial instruments were supported in large part by fees from the companies that were asking the agencies to rate the financial instruments-- "a clear, inherent conflict of interest," Shireman said, according to the accounts of several in the room. On top of that inherent conflict, the ratings agencies have been struggljng to keep tabs on industries that grew quickly and adopted increasingly complex practices, Shireman said, suggesting that the ratings agencies lacked the "firepower" to regulate the financial markets.
In case anyone missed it, Shireman drove his point home, pointing out that rugher education accreiliting agencies are made up of (and financially supported by) their member colleges, and see it as their mission both to help the institutions "improve" and also to ensure, in what is essentially a subcontract from the federal government, that they are of sufficient quality.
The peer review nature of higher education accreditation has an inherent conflict of interest similar to the ratings agencies, Srureman said. Given that, he suggested, it is crucial for state and federal agencies, as the other two parts of the triad, to step up their role in regulating higher education. But do state regulators think they have the "firepower" to keep tabs on the big, growing and complex private market college sector? Shireman asked the state officials in the room. The response was underwhelming. The federal government's own powers may be insufficient to do the job, too, Shireman suggested, according to members of the audience. That is why the department needs new approaches to ensuring integrity in the financial aid programs, he said, such as requiring most for-profit colleges and non-degree vocational programs at nonprofit colleges to show that they are preparing students for gainful employment. Several people who heard the speech said they viewed it as a much more strident critique of for-profit colleges, and of higher education accreditation, than Shireman has delivered before. But David Dies, who heads the Wisconsin Educational Approval Board and just finished a term as president of the national group of state regulators, didn't hear it quite that way. "I think Bob was explaining why we need state regulation and [Education] Department oversight to be part of this threelegged stool, not just accreditation, and why we all need to work together," said Dies. "He was pointing out some limitations of accreditation, but I didn't really see it" as rughly critical of accreditors or for-profit colleges. - Doug Lederman
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To:
Finley Steve Kolotos, John Higgins, Shannan McFadden. Elizabeth Sellers Fred Bergeron, David
4/29/2010 10:09:08 AM
CC: Date:
Subject:
FW: FYI-- Inside Higher Ed article on Bob Shireman's speech on for-profit schools and accreditation
From today's Inside Higher Ed
-----Original Message-----
Comparing Higher Ed to Wall Street

April29, 2010
Whenever worried leaders of for-profit colleges have implied in recent months that the U.S. Education Department is gunning for the institutions, officials of the federal agency have discouraged such talk, offering evenhanded rhetoric about treating all sectors the same in their push for increased accountability.
The words have provided little reassurance to the colleges, since they haven't always seemed to square with the aggressive approach the Obama administration is taking in rewriting federal rules governing vocational and other programs.
On Wednesday, in a speech to state regulators who oversee for-profit colleges, the chief architect of the Education Department's strategy, Robert Shireman, offered a much more critical assessment of the private sector institutions than he has in his public comments to date, according to accounts given by several people who were in the room. He compared the institutions repeatedly to theWall Street firms whose behavior led to the financial meltdown and called them out individually, one by one, for the vast and quickly increasing sums of federal student aid money they are drawing down.
While Shireman's comments were aimed most directly at the for-profit colleges themselves, they may be most noteworthy for his indictment of accreditation, higher education's system of institutional peer review. In Shireman's narrative before the annual meeting of the National Association of State Administrators and Supervisors of Private Schools, the accrediting agencies are to the for-profit colleges what the Wall Street ratings agencies were to the misbehaving financial firms: entities charged with regulating an industry that has grown too quickly and too complex for them to control, and that have an "inherent conflict ofinterest" because their existence depends on financial contributions from those they regulate.
Accreditors lack the "firepower" to regulate the for-profit sector, and the states and the federal government don't necessarily have all the tools they need to do it either, Shireman said, according to the notes of several in the audience. That, he suggested, is why the Education Department must toughen its rules in the way it is now proposing.
Shireman could not be reached for comment, and an Education Department spokesman said its officials did not wish to comment on this article.
To several people in the audience, Shireman's comments represented a much more candid (and critical) appraisal of the for-profit sector than he has offered publicly since he became deputy under secretary of education almost exactly a year ago. Many supporters of the education companies feared his appointment because they believed his track record as an advocate for low-income students and a foe of student debt would result in a crackdown on the institutions, whose students are disproportionately needy and disproportionately go into heavy debt to finance their educations.
But with Wall Street analysts hanging on his every word looking for snippets that might threaten the publicly traded companies' stock prices, Shireman has often seemed to go out of his way to avoid singling the institutions out for criticism.
A typical quotation, from last summer: "Our overall goal at the Department ofEducation in postsecondary education is to make sure that students ... have the information they need to make good choices, and that they have good quality postsecondary education that serves both them as students and taxpayers as well," Shireman said. "...Ifthere is not quality, we want to know about it and if we can, we want to do something about it. Whether that involves a public institution, a nonprofit, a for-profit, a two-year, a four-year, a trade program, whatever type or sector of institution, we want to do all we can to make sure that we have good quality."
Different Tone
The administration has poured tens ofbillions of dollars into Pell Grants and restmctured the federal student loan programs to try to ensure that Americans have access to higher education, Shireman said Wednesday. Many public institutions, facing cuts in their state funding, have had to limit or even cut their enrollments, reducing their ability to meet the increasing demand from students.
The for-profit colleges, by contrast, have stepped up, seeing their enrollments explode-- and with them, the amount of Pell Grant money that follows the students to the institutions, Shireman said. Anyone in the audience from Corinthian Colleges? Shireman asked the assembled audience Wednesday.
A hand went up. The California-based for-profit higher ed company has seen its revenue from Pell Grants grow by 38 percent in the first three quarters of this fiscal year compared to the last one, he said. Anyone from DeVry? Forty-two percent, Shireman said. Strayer? ITT? One by one, he ticked through a list of publicly traded companies, pointing out the increasing amounts of federal money the institutions were collecting ("It was like fourth grade, with a teacher scolding students over their grades," said one person who was in the room).
What are taxpayers and students getting in return for that investment? Shireman asked. It has histmically been up to the "triad" --the three-headed regulatory scheme involving the federal government, state governrnents and accrediting agencies --to ensure access, quality and integrity in higher education, he said.
But is that regulatory system up to the job? To draw a parallel, Shireman noted that as this meeting was unfolding in St. Paul, politicians back in Washington were debating possible reforms of Wall Street, to try to fix the "flawed" regulatory process that aU owed Goldman Sachs and other purveyors of subprime mortgages to engage in misbehavior that helped devastate the economy.
One major reason the process was flawed, Shireman said, was because the bond rating agencies that were supposed to be judging the riskiness of the financial instruments were supported in large part by fees from the companies that were asking the agencies to rate the financial instruments-- "a clear, inherent conflict of interest," Shireman said, according to the accounts of several in the room.
On top of that inherent conflict, the ratings agencies have been struggling to keep tabs on indust:ties that grew quickly and adopted increasingly complex practices, Shireman said, suggesting that the ratings agencies lacked the "firepower" to regulate the financial markets.
made up of (and financially supported by) their member colleges, and see it as their mission both to help the institutions "improve" and also to ensure, in what is essentially a subcontract fiom the federal government, that they are of sufficient quality.
The peer review nature of higher education accreditation has an inherent conflict of interest similar to the ratings agencies, Shireman said. Given that, he suggested, it is crucial for state and federal agencies, as the other two parts of the triad, to step up their role in regulating higher education. But do state regulators think they have the "firepower" to keep tabs on the big, growing and complex private market college sector? Shireman asked the state officials in the room. The response was underwhelming.
The federal government's own powers may be insufficient to do the job, too, Shireman suggested, according to members of the audience. That is why the department needs new approaches to ensuring integrity in the financial aid programs, he said, such as requiring most for-profit colleges and non-degree vocational programs at nonprofit colleges to show that they are preparing students for gainful employment.
Several people who heard the speech said they viewed it as a much more strident critique of for-profit colleges, and of higher education accreditation, than Shireman has delivered before. But David Dies, who heads the Wisconsin Educational Approval Board and just finished a term as president of the national group of state regulators, didn't hear it quite that way.
"I think Bob was explaining why we need state regulation and (Education] Department oversight to be part of this threelegged stool, not just accreditation, and why we all need to work together," said Dies. "He was pointing out some limitations of accreditation, but I didn't really see it" as highly critical of accreditors or for-profit colleges. -Doug Lederman
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To: CC:
Date: Subject:
(b)(5)
Jenkins, Harold Yuan, Georgia 4/29/2010 9:17:34 AM FW: FYI-- Inside Higher Ed article on Bob Shireman's speech on for-profit schools and accreditation
Harold -----Original Message----From: Siegel, Brian Sent: Thursday, April 29, 2010 7:57AM To: Burton, Vanessa; Finley, Steve; Jenkins, Harold; Marinucci, Fred; Morelli, Denise; Sann, Ronald; Scaniffe, Dawn; Varnovitsky, Natasha; Wanner, Sarah; Wolff, Russell; Woodward, Jennifer Subject: FYI-- Inside Higher Ed article on Bob Shireman's speech on for-profit schools and accreditation
Comparing Higher Ed toWall Street April29, 2010 Whenever worried leaders of for-profit colleges have implied in recent months that the U.S. Education Department is gunning for the institutions, officials of the federal agency have discouraged such talk, offering evenhanded rhetoric about treating all sectors the same in their push for increased accountability. The words have provided little reassurance to the colleges, since they haven't always seemed to square with the aggressive approach the Obama administration is taking in rewriting federal rules governing vocational and other programs. On Wednesday, in a speech to state regulators who oversee for-profit colleges, the chief architect of the Education Department's strategy, Robert Shireman, offered a much more critical assessment of the private sector institutions than he has in his public comments to date, according to accounts given by several people who were in the room. He compared the institutions repeatedly to the Wall Street firms whose behavior led to the financial meltdown and called them out individually, one by one, for the vast and quickly increasing sums of federal student aid money they are drawing down. While Shireman's comments were aimed most directly at the for-profit colleges themselves, they may be most noteworthy for his indictment of accreditation, higher education's system of institutional peer review. In Shireman's narrative before the annual meeting ofthe National Association of State Administrators and Supervisors of Private Schools, the accrediting agencies are to the for-profit colleges what the Wall Street ratings agencies were to the misbehaving financial firms: entities charged with regulating an industry that has grown too quickly and too complex for them to control, and that have an "inherent conflict of interest" because their existence depends on financial contributions from those they regulate. Accreditors lack the "firepower" to regulate the for-profit sector, and the states and the federal government don't necessarily have all the tools they need to do it either, Shireman said, according to the notes of several in the audience. That, he suggested, is why the Education Department must toughen its rules in the way it is now proposing.
Shireman could not be reached for comment, and an Education Department spokesman said its officials did not wish to comment on this article. To several people in the audience, Shireman's comments represented a much more candid (and critical) appraisal of the for-profit sector than he has offered publicly since he became deputy under secretary of education almost exactly a year ago. Many supporters of the education companies feared his appointment because they believed his track record as an advocate for low-income students and a foe of student debt would result in a crackdown on the institutions, whose students are disproportionately needy and disproportionately go into heavy debt to finance their educations. But with Wall Street analysts hanging on his every word looking for snippets that might threaten the publicly traded companies' stock prices, Shireman has often seemed to go out of his way to avoid singling the institutions out for criticism. A typical quotation, from last summer: "Our overall goal at the Department of Education in postsecondary education is to make sure that students ... have the infonnation they need to make good choices, and that they have good quality postsecondary education that serves both them as students and taxpayers as well," Shireman said. "... Ifthere is not quality, we want to know about it and if we can, we want to do something about it. Whether that involves a public institution, a nonprofit, a for-profit, a two-year, a four-year, a trade program, whatever type or sector of institution, we want to do all we can to make sure that we have good quality." Different Tone
In his comments Wednesday, Shireman laid out the context underlying the Obama administration's elevation of higher
education as a central focus of its domestic policies. The economic slide created in part by the collapse of the credit markets has sent Americans streaming back to college in record numbers, and has made it more imperative than ever that more Americans get a higher education to strengthen the country's economic base for the future, Shireman said. The administration has poured tens of billions of dollars into Pell Grants and restructured the federal student loan programs to try to ensure that Americans have access to higher education, Shireman said Wednesday. Many public institutions, facing cuts in their state funding, have had to limit or even cut their enrollments, reducing their ability to meet the increasing demand from students. The for-profit colleges, by contrast, have stepped up, seeing their enrollments explode-- and with them, the amount of Pell Grant money that follows the students to the institutions, Shireman said. Anyone in the audience from Corinthian Colleges? Shireman asked the assembled audience Wednesday. A hand went up. The California-based for-profit higher ed company has seen its revenue from Pell Grants grow by 38 percent in the first three quarters of this fiscal year compared to the last one, he said. Anyone from DeVry? Forty-two percent, Shireman said. Strayer? ITT? One by one, he ticked through a list of publicly traded companies, pointing out the increasing amounts of federal money the institutions were collecting ("It was like fourth grade, with a teacher scolding students over their grades," said one person who was in the room). What are taxpayers and students getting in return for that investment? Shireman asked. It has historically been up to the "triad"-- the three-headed regulatory scheme involving the federal government, state governments and accrediting agencies-- to ensure access, quality and integrity in higher education, he said. But is that regulatory system up to the job? To draw a parallel, Shireman noted that as this meeting was unfolding in St. Paul, politicians back in Washington were debating possible refonns ofWall Street, to try to fix the "flawed" regulatory process that aUowed Goldman Sachs and other purveyors of subprime mortgages to engage in misbehavior that helped
devastate the economy. One major reason the process was flawed, Shireman said, was because the bond rating agencies that were supposed to be judging the riskiness of the financial instruments were supported in large part by fees from the companies that were asking the agencies to rate the financial instruments-- "a clear, inherent conflict of interest," Shireman said, according to the accounts of several in the room. On top ofthat inherent conflict, the ratings agencies have been struggling to keep tabs on industries that grew quickly and adopted increasingly complex practices, Shireman said, suggesting that the ratings agencies lacked the "firepower" to regulate the financial markets.
made up of(and financially supported by) their member colleges, and see it as their mission both to help the institutions "improve" and also to ensure, in what is essentially a subcontract from the federal government, that they are of sufficient quality. The peer review nature of higher education accreditation has an inherent conflict of interest similar to the ratings agencies, Shireman said. Given that, he suggested, it is crucial for state and federal agencies, as the other two parts of the triad, to step up their role in regulating higher education. But do state regulators think they have the "firepower" to keep tabs on the big, growing and complex private market college sector? Shireman asked the state officials in the room. The response was underwhelming. The federal government's own powers may be insufficient to do the job, too, Shireman suggested, according to members of the audience. That is why the department needs new approaches to ensuring integrity in the financial aid programs, he said, such as requiring most for-profit colleges and non-degree vocational programs at nonprofit colleges to show that they are preparing students for gainful employment. Several people who heard the speech said they viewed it as a much more strident critique of for-profit colleges, and of higher education accreditation, than Shireman has delivered before. But David Dies, who heads the Wisconsin Educational Approval Board and just finished a term as president of the national group of state regulators, didn't hear it quite that way. "I think Bob was explaining why we need state regulation and [Education] Department oversight to be part of this threelegged stool, not just accreditation, and why we all need to work together," said Dies. "He was pointing out some limitations of accreditation, but I didn't really see it" as highly critical of accreditors or for-profit colleges. -Doug Lederman
From:
To: CC:
Date: Subject:
McFadden, Elizabeth Yuan, Georgia 4/29/2010 10:30:26 AM FW: FYI-- Inside Higher Ed article on Bob Shireman's speech on for-profit schools and accreditation
Not sure if you already saw this.
From: Finley, Steve Sent: Thursday, April29, 2010 10:09 AM To: Kolotos, John; Hi&:,oins, Shannan; McFadden, Elizabeth; Sellers, Fred; Bergeron, David Subject: FW: FYI-- Inside Higher Ed article on Bob Shireman's speech on for-profit schools and accreditation
From today's Inside Higher Ed
-----Original Message-----
Comparing Higher Ed to Wall Street April29, 2010
Whenever worried leaders of for-profit colleges have implied in recent months that the U.S. Education Department is gunning for the institutions, officials of the federal agency have discouraged such talk, offering evenhanded rhetoric about treating all sectors the same in their push for increased accountability.
The words have provided little reassurance to the colleges, since they haven't always seemed to square with the aggressive approach the Obama administration is taking in rewriting federal rules governing vocational and other programs.
On Wednesday, in a speech to state regulators who oversee for-profit colleges, the chief architect of the Education Department's strategy, Robert Shireman, offered a much more critical assessment of the private sector institutions than he has in his public comments to date, according to accounts given by several people who were in the room. He
compared the institutions repeatedly to theWall Street firms whose behavior led to the financial meltdown and called them out individually, one by one, for the vast and quickly increasing sums of federal student aid money they are drawing down.
While Shireman's comments were aimed most directly at the for-profit colleges themselves, they may be most noteworthy for his indictment of accreditation, higher education's system of institutional peer review. In Shireman's narrative before the annual meeting of the National Association of State Administrators and Supervisors of Private Schools, the accrediting agencies are to the for-profit colleges what the Wall Street ratings agencies were to the misbehaving financial firms: entities charged with regulating an indust.Iy that has grown too quickly and too complex for them to control, and that have an "inherent conflict of interest" because their existence depends on financial contributions from those they regulate.
Accreditors lack the "firepower" to regulate the for-profit sector, and the states and the federal government don't necessarily have all the tools they need to do it either, Shireman said, according to the notes of several in the audience. That, he suggested, is why the Education Department must toughen its rules in the way it is now proposing.
Shireman could not be reached for comment, and an Education Department spokesman said its officials did not wish to comment on this article.
To several people in the audience, Shireman's comments represented a much more candid (and critical) appraisal of the for-profit sector than he has offered publicly since he became deputy under secretary of education almost exactly a year ago. Many supporters of the education companies feared his appointment because they believed his track record as an advocate for low-income students and a foe of student debt would result in a crackdown on the institutions, whose students are disproportionately needy and disproportionately go into heavy debt to finance their educations.
But with Wall Street analysts hanging on his every word looking for snippets that might threaten the publicly traded companies' stock prices, Shireman has often seemed to go out of his way to avoid singling the institutions out for criticism.
A typical quotation, from last summer: "Our overall goal at the Department ofEducation in postsecondary education is to make sure that students ... have the information they need to make good choices, and that they have good quality postsecondary education that serves both them as students and taxpayers as well," Shireman said. "...Ifthere is not quality, we want to know about it and if we can, we want to do something about it. Whether that involves a public institution, a nonprofit, a for-profit, a two-year, a four-year, a trade program, whatever type or sector of institution, we want to do all we can to make sure that we have good quality."
Different Tone
The administration has poured tens of billions of dollars into Pell Grants and restructured the federal student loan programs to try to ensure that Americans have access to higher education, Shireman said Wednesday. Many public institutions, facing cuts in their state funding, have had to limit or even cut their enrollments, reducing their ability to meet the increasing demand from students.
The for-profit colleges, by contrast, have stepped up, seeing their enrollments explode -- and with them, the amount of Pell Grant money that follows the students to the institutions, Shireman said. Anyone in the audience from Corinthian Colleges? Shireman asked the assembled audience Wednesday.
A hand went up. The California-based for-profit higher ed company has seen its revenue from Pell Grants grow by 38 percent in the first three quarters of this fiscal year compared to the last one, he said. Anyone from DeVry? Forty-two percent, Shireman said. Strayer? ITT? One by one, he ticked through a list of publicly traded companies, pointing out the increasing amounts of federal money the institutions were collecting ("It was like fourth grade, with a teacher scolding students over their grades," said one person who was in the room).
What are taxpayers and students getting in return for that investment? Shireman asked. It has historically been up to the "triad" -- the three-headed regulatory scheme involving the federal government, state governments and accrediting agencies --to ensure access, quality and integrity in higher education, he said.
But is that regulatory system up to the job? To draw a parallel, Shireman noted that as this meeting was unfolding in St. Paul, politicians back in Washington were debating possible reforms of Wall Street, to try to fix the "flawed" regulatory process that allowed Goldman Sachs and other purveyors of subprime mortgages to engage in misbehavior that helped devastate the economy.
One major reason the process was flawed, Shireman said, was because the bond rating agencies that were supposed to be judging the riskiness of the financial instruments were supported in large part by fees from the companies that were asking the agencies to rate the financial instruments-- "a clear, inherent conflict of interest," Shireman said, according to
the accounts of several1n the room.
On top of that inherent conflict, the ratings agencies have been struggling to keep tabs on industries that grew quickly and adopted increasingly complex practices, Shireman said, suggesting that the ratings agencies lacked the "firepower" to regulate the financial markets.
made up of (and financially supported by) their member colleges, and see it as their mission both to help the institutions "improve" and also to ensure, in what is essentially a subcontract from the federal government, that they are of sufficient quality.
The peer rev1ew nature of higher education accreditation has an inherent conflict of interest similar to the ratings agencies, Shireman said. Given that, he suggested, it is crucial for state and federal agencies, as the other two parts of the triad, to step up their role in regulating higher education. But do state regulators think they have the "firepower" to keep tabs on the big, growing and complex private market college sector? Shireman asked the state officials in the room. The response was underwhelming.
The federal government's own powers may be insufficient to do the job, too, Shireman suggested, according to members of the audience. That is why the department needs new approaches to ensuring integrity in the financial aid programs, he said, such as requiring most for-profit colleges and non-degree vocational programs at nonprofit colleges to show that they are preparing students for gainful employment.
Several people who heard the speech said they viewed it as a much more strident critique of for-profit colleges, and of higher education accreditation, than Shireman has delivered before. But David Dies, who heads the Wisconsin Educational Approval Board and just finished a teim as president of the national group of state regulators, didn't hear it quite that way.
"I think Bob was explaining why we need state regulation and [Education] Department oversight to be part of this threelegged stool, not just accreditation, and why we all need to work together," said Dies. "He was pointing out some limitations of accreditation, but I didn't really see it" as highly critical of accreditors or for-profit colleges. -Doug Ledeiman
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To: CC:
Date: Subject:
Macias Wendy Finley, Steve 7/112010 9:26:28 AM FW: Google Alert- 11gainful employment in a recognized occupation 11
Apollo's quarterly report.
From: Google Alerts [googlealerts-noreply@google.com] Sent: Thursday, July 01, 2010 9:21AM To: Mac1as, Wendy Subject: Google Alert- "gainful employment in a recognized occupation"
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Finley Steve Vierling Chris Sorensen, Howard

3/15/2010 10:34:04 AM
FW: In Hard Times, Lured Into Trade School and Debt
FYI--- This article was on the front page of yesterday 's New York Times.
The New Poor

In Hard Times, Lured Into Trade School and Debt
By PETERS. GOODMAN Published: March 13, 2010
One fast-growing American industry has become a conspicuous beneficiary of the recession : for-profit colleges and trade schools. At institutions that train students for careers in areas like health care, computers and food service, enrollments are soaring as people anxious about weak job prospects borrow aggressively to pay tuition that can exceed $30,000 a year. But the profits have come at substantial taxpayer expense while often delivering dubious benefits to students, according to academics and advocates for greater oversight of financial aid. Critics say many schools exaggerate the value of their degree programs, selling young people on dreams of middle-class wages while setting them up for default on untenable debts, low-wage work and a struggle to avoid poverty. And the schools are harvesting growing federal student aid dollars, including Pel! grants awarded to low-income students. "If these programs keep growing, you' re going to wind up with more and more students who are graduating and can't find meaningful employment," said Rafael I. Pardo, a professor at Seattle University School ofLaw and an expert on educational finance. "They can't generate income needed to pay back their loans, and they' re going to end up in financial distress." For-profit trade schools have long drawn accusations that they overpromise and underdeliver, but the woeful economy has added to the industry's opportw1ities along with the risks to students, according to education experts. They say these schools have exploited the recession as a lucrative recruiting device while tapping a larger pool offederal student aid. "They tell people, 'If you don't have a college degree, you won't be able to get a job,'" said Amanda Wallace, who worked in the financial aid and admissions offices at the Knoxville, Tenn., branch ofiTI Technical Institute , a chain of schools that charge roughly $40,000 for two-year associate degrees in computers and electronics. "They tell them, ' You'll be making beaucoup dollars afterward, and you' ll get all your financial aid covered.'" Ms. Wallace left her job at ITT in 2008 after five years because she was uncomfortable with what she considered deceptive recruiting, which she said masked the likelihood that graduates would earn too little to repay their loans. As a financial aid officer, Ms. Wallace was supposed to counsel students. But candid talk about job prospects and debt obligations risked the wrath of management, she said.
"If you said anything that went against what the recruiter said, they would threaten to fire you," Ms. Wallace said. "The representatives would have already conned them into doing it, and you had to just keep your mouth shut." A spokeswoman for the school' s owner, ITT Educational Services , Lauren Littlefield, said the company had no comment. The average annual tuition for for-profit schools this year is about $14,000, according to the College Board . The forprofit educational industry says it is fulfilling a vital social function, supplying job training that provides a way up the economic ladder. "When the economy is rough and people are threatened with unemployment, they look to education as the way out," said Hanis N. Miller, president of the Career College Association, which represents approximately 1,400 such institutions. "We're preparing people for careers." Concerned about aggressive marketing practices, the Obama administration is toughening rules that restrict institutions that receive federal student aid from paying their admissions recruiters on the basis of enrollment numbers. The administration is also tightening regulations to ensure that vocational schools that receive aid dollars prepare students for "gainful employment." Under a proposal being floated by the Department of Education , programs would be barred from loading students with more debt than justified by the likely salaries of the jobs they would pursue. "During a recession, with increased demand for education and more anxiety about the ability to get a job, there is a heightened level of hazard," said Robert Shireman, a deputy under secretary of education. "There is a lot ofPetl grant money out there, and we need to make sure it's being used effectively." The administration's push has provoked fierce lobbying from the for-profit educational industry, which is seeking to maintain flexibility in the rules. A Lucrative Business The stakes are enormous: For-profit schools have long derived the bulk of their revenue from federal loans and grants, and the percentages have been climbing sharply. The Career Education Corporation , a publicly traded global giant, last year reported revenue of$1.84 billion. Roughly 80 percent came from federal loans and grants, according to BMO Capital Markets, a research and trading firm. That was up from 63 percent in 2007. The Apollo Group- which owns the for-profit University ofPhoenix- derived 86 percent of its revenue from federal student aid last fiscal year, according to BMO. Two years earlier, it was 69 percent. For-profit schools have proved adept at capturing Pel! grants, which are a centerpiece of the Obama administration's efforts to make higher education more affordable. The administration increased financing for Pell grants by $17 billion for 2009 and 2010 as part of its $787 billion stimulus package . Two years ago, students at for-profit trade schools received $3.2 billion in Pell grants, according to the Department of Education, less than went to students at two-year public institutions. By the 2011-12 school year, the administration now estimates, students at for-profit schools should receive more than $10 billion in Pell grants, more than their public counterparts. (Those anticipated increases may shrink, depending on the outcome of wrangling in Congress over health care and student lending .) Enrollment at for-profit trade schools expanded about 20 percent a year the last two years, more than double the pace from 2001-7, according to the Career College Association. Mr. Miller, the association's president, said for-profit schools were securing large numbers ofPell grants because their financial aid offices were diligent and because the schools served many low-income students. But financial aid experts say the surge of federal money reaching such institutions reflects something else: their aggressive, sometimes deceitful recruiting practices. Jeffrey West was working at a pet store near Philadelphia, earning about $8 an hour, when he saw advertisements for training programs offered by WyoTech, a chain oftrade schools owned by Corinthian Colleges Inc., a publicly traded company that last year reported revenue of$1 .3 billion. After Mr. West called the school, an admissions representative drove to his house to sell him on classes in auto body refinishing and upholstering technology, a nine-month program that cost about $30,000. Mr. West blanched at the tuition, he recalled, but the representative assured him the program amounted to an antidote to hard economic times.
"They said they had a very high placement rate, somewhere around 90 percent," he said. "That was one of the key factors that caused me to go there. They said I would be earning $50,000 to $70,000 a year." Some 14 months after he completed the program, Mr. West, 21, has failed to find an automotive job. He is working for $12 an hour weatherizing foreclosed houses. With loan payments reaching $600 a month, he is working six and seven days a week to keep up. "I've got $30,000 in student loans, and I really don 't have much to show for it," he said. "It's really frustrating when you' re trying to better yourself and you wind up back at Square One." Corinthian says it bars its recruiters from making promises about pay. "The majmity of our students graduate," said a spokeswoman, Anna Marie Dunlap, in a written statement. "Most see a significant earnings increase." The increase in market opportunities for the for-profit education industry comes as governments spend less on education. In states like California, community colleges have been forced to cut classes just when demand is greatest. "This is creating a very ripe environment for the for-profit schools to pick off more students," said Lauren Asher, president of the Institute for College Access & Success , a nonprofit research group based in California that seeks to make higher education more affordable. "The risks of exploitation are higher, and the potential rewards of those practices are higher." For-profit culinary schools have long drawn criticism for leading students to rack up large debts. Now, they are enjoying striking growth. Enrollment at the 17 culinary schools of the Career Education Corporation- most of them operated under the name Le Cordon Bleu- swelled by 31 percent in the final months of last year from a year earlier. When Andrew Newburg called the Le Cordon Bleu College of Culinary Arts in Portland, Ore., to seek information, he was feeling pressure to start a new career. It was 2008, and his Florida mortgage business was a casualty of the housing bust. An associate degree in culinary arts from a school in the food-obsessed Pacific Northwest seemed like a portal to a new career. The tuition was daunting- $41,000 for a 15-month or 21-month program -but he said the admissions recruiter portrayed it as the entrance price to a stable life. "The recru.iter said, ' The way the economy is, with the recession, you need to have a safe way to be sure you will always have income,' " Mr. Newburg said." 'In today's market, chefs will always have a job, because people will always have to eat. ' " According to Mr. Newburg, the recruiter promised the school would help him find a good job, most likely as a line cook, paying as much as $38,000 a year. Last summer, halfway through his program and already carrying debts of about $10,000, Mr. Newburg was alarmed to see many graduates taking jobs paying as little as $8 an hour washing dishes and busing tables, he said. He dropped out to avoid more debt. "They have a basic money-making machine," Mr. Newburg said. More Bills Than Paychecks Career Education says admissions staff are barred from making promises about jobs or salaries. The school requires students to sign disclosures stating that they understand that its programs afford no guarantees. But promotional materials convey a sense of promise. "Our students are given the tools needed to become the future leaders in the industry," proclaims the Le Cordon Bleu Web site . "Many graduates have attained positions of responsibility, visibility, and entrepreneurship soon after completing their studies." The job placement results that the school files with accrediting agencies suggest a different outcome. From July 2007 to June 2008, students who graduated from the culinary arts associate degree program landed jobs that paid an average of $21,000 a year, or about $10 an hour. Oregon's minimum wage is $8.40 an hour. The job placement list is cited in a class-action lawsuit filed against the Portland school- previously known as Western Culinary Institute- by graduates who allege fraud, breach of contract and unlawful trade practices. Executives at Career Education denied the allegations while asserting it would be wrong to judge the school on the basis of its graduates' first jobs. "You go out in the industry and work your way up," said Brian R. Williams, the company's senior vice president for
culinary arts. On a recent morning at the campus in Portland, hundreds of students donning chefs whites labored in demonstration kitchens stocked with stainless steel countertops and commercial gas ranges. A chef inspected plates ofboeuf Bourgogne and risotto Milanese. Students melted and pulled sugar into multicolored ribbons. Others used a chainsaw to sculpture blocks of ice into decorative centerpieces. "It's employable skills; that's what we teach people here," said the school president, Jon Alberts. "We try to give them as much of an industry experience in the classroom as possible." But several local chefs said the program merely simulated what students could learn in entry-level jobs. "When they graduate and come in the kitchen, ltell them, 'I'm goingtotreatyou like you don't know anything,'" said Kenneth Giambalvo, executive chef at Bluehour, an upscale restaurant in Portland' s Pearl District. "It doesn 't really give them any edge." What the school does give many students is debt, often at double-digit interest rates- debt that even bankruptcy cannot erase without a lengthy, low-odds legal proceeding. When TJ Williams anived in Portland from his home in Utah to enroll atLe Cordon Bleu in 2007, he was shocked by the terms of the aid package the school had arranged for him: One loan, for nearly $14,000, carried a $7,327 "finance charge" and a 13 percent interest rate. "They told me that halfway through the program, I could probably refinance to a lower rate," he said. When he tried to refinance, the school turned him down, he says. Career Education declined to discuss Mr. Williams' s case, citing privacy restrictions and saying he had not signed a waiver. Mr. Williams has been jobless since last fall and recently returned to Utah, where he moved in with his mother. After Graduation The Career Education Corporation e-mailed The New York Times names and contact information for four graduates "with whom we hope you' ll touch base for important perspective." One came with a wrong number. A second had graduated 15 years ago. A third, Cherie Thompson, called the program "a really positive experience" but declined to discuss her debts or earnings. The fourth, Ericsel Tan, graduated in 2003 and later eamed $42,000 a year overseeing catering at a convention center near Seattle. He said his success reflected his seven years of kitchen experience prior to culinary school. Career Education notes that only 5.9 percent of the federal loans to students at the Western Culinary Institute that began to come due in 2007- the latest available data- are listed in default by the Department of Education. But default rates have traditionally reflected only those borrowers who fail to pay in the first two years payments are due. The Department ofEducation has begun calculating default rates for three years. By that yardstick, Western Culinary's default rate more than doubles, to 12.5 percent. For-profit schools have ramped up their own lending to students to replace loans formerly extended by Sallie Mae , the student lending giant. These loans are risky: Career Education and Corinthian recently told investors they had set aside roughly half the money allocated this year for private lending to cover anticipated bad debts. Financial aid experts say such high rates of expected default prove that graduates will not earn enough to make their payments, yet the loans make sense for the for-profit school industry by enabling the flow of taxpayer funds to their coffers: they satisfy federal requirements that at least 10 percent of tuition money come from students directly or from private sources. "They' re making so much money off their federal student loans and grants that they can afford to write off their own loans," said Ms. Asher of the Institute for College Access & Success.
A version of this article appeared in print on March 14, 2010, on page A 1 of the New York edition.
http://www. nyti mes.com/2010/03/14/busi ness/14schools. htm 1
Finley Steve To: Kolotos, John McCullough. Carney Sellers. Fred CC: Sann, Ronald Date: 3/15/2010 10:33:52 AM Subject: FW: In Hard Times, Lured Into Trade School and Debt
From:
FYI--- This article was on the front page of yesterday's New York Times.
The New Poor In Hard Times, Lured Into Trade School and Debt By PETERS. GOODMAN Published: March 13, 2010
One fast-growing American industry has become a conspicuous beneficiary of the recession : for-profit colleges and trade schools. At institutions that train students for careers in areas like health care, computers and food service, enrollments are soaring as people anxious about weak job prospects borrow aggressively to pay tuition that can exceed $30,000 a year. But the profits have come at substantial taxpayer expense while often delivering dubious benefits to students, according to academics and advocates for greater oversight of :financial aid. Critics say many schools exaggerate the value of their degree programs, selling young people on dreams of middle-class wages while setting them up for default on untenable debts, low-wage work and a struggle to avoid poverty. And the schools are harvesting growing federal student aid dollars, including Pell grants awarded to low-income students. "If these programs keep growing, you' re going to wind up with more and more students who are graduating and can't find meaningful employment," said Rafael I. Pardo, a professor at Seattle University School ofLaw and an expert on educational finance. "They can' t generate income needed to pay back their loans, and they' re going to end up in financial distress." For-profit trade schools have long drawn accusations that they overpromise and underdeliver, but the woeful economy has added to the industry's opportunities along with the risks to students, according to education experts. They say these schools have exploited the recession as a lucrative recruiting device while tapping a larger pool of federal student aid. "They tell people, 'If you don't have a college degree, you won't be able to get a job,'" said Amanda Wallace, who worked in the financial aid and admissions offices at the Knoxville, Tenn., branch ofiTT Technical Institute , a chain of schools that charge roughly $40,000 for two-year associate degrees in computers and electronics. "They tell them, 'You'll be making beaucoup dollars afterward, and you' ll get all your financial aid covered.'" Ms. Wallace left her job at ITT in 2008 after five years because she was uncomfortable with what she considered deceptive recruiting, which she said masked the likelihood that graduates would earn too little to repay their loans. As a financial aid officer, Ms. Wallace was supposed to counsel students. But candid talk about job prospects and debt
obligations risked the wrath of management, she said. "If you said anything that went against what the recruiter said, they would threaten to fire you," Ms. Wallace said. "The representatives would have already conned them into doing it, and you had to just keep your mouth shut." A spokeswoman for the school's owner, ITT Educational Services , Lauren Littlefield, said the company had no comment. The average annual tuition for for-profit schools this year is about $14,000, according to the College Board. The forprofit educational industry says it is fulfilling a vital social function, supplying job training that provides a way up the economic ladder. "When the economy is rough and people are threatened with unemployment, they look to education as the way out," said Harris N. Miller, president of the Career College Association, which represents approximately 1,400 such institutions. "We're preparing people for careers." Concerned about aggressive marketing practices, the Obama administration is toughening rules that restrict institutions that receive federal student aid from paying their admissions recruiters on the basis of enrollment numbers. The administration is also tightening regulations to ensure that vocational schools that receive aid dollars prepare students for "gainful employment." Under a proposal being floated by the Department of Education, programs would be barred from loading students with more debt than justified by the likely salaries of the jobs they would pursue. "During a recession, with increased demand for education and more anxiety about the ability to get a job, there is a heightened level of hazard," said Robert Shireman, a deputy under secretary of education. "There is a lot ofPell grant money out there, and we need to make sure it's being used effectively." The administration's push has provoked fierce lobbying from the for-profit educational industry, which is seeking to maintain flexibility in the rules. A Lucrative Business The stakes are enormous: For-profit schools have long derived the bulk of their revenue from federal loans and grants, and the percentages have been climbing sharply. The Career Education Corporation , a publicly traded global giant, last year reported revenue of $1.84 billion. Roughly 80 percent came from federal loans and grants, according to BMO Capital Markets, a research and trading firm. That was up from 63 percent in 2007. The Apollo Group- which owns the for-profit University of Phoenix- derived 86 percent of its revenue from federal student aid last fiscal year, according to BMO. Two years earlier, it was 69 percent. For-profit schools have proved adept at capturingPell grants, which are a centerpiece of the Obama administration's efforts to make higher education more affordable. The administration increased financing for Pell grants by $17 billion for 2009 and 2010 as part of its $787 billion stimulus package . Two years ago, students at for-profit trade schools received $3.2 billion in Pell grants, according to the Department of Education, less than went to students at two-year public institutions. By the 2011-12 school year, the administration now estimates, students at for-profit schools should receive more than $10 billion in Pel! grants, more than their public counterparts. (Those anticipated increases may shrink, depending on the outcome of wrangling in Congress over health care and student lending .) Enrollment at for-profit trade schools expanded about 20 percent a year the last two years, more than double the pace from 2001-7, according to the Career College Association. Mr. Miller, the association's president, said for-profit schools were securing large numbers ofPell grants because their financial aid offices were diligent and because the schools served many low-income students. But financial aid experts say the surge of federal money reaching such institutions reflects something else: their aggressive, sometimes deceitful recruiting practices. Jeffrey West was working at a pet store near Philadelphia, earning about $8 an hour, when he saw advertisements for training programs offered by WyoTech, a chain of trade schools owned by Corinthian Colleges Inc. , a publicly traded company that last year reported revenue of$1 .3 billion. After Mr. West called the school, an admissions representative drove to his house to sell him on classes in auto body refinishing and upholstering technology, a nine-month program that cost about $30,000. Mr. West blanched at the tuition, he recalled, but the representative assured him the program amounted to an antidote to
hard economic times. "They said they had a very high placement rate, somewhere around 90 percent," he said. "That was one of the key factors that caused me to go there. They said I would be eaming $50,000 to $70,000 a year." Some 14 months after he completed the program, Mr. West, 21, has failed to find an automotive job. He is working for $12 an hour weatherizing foreclosed houses. With loan payments reaching $600 a month, he is working six and seven days a week to keep up. "I've got $30,000 in student loans, and I really don't have much to show for it," he said. "It's really frustrating when you' re trying to better yourself and you wind up back at Square One." Corinthian says it bars its recruiters from making promises about pay. "The majority of our students graduate," said a spokeswoman, Anna Marie Dunlap, in a wtitten statement. "Most see a significant eamings increase." The increase in market opportunities for the for-profit education industry comes as govemments spend less on education. In states like California, community colleges have been forced to cut classes just when demand is greatest. "This is creating a very ripe environment for the for-profit schools to pick off more students," said Lauren Asher, president of the Institute for College Access & Success , a nonprofit research group based in California that seeks to make higher education more affordable. "The risks of exploitation are higher, and the potential rewards of those practices are higher." For-profit culinary schools have long drawn criticism for leading students to rack up large debts. Now, they are enjoying striking growth. Enrollment at the 17 culinary schools of the Career Education Corporation- most of them operated under the name Le Cordon Bleu- swelled by 31 percent in the final months of last year from a year earlier. When Andrew Newburg called the Le Cordon Bleu College of Culinary Arts in Portland, Ore., to seek information, he was feeling pressure to start a new career. It was 2008, and his Florida mortgage business was a casualty of the housing bust. An associate degree in culinary arts from a school in the food-obsessed Pacific Northwest seemed like a portal to a new career. The tuition was daunting- $41 ,000 for a 15-month or 21-month program- but he said the admissions recruiter portrayed it as the entrance price to a stable life. "The recruiter said, ' The way the economy is, with the recession, you need to have a safe way to be sure you will always have income,'" Mr. Newburg said." 'In today's market, chefs will always have a job, because people will always have to eat.' " According to Mr. Newburg, the recruiter promised the school would help him find a good job, most likely as a line cook, paying as much as $38,000 a year. Last summer, halfway through his program and already carrying debts of about $10,000, Mr. Newburg was alarmed to see many graduates taking jobs paying as little as $8 an hour washing dishes and busing tables, he said. He dropped out to avoid more debt. "They have a basic money-making machine," Mr. Newburg said. More Bills Than Paychecks Career Education says admissions staff are barred from making promises about jobs or salaries. The school requires students to sign disclosures stating that they understand that its programs afford no guarantees. But promotional materials convey a sense of promise. "Our students are given the tools needed to become the future leaders in the industry," proclaims the Le Cordon Bleu Web site . "Many graduates have attained positions of responsibility, visibility, and entrepreneurship soon after completing their studies." The job placement results that the school files with accrediting agencies suggest a different outcome. From July 2007 to June 2008, students who graduated from the culinary arts associate degree program landed jobs that paid an average of $21 ,000 a year, or about $10 an hour. Oregon's minimum wage is $8.40 an hour. The job placement list is cited in a class-action lawsuit filed against the Portland school- previously known as Western Culinary Institute- by graduates who allege fraud, breach of contract and unlawful trade practices. Executives at Career Education denied the allegations while asserting it would be wrong to judge the school on the basis of its graduates' first jobs.
"You go out in the industty and work your way up," said Brian R. Williams, the company's senior vice president for culinary arts. On a recent morning at the campus in Portland, hundreds of students donning chefs whites labored in demonstration kitchens stocked with stainless steel countertops and commercial gas ranges. A chef inspected plates ofboeuf Bourgogne and risotto Milanese. Students melted and pulled sugar into multicolored ribbons. Others used a chain saw to sculpture blocks of ice into decorative centerpieces. "It's employable skills~ that's what we teach people here," said the school president, Jon Alberts. "We try to give them as much of an industry experience in the classroom as possible." But several local chefs said the program merely simulated what students could learn in entry-level jobs. "When they graduate and come in the kitchen, I tell them, 'I'm going to treat you like you don't know anything,'" said Kenneth Giambalvo, executive chef at Bluehour, an upscale restaurant in Portland' s Pearl District. "It doesn't really give them any edge." What the school does give many students is debt, often at double-digit interest rates- debt that even bankruptcy cannot erase without a lengthy, low-odds legal proceeding. When TJ Williams arrived in Portland from his home in Utah to enroll at Le Cordon Bleu in 2007, he was shocked by the terms of the aid package the school had arranged for him: One loan, for nearly $14,000, carried a $7,327 "finance charge" and a 13 percent interest rate. "They told me that halfway through the program, I could probably refinance to a lower rate," he said. When he tried to refinance, the school turned him down, he says. Career Education declined to discuss Mr. Williams' s case, citing privacy restrictions and saying he had not signed a wruver. Mr. Williams has been jobless since last fall and recently returned to Utah, where he moved in with his mother. After Graduation The Career Education Corporation e-mailed The New York Times names and contact information for four graduates "with whom we hope you' ll touch base for important perspective." One came with a wrong number. A second had graduated 15 years ago. A third, Cherie Thompson, called the program "a really positive experience" but declined to discuss her debts or earnings. The fourth, Ericsel Tan, graduated in 2003 and later eamed $42,000 a year overseeing catering at a convention center near Seattle. He said his success reflected his seven years of kitchen experience prior to culinary school. Career Education notes that only 5.9 percent of the federal loans to students at the Western Culinary Institute that began to come due in 2007 -the latest available data- are listed in default by the Department of Education. But default rates have traditionally reflected only those borrowers who fail to pay in the first two years payments are due. The Department ofEducation has begun calculating default rates for three years. By that yardstick, Western Culinary's default rate more than doubles, to 12.5 percent. For-profit schools have ramped up their own lending to students to replace loans formerly extended by Sallie Mae , the student lending giant. These loans are risky: Career Education and Corinthian recently told investors they had set aside roughly half the money allocated this year for private lending to cover anticipated bad debts. Financial aid experts say such high rates of expected default prove that graduates will not earn enough to make their payments, yet the loans make sense for the for-profit school industry by enabling the flow of taxpayer funds to their coffers: they satisfy federal requirements that at least 10 percent of tuition money come from students directly or from private sources. "They're making so much money offtheir federal student loans and grants that they can afford to write off their own loans," said Ms. Asher of the Institute for College Access & Success.
A version of this article appeared in print on March 14, 2010, on page Al of the New York edition.
http://www.nytimes.com/2010/03/l4/business/14schools.html
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To: CC:
Date: Subject:
Finley Steve Macias, Wendy 3/15/2010 10:34:14 AM FW: In Hard Times, Lured Into Trade School and Debt
From: Sann, Ronald Sent: Monday, March 15, 2010 9:13AM To: Siegel, Brian; Burton, Vanessa; Scaniffe, Dawn; Morelli, Denise; Marinucci, Fred; Jenkins, Harold; Woodward, Jennifer; Wolff, Russell; Wanner, Sarah; Finley, Steve; Vamovitsky, Natasha Subject: In Hard Times, Lured Into Trade School and Debt
FYI--- This article was on the front page of yesterday' s New York Times.
The New Poor In Hard Times, Lured Into Trade School and Debt By PETERS. GOODMAN Published: March 13, 2010
One fast-growing American industry has become a conspicuous beneficiary of the recession : for-profit colleges and trade schools. At institutions that train students for careers in areas like health care, computers and food service, enrollments are soaring as people anxious about weak job prospects borrow aggressively to pay tuition that can exceed $30,000 a year. But the profits have come at substantial taxpayer expense while often delivering dubious benefits to students, according to academics and advocates for greater oversight of financial aid. Critics say many schools exaggerate the value of their degree programs, selling young people on dreams of middle-class wages while setting them up for default on untenable debts, low-wage work and a struggle to avoid poverty. And the schools are harvesting growing federal student aid dollars, including Pell grants awarded to low-income students. "If these programs keep growing, you're going to wind up with more and more students who are graduating and can't find meaningful employment," said Rafael I. Pardo, a professor at Seattle University School ofLaw and an expert on educational finance. "They can't generate income needed to pay back their loans, and they' re going to end up in financial distress." For-profit trade schools have long drawn accusations that they overpromise and underdeliver, but the woeful economy has added to the industry's opportunities along with the risks to students, according to education experts. They say these schools have exploited the recession as a lucrative recruiting device while tapping a larger pool of federal student aid. "They tell people, 'If you don't have a college degree, you won't be able to get a job,'" said Amanda Wallace, who worked in the financial aid and admissions offices at the Knoxville, Tenn., branch ofiTT Technical Institute , a chain of
schools that charge roughly $40,000 for two-year associate degrees in computers and electronics. "They tell them, 'You'll be making beaucoup dollars afterward, and you' ll get all your financial aid covered.'" Ms. Wallace left her job at ITT in 2008 after five years because she was uncomfortable with what she considered deceptive recruiting, which she said masked the likelihood that graduates would earn too little to repay their loans. As a financial aid officer, Ms. Wallace was supposed to counsel students. But candid talk about job prospects and debt obligations risked the wrath of management, she said. "If you said anything that went against what the recruiter said, they would threaten to fire you," Ms. Wallace said. "The representatives would have already conned them into doing it, and you had to just keep your mouth shut." A spokeswoman for the school' s owner, ITT Educational Services , Lauren Littlefield, said the company had no comment. The average annual tuition for for-profit schools this year is about $14,000, according to the College Board . The forprofit educational industry says it is fulfilling a vital social function, supplying job training that provides a way up the economic ladder. "When the economy is rough and people are threatened with unemployment, they look to education as the way out," said Harris N. Miller, president of the Career College Association, which represents approximately 1,400 such institutions. "We're preparing people for careers." Concerned about aggressive marketing practices, the Obama administration is toughening rules that restrict institutions that receive federal student aid from paying their admissions recruiters on the basis of enrollment numbers. The administration is also tightening regulations to ensure that vocational schools that receive aid dollars prepare students for "gainful employment." Under a proposal being floated by the Department of Education , programs would be barred from loading students with more debt than justified by the likely salaries of the jobs they would pursue. "During a recession, with increased demand for education and more anxiety about the ability to get a job, there is a heightened level of hazard," said Robert Shireman, a deputy under secretary of education. "There is a lot ofPell grant money out there, and we need to make sure it's being used effectively." The administration's push has provoked fierce lobbying from the for-profit educational industry, which is seeking to maintain flexibility in the rules. A Lucrative Business The stakes are enormous: For-profit schools have long derived the bulk of their revenue from federal loans and grants, and the percentages have been climbing sharply. The Career Education Corporation , a publicly traded global giant, last year reported revenue of $1 .84 billion. Roughly 80 percent came from federal loans and grants, according to BMO Capital Markets, a research and trading firm. That was up from 63 percent in 2007. The Apollo Group- which owns the for-profit University ofPhoenix- derived 86 percent of its revenue from federal student aid last fiscal year, according to BMO. Two years earlier, it was 69 percent. For-profit schools have proved adept at capturingPell grants, which are a centerpiece of the Obama administration's efforts to make higher education more affordable. The administration increased financing for Pell grants by $17 billion for 2009 and 2010 as part of its $787 billion stimulus package . Two years ago, students at for-profit trade schools received $3.2 billion in Pell grants, according to the Department of Education, less than went to students at two-year public institutions. By the 2011-12 school year, the administration now estimates, students at for-profit schools should receive more than $10 billion in Pell grants, more than their public counterparts. (Those anticipated increases may shrink, depending on the outcome ofwrangling in Congress over health care and student lending.) Enrollment at for-profit trade schools expanded about 20 percent a year the last two years, more than double the pace from 2001-7, according to the Career College Association. Mr. Miller, the association's president, said for-profit schools were securing large numbers ofPell grants because their financial aid offices were diligent and because the schools served many low-income students. But financial aid experts say the surge of federal money reaching such institutions reflects something else: their aggressive, sometimes deceitful recruiting practices. Jeffrey West was working at a pet store near Philadelphia, earning about $8 an hour, when he saw advertisements for
training programs offered by WyoTech, a chain of trade schools owned by Corinthian Colleges Inc., a publicly traded company that last year reported revenue of$1 .3 billion. After Mr. West called the school, an admissions representative drove to his house to sell him on classes in auto body refinishing and upholstering technology, a nine-month program that cost about $30,000. Mr. West blanched at the tuition, he recalled, but the representative assured him the program amounted to an antidote to hard economic times. "They said they had a very high placement rate, somewhere around 90 percent," he said. "That was one of the key factors that caused me to go there. They said I would be earning $50,000 to $70,000 a year." Some 14 months after he completed the program, Mr. West, 21 , has failed to find an automotive job. He is working for $12 an hour weatherizing foreclosed houses. With loan payments reaching $600 a month, he is working six and seven days a week to keep up. "I've got $30,000 in student loans, and I really don't have much to show for it," he said. "It's really frustrating when you' re trying to better yourself and you wind up back at Square One." Corinthian says it bars its recruiters from making promises about pay. "The majority of our students graduate," said a spokeswoman, Anna Marie Dunlap, in a written statement. "Most see a significant earnings increase." The increase in market opportunities for the for-profit education industry comes as governments spend less on education. In states like California, community colleges have been forced to cut classes just when demand is greatest . "This is creating a very ripe environment for the for-profit schools to pick off more students," said Lauren Asher, president of the Institute for College Access & Success , a nonprofit research group based in California that seeks to make higher education more affordable. "The risks of exploitation are higher, and the potential rewards of th.ose practices are higher." For-profit culinary schools have long drawn criticism for leading students to rack up large debts. Now, they are enjoying striking growth. Enrollment at the 17 culinary schools of the Career Education Corporation - most of them operated under the name Le Cordon Bleu- swelled by 31 percent in the final months of last year from a year earlier. When Andrew Newburg called theLe Cordon Bleu College of Culinary Arts in Portland, Ore., to seek information, he was feeling pressure to start a new career. It was 2008, and his Florida mortgage business was a casualty of the housing bust. An associate degree in culinary arts from a school in the food-obsessed Pacific Northwest seemed like a portal to a new career. The tuition was daunting- $41 ,000 for a 15-month or 21-month program- but he said the admissions recruiter portrayed it as the entrance price to a stable life. "The recruiter said, 'The way the economy is, with the recession, you need to have a safe way to be sure you will always have income,'" Mr. Newburg said." 'In today's market, chefs will always have a job, because people will always have to eat. ' " According to Mr. Newburg, the recruiter promised the school would help him find a good job, most likely as a line cook, paying as much as $38,000 a year. Last summer, halfway through his program and already carrying debts of about $10,000, Mr. Newburg was alarmed to see many graduates taking jobs paying as little as $8 an hour washing dishes and busing tables, he said. He dropped out to avoid more debt. "They have a basic money-making machine," Mr. Newburg said. More Bills Than Paychecks Career Education says admissions staff are barred from making promises about jobs or salaries. The school requires students to sign disclosures stating that they understand that its programs afford no guarantees. But promotional materials convey a sense of promise. "Our students are given the tools needed to become the future leaders in the industry," proclaims the Le Cordon Bleu Web site. "Many graduates have attained positions of responsibility, visibility, and entrepreneurship soon after completing their studies." The job placement results that the school files with accrediting agencies suggest a different outcome. From July 2007 to June 2008, students who graduated from the culinary arts associate degree program landed jobs that paid an average of
$21 ,000 a year, or about $10 an hour. Oregon's minimum wage is $8.40 an hour.
The job placement list is cited in a class-action lawsuit filed against the Portland school- previously known as Western Culinary Institute- by graduates who allege fraud, breach of contract and unlawful trade practices. Executives at Career Education denied the allegations while asserting it would be wrong to judge the school on the basis of its graduates' firstjobs. "You go out in the industry and work your way up," said Brian R. Williams, the company's senior vice president for culinary arts. On a recent morning at the campus in Portland, hundreds of students donning chefs whites labored in demonstration kitchens stocked with stainless steel countertops and commercial gas ranges. A chef inspected plates ofboeuf Bourgogne and risotto Milanese. Students melted and pulled sugar into multicolored ribbons. Others used achainsawto sculpture blocks of ice into decorative centerpieces. "It's employable skills; that's what we teach people here," said the school president, Jon Alberts. "We try to give them as much of an industty experience in the classroom as possible." But several local chefs said the program merely simulated what students could learn in entty-level jobs. "When they graduate and come in the kitchen, I tell them, 'I'm going to treat you like you don't know anything,'" said Kenneth Giambalvo, executive chef at Bluehour, an upscale restaurant in Portland's Pearl District. "It doesn't really give them any edge." What the school does give many students is debt, often at double-digit interest rates- debt that even bankruptcy cannot erase without a lengthy, low-odds legal proceeding. When TJ Williams arrived in Portland from his home in Utah to enroll at Le Cordon Bleu in 2007, he was shocked by the terms of the aid package the school had arranged for him: One loan, for nearly $14,000, carried a $7,327 "finance charge" and a 13 percent interest rate. "They told me that halfway through the program, I could probably refinance to a lower rate," he said. When he tried to refinance, the school turned him down, he says. Career Education declined to discuss Mr. Willian1s' s case, citing privacy restrictions and saying he had not signed a wruver. Mr. Williams has been jobless since last fall and recently returned to Utah, where he moved in with his mother. After Graduation The Career Education Corporation e-m ailed The New York Times names and contact information for four graduates "with whom we hope you' ll touch base for important perspective." One came with a wrong number. A second had graduated 15 years ago. A third, Cherie Thompson, called the program "a really positive experience" but declined to discuss her debts or earnings. The fourth, Ericsel Tan, graduated in 2003 and later earned $42,000 a year overseeing catering at a convention center near Seattle. He said his success reflected his seven years of kitchen experience prior to culinary school. Career Education notes that only 5.9 percent of the federal loans to students at the Western Culinary Institute that began to come due in 2007 - the latest available data - are listed in default by the Department of Education. But default rates have traditionally reflected only those borrowers who fail to pay in the first two years payments are due. The Department ofEducation has begun calculating default rates for three years. By that yardstick, Western Culinary's default rate more ilian doubles, to 12.5 percent. For-profit schools have ramped up their own lending to students to replace loans formerly extended by Sallie Mae , the student lending giant. These loans are risky: Career Education and Corinthian recently told investors they had set aside roughly half the money allocated this year for private lending to cover anticipated bad debts. Financial aid experts say such high rates of expected default prove that graduates will not earn enough to make their payments, yet the loans make sense for the for-profit school industty by enabling the flow of taxpayer funds to their coffers: they satisfy federal requirements that at least 10 percent of tuition money come from students directly or from private sources. "They're making so much money off their federal student loans and grants that they can afford to write off their own loans," said Ms. Asher of the Institute for College Access & Success.
A version of this article appeared in print on March 14, 2010, on page AI of the New York edition.
http://www.nyti mes.com/20 10/03/14/busi ness/14schools. htm l
From:
To: CC:
Date: Subject:
Jenkins, Harold Yuan, Georgia 8/9/2010 9:15:34 AM FW: Inside Higher Ed article on impact of Congressional hearings on for-proifts
Georgia- FYI. (Scroll down to see article.)
Has the Conversation Changed?
WASHINGTON-- Leaders in for-profit higher education have historically tried to deflect criticism of the institutions by pointing to a few misbehaving "bad actors" who aggressively recruit unqualified students, keep them enrolled for as long as possible while burying them in debt and, if students stick it out long enough, award them worthless degrees. But the events of last week-- most notably the findings of the Government Accountability Office's undercover investigation of recruiting at for-profit colleges that included inducements to commit fraud at four institutions, and the highly critical Senate hearing at which the findings were aired-- challenged the validity of that argument and put advocates of the sector on the defensive in a way that they have not been for years. The developments emboldened critics, saying that the week's events prove what they've been saying about the systemic nature of the sector's problems. And the developments prompted a perceptible, if subtle, shift in the rhetoric of for-profit college leaders and a set of selfimposed actions that, while derided by skeptics as little more than damage control, reflected a recognition by the institutions that their previous protestations may no longer suffice. "It's not us, it's them, so don't penalize the whole sector" has become "it's us, but it's not really that bad, and we're trying to fix it-- so don't use a heavy hand in regulating or legislating against us." Based on the tack taken by Congressional Democrats in recent weeks, following on the Obama administration's aggressive regulatory approach this winter and spring, many observers seem to think that wish may be wishful thinking at this point. With the GAO's findings suggesting that evidence of for-profit recruiters encouraging students to commit fraud was fairly widespread and that questionable or misleading practices were identified at all 15 for-profit colleges that investigators visited, "the world changed this week," said Terry W. Hartle, senior vice president of government and public affairs at the American Council on Education. "There should be no doubt that the world of federal student aid policy changed this week," certainly for for-profit colleges but perhaps for nonprofit institutions, too. A few hours after the hearing ended on Wednesday afternoon, a team of Credit Suisse analysts who have been closely monitoring Washington's scrutiny of the sector wrote "the hearing was quite harsh on the for-profit education sector, and certainly did not come as a relief" (Note: This paragraph has been updated to clarify the characterization of Credit Suisse.) On Friday momi ng, Jeff Silber, a managing director at BMO Capital Markets, downgraded the sector's stocks for investors. Admitting "this call is late," Silber said, "the level of uncertainty exacerbated this week ... likely meaning the increased oversight will be with the sector for some time." That sort of analysis, in combination with several companies' reports of slowing enrollment growth, helped drive down the stocks of most of the sector's publicly-traded companies
by more than 10 percent between Monday morning and Friday afternoon. The GAO Report as Evidence No matter how you cut it, it was a hell of a week for for-profit colleges. On Monday, reporters and investors got their hands on the GAO's "secret shopper'' investigation of recruiting practices at 15 for-profit coiJeges that identified questionable or misleading statements everywhere -- and inducements to commit financial aid fraud at four. On Wednesday, the GAO's report in hand, Sen. Tom Harkin (D-lowa) and other members of the Health, Education, Labor and Pensions Committee voiced concerns about the GAO's findings and cornered the leader of a national accreditor, who insisted that his agency's standards were "rigorous," even though the accreditor had given approval to some of the campuses where the GAO found problems. (While it's not an accreditor' s responsibility to hunt for fraud, some senators wondered how people examining the institutions could miss such seemingly endemic problems.) Two Senators not on the HELP committee asked the Secretaries of Defense and Veterans Affairs to provide information on the funding that flows from their military education programs to for-profit institutions. The biggest change engendered by the GAO report, particularly in the eyes of Congressional and other critics, was that it suggested "systemic" problems in the sector, as Harkin put it-- problems that would almost certainly need legislation to be ameliorated. The agency's findings seemed to unshackle Harkin, making him less guarded, and more passionate, on the issue than ever before. "I'm pleased to see that all of the concerns that we' ve been expressing to Congress for the last decade are being borne out by independent observers," said BarmakNassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers. "This is a slam dunk. There's no ambiguity to what's going on." Harris N. Miller, president of the Career College Association, the sector's biggest trade group, said the GAO's findings and the hearing were "a wakeup call" for him and his members. "And a wakeup call doesn't mean it was a good week." When the HELP committee held its first hearing examining for-profits on June24, Miller's strategy was to go on the offensive, attacking the committee's decision to include Steven Eisman, an investor who stood to make money on greater scrutiny of the sector and declining stock prices, among its witnesses. After this week's hearing, there were no distractions-- just the sobering evidence gathered by GAO and signs that Congress won't be backing down. "We have to show that we as an association and we as institutions are changing our behavior," Miller said. "It means not just saying something different, it means doing something different.... We need to focus more on compliance." While it was "fair.ly likely that Congress would act" before GAO released its findings and the Senate held its hearing, Hartle said, "now I think it is inevitable." And, with Congressional scrutiny continuing to ramp up, he said, it's extremely likely that the U.S. Department of Education will issue final regulations on contentious issues such as gainful employment and incentive compensation that are at least as harsh as the versions released this summer in two notices of proposed rule making. Some members of the House ofRepresentatives, though, are still pushing for the department to back down. Fourteen House Democrats and two House Republicans-- mostly members of the Congressional Black Caucus-- wrote to Education Secretary Arne Duncan on Tuesday asking that the department ease its proposed regulations to define gainful employment offor-profit colleges' former students using metrics based on debt levels. And Rep. Rob Andrews (D-N.J.), a longtime advocate for the sector, wrote his own letter to Duncan on July 30, arguing that Congress, the Obama administration and colleges and universities "should take a more comprehensive look
at the return on investment of higher education for students and taxpayers" across sectors. Like other for-profit supporters, Andrews is trying to draw attention to traditional higher education as well, understanding that nonprofits have the clout to kill unfavorable legislation. Miller wrote to the Education Department on July 30 asking the agency to at least double the 45-day public comment period on the notice of proposed rule making detailing proposed metrics on gainful employment. "We do not believe that the 45-day period provides sufficient opportunity for schools and the rest of the higher education community that would be impacted by the proposed rule to assess fully the many significant, complex issues raised in the NPRM," he wrote. Late last week, the department denied the request, Miller said, explaining that it plans to publish final regulations by Nov. 1 --so that they can go into effect on July 1, 2011 --and that extending the public comment period and making any changes based on those comments would not make it possible for the department to stick to that timeline. Coupled with the GAO report and Wednesday's hearing, the department's decision to decline the extension request might've been bad enough news. (One small shred of optimism for the sector: the Small Business Administration's examination of the gainful employment rule for the impact it would have on small for-profits.) But Harkin also stressed that more oversight was to come. Harkin said he planned to hold hearings in September, November and possibly December. He also asked the 15 publicly-traded for-profit college companies and 15 others to submit information on how the institutions recruit and enroll students, determine prices, calculate fi nanci.al aid, and manage compliance with the 90-10 rule (which requires for-profits to collect at least 1. 0 percent of their revenues from sources other than federal financial aid), as well as information about corporate finances and structure. The first set of data is due on Aug. 26 and the second set on Sept. 16. Harkin said that his decision about the topic of the next hearing would probably be influenced by the patterns the data reveal. "Are we talking about a few bad apples or are we talking about the entire orchard being contaminated by a business model that chums students, that provokes the kind of recruitment and unethical conduct we saw in the GAO, because of a need to increase profits?" Harkin asked, rhetorically, at the hearing. His repeated use of "systemic" to describe the problems suggested that he is going after the whole orchard. Though results ofthe fall's elections could alter the political calculus (and could bring nonprofit colleges more directly into the fray), the evidence of fraud, Hartle said, "changes the political and policy environment incredibly." The question is no Ionger whether Congress wi II act but how it wi II act. "That students were encouraged to commit fraud requires Congress to step in and say we have to satisfy ourselves that this problem has been dealt with," he said. "It's a long and winding road - the start of a fairly long and complicated process to design strong and appropriate legislation that wi II not have an enormous number of unintended consequences." Crisis management or real change? After Inside Higher Ed and other news organizations published stories on the GAO report Tuesday morning, Harris Miller issued a six-point plan laying out how the CCA and its members planned to investigate and reform themselves. "We can have zero tolerance for bad behavior," he said in a statement then, proposing a strengthened code of conduct for members and the development of a sector-wide secret shopper program to ensure that employees behave properly when interacting with students. For months, Miller said he welcomed policy makers' scrutiny because it would ultimately vindicate the sector's efforts to be seen as more than a bunch of"bad apples."
"It is time for analysis by anecdote to end," he said in June, after a group of Democrats asked the GAO to begin a wide-
reaching investigation of the sector. "Elitist Wall Street stock manipulators, rather than higher education experts, have been driving hyperbolic media coverage, creating the impression that outliers are the norm, and insulting millions of hardworking students and graduates in the process. We have every expectation that the GAO, using facts and figures, will provide a full and fair review." Now that some of those GAO findings have been made public, Miller tried to balance the fact that an examination he said he approved ofhad produced an unfavorable view of his constituents. "Maybe the factual findings of the GAO aren't as widespread or as systemic as they think," he said. Nonetheless, to the institutions he prefers to call"market-driven," the problems "are more widespread than any of us thought." He added: "Is it as wide or as deep as some people think? No, I don' t think so, but it still has to be addressed." Nassirian said he saw the sector having two options for how to respond to the GAO report and Congress's questions-either by "seriously evaluating the sustainability oftheir past practices and genuinely reform in the interest oflong-term survival," or by "coming out swinging." So far, there's been a bit of both strategies.
In response to the GAO investigation, Career College Central, a news aggregation website with a decidedly pro-sector position, launched a "Double Standard" page, where it is culling "advertisements in which community colleges, four-year institutions or their related online programs make statements that career colleges cannot." Paradise Valley Community College, for instance, promised incoming students that they would be able to "begin a new job within two years." An advettisement for the University of Texas at Austin's law school calls the city "one of the most dynamic cities in the U.S." The University of California at Berkeley calls itself"truly a prototype of a contemporary university" and "one of the world's leading academic institutions."
Pedro de Ia Torre ill, an advocacy senior associate at the left-leaning Center for American Progress's Campus Progress, wrote on Thursday that the site demonstrated that "[i]n the face of mounting evidence of widespread abuse in the sector it appears that the classic defense, ' it's only a few bad apples,' is no longer convincing, leaving the for-profit education industry with but one retort: of ' they do it too!' " But, he said, "the problem is that the examples of' misleading' advertising by other higher education sectors are, at least comparatively, harmless, and that all of the data clearly shows that for-profit education is-- more than any other sector- in desperate need of strong oversight." Kaplan, Inc., has frozen new enrollments indefinitely at its Kaplan College campuses in Pembroke Pines, Fla., and Riverside, Calif., two of the campuses visited by GAO investigators. "We will take all necessary actions - including termination-- with respect to any employee found to be in violation of our clearly outlined standards and the code of conduct that is emphasized in our repeated training and our day-to-day operations," said Melissa Mack, senior vice president of marketing, in a statement. "The actions described in the GAO report are simply unacceptable. We will do everything we can to ensure that such incidents are not repeated anywhere at our 75 campuses or among our 16,000 higher education employees." One question that was posed at the Senate hearing-- and that appears to be ignored by a strategy like Kaplan 's --is whether questionable recruitment practices were generated by "rogue" employees at campuses, or by higher-ups. ffthe problems at Kaplan, or any other for-profit college, reach beyond the campus level, then toughening rules just at the campuses GAO visited won 't actually bring widespread change.
"People are going to have to be taken out in the back and metaphorically shot," Miller said. He sounded like he was thinking about the "rogue" recruiters or campus-based managers, rather than high-level executives at the major companies or the owners of privately held colleges. "I'm not sure it's true, I'm not sure it's false," he said, that deceptive recruiting practices at some colleges were coming from above. But, going forward, he said, "leadership has to come from the top." Like Miller, Anthony Guida, senior vice president of regulatory affairs and strategic development at Education Management Corporation, said in June that he welcomed the GAO's scrutiny of the sector. The agency's work, he said at the time, would "allow the discussion to go from hyperbole and anecdotes about a small number of incidents and move into a fact-based discussion of the whole sector." One of the campuses GAO investigators visited was Education Management's Argosy University in Chicago, but "it causes us to bristle a little when they say all 15 schools were found guilty of fraud and deception." At Argosy, one of GAO's secret shoppers was quoted a price that represented only about 20 percent of the annual tuition, while another student who asked for the college' s graduation rate was told that "not everyone graduates" and was given only a vague answer about faculty qualifications. Guida defended all three findings. There was, he said, "not any intent to mislead" and, had the secret shopper completed the enrollment process, he "would have gotten all the infmmation" from Argosy's enrollment agreement document. While GAO said that " all 15 were found to have done misrepresentation," Guida said he doesn't " think any of these three examples fall into that'' category. "A lot of the stuff was bad and it needs to be condemned," he said, just not what Argosy's employees did. Nonetheless, he said, the Argosy employees who met with GAO's undercover students will go through additional training. Nassirian said he is doubtful that for-profit colleges will make any large-scale effort to change. "If they really wanted to seriously enforce any kind of a code of ethics, the whole business model would be upended because the business model here is consumer fraud," he said. "The margins involved can only be produced if you can shortchange people on the substance of what you purportedly sell, which is education." -Jennifer Epstein
From: Yuan. Georgia To: Finley, Steve Jenkins. Harold Rose. Charlie CC: Date: 4/22/2010 6:37:22 PM Subject: FW: Letter to Hon. Tony Miller
Wasn't sure if I forwarded this one or not
From: Mdrew S. Rosen [maitto:andrew.s.rosen@kaplan.com] Sent: Monday, April19, 2010 7:01 PM To: Miller, Tony Cc: Kanter, Martha; Martin, Cannel; Shireman, Bob; Yale, Matt; Yuan, Georgia; Fine, Stephanie; Rebecca
Campoverde
Subject: Letter to Hon. 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. VVe 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. VVe would welcome the opportunity to continue to provide feedback on these and other issues before your offre.
Best regards,
Andy
Ardrew S. Rosen Chairman and CEO Kaplan, Inc. 6301 Kaplan University Avenue
Fort Lauderdale, Florida 33309 (954) 515-3888 www.kaplan .com
April 19,2010
Dear Secretary Miller:

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 unworkable 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.
The Honorable Anthony Wilder Miller April 19,2010 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 alikeincluding 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
The Honorable Anthony Wilder Miller Apri119, 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 difftcully 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 ....
(b) Debt to earnings ratio./A/n 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 determine 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 nondegree 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
Non-Degree Associate's Degree Bachelor's Degree
Debt-service-toincome threshold 12% 15% 15%
BLS Percentile
25th 50th 5otn
Years in Repayment 15 15 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.
The Honorable Anthony Wilder Miller 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 of 70% 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 organizationsare 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.
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,
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 XYZ University exceeds the maximum debt-to-earnings ratio as recommended by the U. S. Department of Education. Program Level: 0Associates 0Bachelors
~Certificate/Diploma
Here are some important disclosures for the award year ending June 30, 2009 During the yea r ended June 30, 2009, 81.2% of students enrolled in this program graduated or continued their enrollment into the next year w hile 18.8% withdrew from school. 1 Of the students who graduated and were availa ble for employment2, 73.4% were employed in their field of study, or a related field, w ithin 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 $5,000
---------------XYZ University Veterinary Assistant Graduates' 1st year Salaries
$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 sa laries 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 tran sfer 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 yea r was $27,400. This amount includes $20,300 of federal student loans and $17,100 of inst itutional loans. Additionally, 2.0% of graduates obtained private student loans from third parties. 1
Appendix A
Loan Repayment as a Percentage of 25th Percentile of Salaries for Veterinary Assistant Occupations
$4,000.00 $3,000.00 $2,000.00 $1,000.00
$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 t ota l of your first 12 monthly payments would be $2.918.76.3 The latest official Cohort Default Rate (FY07) from the 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 are 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 are not counted in the placement rate calculation: graduates who are pursuing further education, are deceased, are in active military service, have medical conditions that prevent them from working, are continuing in a 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 are 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/currentloes nat.htm. {4} Costs are based on tuition rates and fees currently charged to students in the indicated program of study. (S) The recommended loan repayment is calculated using a debt-to-earnings ratio of 1296 of the 25rh percentile of salaries as reported from the Bureau of Labor Statistics 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/myDirectLoan/index.action.
APPENDIXB
Regu~n-"''Cita:tions ~ 3.
Title IV 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 ofthe institution and may deny ongoing Title IV participation.
Additional Program Participation Agreement Conditions

ED has discretion to include additional provisions in new participation agreement
Title IV eligibility tenninates when an institution changes ownership. The new ownership must re-apply for participation in Title IV programs. Under ED's current practice, the ED may extend the current program participation agreement under a " provisional certification." The ED will 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 bas 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.
34 C.F.R 600.20(g) and (h) 34 C.F.R. 600.31(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)
Disallowance of Title IV Participation

May revolre Title IV participation following a change
Reimbursement or Heightened Cash Monitoring

Ability to place institution on cash management restrictions, even in absence ofchani{e in ownership
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 IV payments, so 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 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 determine compliance or issues.
34 C.F.R. 668.13(d)(l)
34 C.P.R. 668.162 34 C.F.R. 668.1 75(d)(2Xi)
Annual Compliance Audits

May annually review institution 's compliance with Department regulations
34 C.F .R. 668.23(b)
Program Review Requirements

ED may conduct a full program review ofany institution in addition to the review associated with app/yini{/or elii{ibility
34 C.F.R. 668.24(f)
From: To:
Finley, Steve Bruce Deutsch 8111/2010 9:21:08 AM FW: Monsters in the making?
CC: Date:
Subject:
FYI, from The Economist For-profit colleges Monsters in the making? Washington grapples with a booming education industry Jul 22nd 2010 I Chicago IT SEEMS too good to be true, at least for companies. Customers arrive at for-profit colleges by the million. With them comes billions of dollars offederal student grants and loans, to be poured into corporate coffers. Public subsidies may provide up to 90% of revenue; the government bears the risk of loan defaults. This business model has served firms rather well. Its effect on students and taxpayers is less clear. This summer, however, a brawl over for-profit colleges has exploded at last. On May 26th Steven Eisman, a big shorter, warned investors that for-profit colleges could echo sub prime mortgages. June brought a Senate hearing (including testimony from Mr Eisman, to the industry's horror) and proposed regulations from the Education Department. As The Economist went to press the department was expected to release another, even more controversial rule. Behind this fight lies a new, rather uncomfortable urgency. For-profit colleges have happily depended on government support. Now education may increasingly come to depend on for-profit colleges. Proprietary colleges have morphed into behemoths, some of them publicly traded companies that reach hundreds of thousands of students in classrooms and online. Enrolment jumped by 225% between 1998 to 2008, more than seven times the rate for all post-secondary programmes. The recession has accelerated this trend. The Apollo Group's University ofPhoenix, the biggest proprietary college, now enrolls 476,500 students. With more students comes more public money. In 2008-09 $24 billion in Pell grants and federal loans went to for-profit colleges. The return on investment is harder to calculate. The industry is shrouded in fuzzy numbers. Reliable graduation rates and earnings data do not exist. More certain, however, is that the debt burden and default rates for graduates are particularly high. In 2009 the average yearly tuition was about $14,000, compared with $2,500 at a community college. Critics claim that misleading recruiting lures students into prograrnrnes that leave them with heavy debt and flimsy skills. Of postsecondary investigations by the Education Department, 70% are related to proprietary schools. Litigation is common. In 2009 Apollo agreed to pay $78.5m to settle a suit over pay schemes for recruiters. The Education Department is trying to fix these problems. It has proposed requiring schools to give more information about fees, graduation rates and job placement. Schools would not be able to tie recruiters' pay to their enrolment numbers. The most controversial idea, to cap students' yearly debt obligations to a small share of income after graduation, will be f01mally proposed any day now. Harris Miller of the Career College Association contends that such a change would force thousands of good programmes to shut. Final regulations are expected by November. Further legislation may come from Tom Harkin, who is leading Senate hearings on the industry. Changes are needed-and soon-not merely to protect students and taxpayers. For despite all the criticism, proprietary colleges look likely to become ever more necessary. Barack Obama has set a goal of having the world's highest share of college graduates by 2020. Proprietary schools offer flexible classes for those with jobs, children or remote homes. More important, community colleges are severely strained. Though federal student aid has risen, a plan to support community colleges was all but gutted in March. States
are overwhelmed by growing demand and shrinking budgets. California estimates that tight capacity forced community colleges to tum away 140,000 students this year. It is no coinc1dence that Kaplan, a for-profit college, has signed a controversial agreement to tap the state's glut of students. Mr Miller is defiant. "No one wants to talk about how the capacity expansion has to come from somewhere," he says. In 2008 for-profit colleges accounted for 7.7% of all postsecondary enrolment. For better or worse, that share is likely to grow. http://www.economist.com/node/16643333/print
From: Finley, Steve To: Macias Wendy CC: Date: 10/26/2009 10:29:46 AM Subject: FW: Neg Reg Article
In the Crosshairs? October 26, 2009 Share This Story http://www.insidehighered.cornlnews/2009/10/26/regs# Education Department officials have been insisting for months that, despite the warnings of some Wall Street analysts to the contrary, the federal government is not intent on intensifying its regulation of for-profit higher education. That assertion got a little harder to believe on Friday, when the department announced the composition of a committee charged with negotiating a set of new federal regulations related to the integrity of federal financial aid programs. Given the issues on the panel's agenda, its membership leans notably toward critics of the for-profit sector of higher education, and decidedly short on representatives of the colleges. Department officials, however, reject the idea that the panel they've appointed is unbalanced. As is typically the case in the federal negotiated rule making process (which is explained here), the department's September 9 announcement inviting nominations for the committees said it would populate the panels with people who "represent the interests significantly affected by the topics proposed for negotiations." In this case, the topics under the overall rubric of the integrity of federal financial aid programs include such things as incentive compensation for college recruiters and the use oftests to gauge students' "ability to benefit" from a higher education, which are heavily used by for-profit universities, community colleges, and other open-access institutions. The goal of negotiating committees like this one (and another the department is creating to look at foreign institutions) is to try to reach unanimous agreement on a set of recommendations for proposed regulatory changes, to provide to the education secretary. Disapproval from any single negotiator can torpedo the whole process, giving the federal agency that sponsors the session-- in tllis case the Education Department-- free rein to propose whatever it wants. It was inevitable that any group of officials deemed to have an interest in issues related to potential financial aid fraud and abuse would contain some people who don't like for-profit colleges. The institutions have long been viewed with skepticism by consumers' rights groups that (citing many historical examples and a smaller number of high-profile recent ones) accuse some of the institutions of preying on low-income students by charging comparatively high tuitions and underdelivering on their promises of good jobs. So it's no surprise that the committee appointed by the Education Department contains consumer and student advocates with a track record of criticizing for-profit colleges. The student members (one primary representative and an alternate) come from two student groups, U.S. PIRG and the United States Student Association, that frequently take aim at forprofit coll eges. Both groups signed a letter this month, for instance, that urged Congress to toughen its regulation of private student loans made by for-profit colleges. The panel also features two consumer advocates. One, Margaret Reiter, is a lawyer who, as deputy attorney general in California, sued Corinthian Colleges, Inc. , for "a persistent pattern of unlawful conduct" that included allegedly inflating job placement data and falsifying government records. (C01inthian settled for $6.5 million in 2007.) Her alternate, Deanne Loonin, represents the National Consumer Law Center, which pubLished a 2005 study called "Making the Numbers Count: Why Proprietary School Performance Data Doesn't Add Up and What Can Be Done About It." What's more unexpected, perhaps, is that the group gathered by the department to negotiate a set of issues that relate heavily to for-profit institutions contains so many other members with a clearly stated antipathy toward the sector, and so
few members from for-profit institutions themselves. As is common, the financial integrity committee includes one representative (plus an alternate) from each of the major sectors of higher education-- public two-year (Richard Heath of Anne Arundel Community College), public four-year (Philip Asbury of the University ofNorth Carolina at Chapel Hill), private four-year (Todd Jones of the Association of Independent Colleges and Universities of Ohio) and for-profit colleges (Elaine Neely ofKaplan Higher Education). Aside from Neely, who can be counted on to advocate for the career college sector, none is known to be particularly a fuend or foe offor-profit higher education. But based on their track records or previous statements, it's fair to expect several of the officials selected by the department to represent various other "communities of interest" to take a sharply skeptical view of for-profit colleges. Jim Simpson, associate vice president of workforce development and adult education at Florida State College (formerly Florida Community College at Jacksonville), was appointed to fill a slot designed to represent the interests of "work force development." Simpson traveled to Denver in June to speak at one of three regional hearings the department held to solicit views on the issues it should explore in negotiated rule making, and he closed his presentation (which can be found on Page 35 of this transcript) with a stinging critique of for-profit colleges. He flew to Denver, Simpson said, in part to "put a human face on what happens when schools take advantage oflax regulations." He then recounted the story of a student who applied to his institution after having made the honor roll at an unidentified for-profit university-- "despite later test results ... that placed the student at an elementary school level in mathematics, language and reading," Simpson said. "This student and their family took out $16,000 in student loans to pay for a two-year degree from a for-profit university that was clearly only interested in tuition money obtained from federally backed student loans," he said. "It is a travesty that they were encouraged to take out huge student loans when their daughter has almost no chance of getting a job that would allow the eventual repayment of those loans." College presidents are represented in the negotiation process by Terry W. Hartle, senior vice president for government and public affairs at the American Council on Education. Hartle typically stays above the fray in the regular political skirmishing between traditional colleges and for-profit higher education. But ACE, as the lead lobbying group for higher education, almost always sides with traditional colleges in policy debates, and the Career College Association, the leading lobbying group for for-profit institutions, withdrew from ACE in a public spat earlier this decade. The Education Department chose David Hawkins, director of public policy at the National Association for College Admission Counseling, to represent the interests of admissions officers on the negotiating team. Like several major higher education associations, NACAC does not let for-profit colleges into its membership. And Hawkins, who writes widely about ethics and other issues in higher education, wrote a 2007 article challenging the notion that for-profit institutions are doing a good job of serving students from low-income backgrounds. "During the long-running debate over the current reauthorization of the Higher Education Act, lobbyists for the for-profit institutions would have you believe that 'traditional' colleges and universities are fighting against the for-profit colleges in a spiteful legislative contest," Hawkins wrote. "In reality, the 'contest' in Washington is one to preserve the integrity of student-aid programs in an environment characterized by increasingly aggressive recruiting, indiscriminate admissions and loan financing-- often with little to no regard for the student's ability to benefit or repay --and questionable 'return on investment' for many students lured in by the publicly traded for-profit colleges' massive advertisement complex." Apart from Neely, the Kaplan senior vice president of regulatory affairs, and her alternate, David Rhodes, president of the School of Visual Arts, the only other negotiator who appears likely to advocate for for-profit institutions is, by design, is Anthony Mirando, who as president of the National Accrediting Commission of Cosmetology Arts and Sciences was appointed to represent national accrediting agencies. (Other negotiating teams in the recent past contained just one representative of for-profit colleges, too, but they were focused on topics-- such as accreditation and student loans --that did not disproportionately affect those institutions. The loan team contained multiple lenders, and the accreditation team three or four accrediting officials.) Officials of the for-profit higher education sector had argued-- to no avail-- that given the growth offor-profit colleges and the emphasis in this round of rule making on issues that could directly affect them, the department should consider appointing more than one person from the institutions to the negotiating team. Harris N. Miller, president and CEO of the Career College Association, declined to comment on the makeup of the
negotiating panel, which begins its work a week from today. Officials at the Education Department offered only a one-line statement in response. "The make-up of this committee is similar to past committees and we remain committed to ensuring that it reflects key constituencies," said Justin Hamilton, a spokesman. But Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, vigorously challenged the assertion that the negotiating team appointed by the department is tilted against forprofit colleges, and that the department has it in for the sector. Nassirian specifically disputed the notion that Hawkins and others (including Nassirian himself) who have criticized forprofit colleges in the past are biased against the colleges. Hawkins has criticized the colleges' use of incentive compensation for recruiters, Nassirian said, because he believes such payments "inevitably lead to abuse" in the admissions world that Hawkins's group oversees. "But on the rest of the issues, he is a fairly moderate guy, and I don't know that he is any harsher on the for-profit sector than the nonprofit sector," Nassirian said. Like many experts on financial aid and higher education, Nassirian said, Hawkins believes "it's in everybody's interest that these programs be able to demonstrate accountability and program integrity, or else the billions of dollars that are being devoted to them could be redirected elsewhere." For-profit colleges have "legitimate concerns ... that they not be subjected to utterly destructive requirements," Nassirian said. But if the institutions are feeling picked on by the new administration, that may have more to do with the fact that the previous White House and Education Department were soft on the sector, greatly softening the very same regulations on executive compensation that are now under review in the upcoming negotiations. "I can understand why, from the perspective of the last eight years of the Bush administration, any change can only be perceived as a change for the worse" for for-profit colleges, Nassirian said. "But when you judge the matter from the perspective of the taxpayers who fund the system, all the department has asked them to do is to be more reasonable. There is a new mindset in this administration that every dollar needs to be reasonably accounted for, and that money is not being wasted. I don't believe that the good for-profit schools want to contest that view." -Doug Lederman
From:
To: CC:
Date: Subject:
Finley Steve Macias, Wendy 5/4/2010 12:01:44 PM FW: New Bloomberg article today: Obama Plans New Rules as For-Profit Colleges Mobilize
FYI
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Obama Plans New Rules as For-Profit Colleges Mobilize for Fight 2010-05-04 04:02:00.0 GMT
By John Hechinger, Daniel Golden and John Lauerman May 4 (Bloomberg)-- The Obama Administration is gearing up to produce tougher regulations that may reduce the amount of federal financial aid flowing to for-profit colleges, cutting the companies' annual revenue growth by as much as a third. In response, the $29 billion industry and its supporters including Republican Senators have enlisted top Washington lobbyists and are courting black and Hispanic legislators to fight the proposed rules scheduled to be released as early as this month. The companies draw students from low-income and minority communities. Federal aid to for-profit colleges has become an issue as it has jumped to $26.5 billion in 2009 from $4.6 billion in2000, according to the Education Department, prompting concern that these students are taking on too much debt. Twelve highereducation stocks fell an average of7.4 percent for the week ended April 30, according to Bloomberg data, following an April 28 speech by an Education Department official critical of forprofit colleges. In the same period, the Standard & Poor's 500 Index dropped l. 7 percent. "There's an attempt to manage" for-profit colleges by the Obama administration, Robert Wetenhall, an analyst with BMO Capital Markets in New York, said in a telephone interview. The education companies' influence in Washington has "radically changed," from the years ofthe Bush administration, he said. The tougher rules, which are expected to be released for public comment in the next several weeks, would require m Educational Services Inc., Career Education Corp. and Apollo Group Inc.'s University ofPhoenix to show that their graduates earn enough money to pay off their student loans. lffor-profit
colleges can't meet the standard, they could lose federal financial aid, which typically makes up three-quarters of their revenue. Tuition Increases The proposed rules may disqualifY for-profits from receiving federal financial aid if their graduates must spend more than 8 percent of their starting salaries on repaying student loans. The regulations may slow or even halt tuition increases at ITI, Education Management Corp., Lincoln Educational Services, Universal Technical Institute, and Career Education because many graduates take low-paying jobs in criminal justice, cooking and medical office work, Trace Urdan, an analyst at Signal Hill Capital Group in San Francisco, said in an interview. Education companies have increased revenue by as much as 15 percent and enrollment by 8 to 10 percent on an annual basis, while raising tuition about 4 to 6 percent a year, Urdan said. The new rules may slow their revenue growth by one third by limiting their ability to raise tuition. Pricing Power "The days of 4 to 6 percent annual tuition price increases are over," Urdan said. "The new proposed rules will bring some school 's power to increase prices down to zero." Apollo closed at $58.32, up 91 cents, or 1.6 percent, in New York Stock Exchange composite trading yesterday. ITT closed at $104.22, up $3.09, or 3.1 percent. Career Education rose $97 cents or 3.3 percent to $30.24. The Education Department plans to issue the regulations without Congressional approval, unljke student-loan legislation which passed in March. "Congress has not held a single hearing on these new enforcement mechanisms," Alexa Marrero, spokeswoman for John Kline, the ranking Republican on the House education commjttee, said in an e-mail. "No research has been offered by the department to justify the controversial proposal." U.S. Senator Lamar Alexander, who chairs the Senate Republican Conference, is trying to persuade U.S. Education Secretary Arne Duncan to reconsider the regulations, said a Republican aide on the education committee. If that doesn 't work, Alexander, who is on the education and appropriation committees, would tty to kill the regulations by cutting off funding, the aide said. Enrollment in for-profit colleges increased to 1.8 million in 2008 from 673,000 in 2000. Industry revenue will rise to $29.2 billion trus year from $9 billion in 2000, said Jeffrey Silber, an analyst for BMO Capital Markets in New York. The
industty has grown in part by marketing to low-income students, including the homeless, who qualifY for federal grants and loans. Regulations' hnpact The new regulations would shut 300,000 students out of classes and eliminate 2,000 educational programs, according to a study commissioned by the Washington-based Career College Association, which represents more than 1,400 for-profit colleges. The proposal would reduce opportunities for women and racial minorities who want to go to college, the group said. For-profit colleges have proposed alternative regulations that would require companies to disclose more information about students' debt and job prospects. The Career College Association has retained the Podesta Group, a Washington lobbying firm headed by Anthony Podesta, whose brother, John, was President Bill Clinton's chief of staff, according to federal filings. Clinton will be a keynote speaker at the association's annual meeting in June. Podesta's Paul Brathwaite, former executive director of the Congressional Black Caucus, is also lobbying on the association 's behalf, records show. Phoenix Scholarships The University ofPhoenix, the largest for-profit college in the U.S. by enrollment, awarded 25 full-tuition scholarships worth $1.25 million in the fiscal year ended August 31 to the Congressional Black Caucus Foundation, which selects the recipients, Apollo spokeswoman Sara Jones said in an e-mail. More minority students earn degrees from Phoenix than from any other U.S. university, she said. In March, several members of the Congressional Black Caucus sent a letter to Duncan, saying the regulations would reduce educational opportunity. Regulators need more tools to oversee publicly-traded education companies receiving increasing amounts of federal money, Robert Shireman, deputy undersecretaty of the education department, said in a speech on April 28. "I don't think we have the firepower that we need," he said, according to a transcript of his remarks. The speech was "highly negative" and was "drawing inappropriate and unwarranted parallels between developments in higher education and the causes of the recent financial crisis," Harris Miller, president of the Career College Association wrote in an April 29letter to Duncan. For Related News and Information:
Stories about education: NI EDU U.S. colleges and universities: USUV Education organizations: EDOR Stories about the Department of Education: NlEDN
--Editors: Robin D. Schatz,Jonathan Kaufman To contact the reporters on this story: John Hechinger in Boston at + 1-617-210-4614 or jhechinger@bloomberg.net; Daniel Golden in Boston at + 1-617-210-4610 or dlgolden@bloomberg.net; John Lauerman in Boston at + 1-617-210-4630 or jlauerman@bloomberg.net. To contact the editor responsible for this story: Jonathan Kaufman at + 1-617-210-4638 or Jkaufman 17@bloomberg.net.
From: Jenkins Harold To: Burton Vanessa Finley, Steve Marinucci. Fred Morelli, Denise Sann Ronald Scaniffe Dawn Siegel, Brian Vamovitsky. Natasha Wanner, Sarah Wolfr: Russell Woodward Jennifer CC: Date: 9/21/2009 2:32:04 PM Subject: FW: new GAO reports on HEA programs
FYI.
-----Original Message----From: Riddle, Paul Sent: Monday, September 21 , 2009 2:25 PM To: Laitinen, Amy; Bergeron, David; Baker, Jeff; Jenkins, Harold; Graham, William; Cichowski, Carol; Hansen, Randy; Smith, Megan; Hammond, Cynthia; Madzelan, Dan; Marinucci, Fred Subject: FYI: new GAO reports on HEA programs GAO posted these two reports today. They are public documents, so feel free to pass aJong to others.
United States Government Accountability Office
GAO
August 2009
Report to the Chairman, Subcommittee on Higher Education, Lifelong Learning, and Competitiveness, Committee on Education and Labor, House of Representatives
LOW-INCOME AND MINORITY SERVING INSTITUTIONS Management Attention to Long-standing Concerns Needed to Improve Education's Oversight of Grant Programs
Accountability
GAO
* Integrity * Reliability
GA0-09-309
August2009
G A 0
Accountability lntegri!y Reliability
Highlights
Highlights of GA0-09-309, a report to the Chairman, Subcommittee on Higher Education, Lifelong Learning, and Competitiveness, Committee on Education and Labor, House of Representatives
LOW-INCOME AND MINORITY SERVING INSTITUTIONS

Management Attention to Long-standing Concerns Needed to Improve Education's Oversight of Grant Programs
Why GAO Did This Study

Institutions that serve large proportions of low-income and minority students may receive funding under Titles ill and V of the Higher Education Act. In fiscal year 2008, $667 million in grants were awarded to over 500 institutions. GAO was asked to determine (1) the characteristics of institutions eligible to receive grants under Titles III and V and charactelistics of students served; (2) any challenges grantees face, and how they spent Title III and Vfunds to address these challenges; and (3) the extent to which the Department of Education (Education) monitors the financial and programmatic performance of grantees, and uses this infotmation to target its technical assistance. To address these objectives, GAO analyzed data from a representative sample of grant applications and annual pelformance reports for the entire population of fiscal year 2006 grantees. GAO also interviewed officials from Education and 27 grantee institutions, and conducted financial site visits at other 7 grantee institutions.
What GAO Found

Twenty-eight percent of all2-year and 4-year public and private, not-for-profit institutions are eligible to receive Title III and V grants. Eligible institutions had fewer resources, including endowment holdings and revenue from tuition and fees, and lower per student spending on equipment than ineligible institutions. Eligible institutions also served more students who were minority, low-income, and attended part-time. In their grant applications, Title III and V grantees reported challenges in all four grant focus areas: academic quality, student suppmt, institutional management, and fiscal stability. Grantees reported spending almost $385 million in tiscal year 2006 grant funds to address challenges in these areas, primarily to strengthen academic quality and student suppmt services. Specifically, grantees repmted using 43 percent of grant funds on efforts designed to improve academic quality, such as using the latest technology in the classroom and improving academic space. Efforts to improve student support services, including remedial courses, tutoring, and academic counseling represented about one-third of grantee expenditures. While nearly all grantees reported challenges related to strengthening institutional management and fiscal stability, expenditures in these areas represented less than one-quarter of all grant funds spent. Since GAO repmted and made recommendations on the management of these programs in 2004 and 2007, Education has continued to take steps to improve monitoring, but many of its initiatives have not been completed. Education has made recent progress in developing an electronic monitoring system and lisk-based cliteria to improve monitoring, but it discontinued the use of annual plans to guide its efforts. Also, limited progress in addressing staff skill gaps and substantial declines in site visits to grantees has impeded Education's ability to adequately monitor grantees. Because Education lacks a comprehensive approach to target monitoring, it lacks assurance that grantees appropriately manage federal funds, increasing Ute potential for fraud, waste, or abuse. For example, GAO identified more than $100,000 in questionable expenditures at one grantee institution, including student tlips to locations such as resorts and amusement parks, and an airplane global positioning system. Education provides limited technical assistance to grantees, but it has not developed a systematic approach that targets the needs of grantees. For example, some grantees told GAO that Education could suengthen grantee performance by sharing more information regarding common implementation challenges and successful projects. Additionally, GAO found that Education's ability to target technical assistance is limited because its current approach for obtaining feedback does not encourage candor, and it does not use the feedback it currently receives from grantees.
What GAO Recommends

GAO recommends that Education develop a comprehensive, riskbased approach to t.arget monitoring and technical assistance; follow-up on improper uses of grant funds identified in this report; ensure staff training needs are fully met; disseminate information about implementation challenges and successful projects to grantees; and develop appropriate feedback mechanisms. Education agreed with our recommendations.
View GA0-09-309 or key components. For more information, contact George Scott at (202) 512-7215 or scottg@gao.gov.
- - - - - - - - - - - - - - - United States Government Accountability Office
Contents
Letter
Background Eligible Institutions Had Fewer Resources to Serve Proportionately More Students at Academic Risk Institutions Faced Challenges across the Grant Programs' Four Focus Areas but Spent Most of Their Funds in Two Areas, Academic Quality and Student Support Long-standing Deficiencies in Grant Monitoring and Technical Assistance Limit Education's Ability to Ensure That Funds Are Used Properly and Grantees Are Supported Conclusions Recommendations for Executive Action Agency Comments
4 11 19 25 36 37 37
Appendix I
Objectives, Scope, and Methodology
39
Appendix II
Institutional and Student Characteristics, by Program Eligibility Status
43
Appendix III
Fiscal Year 2002 to 2005 Grantee Expenditures by Focus Area
45
Appendix IV
Comments from the Department of Education
47
AppendixV
GAO Contact and Staff Acknowledgments
50
Tables
Table 1: Characteristics and Eligibility Criteria of Title III and V Grant Programs Table 2: Title III and V Funding, Fiscal Years 1999 and 2008 Table 3: Comparison of All Title III and V Allowable Activities by Program 6 7 8
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GA0 -09-309 Low-Income and Minority Serving Instit utio ns
Table 4: Summary of Opportunities for Improvement in Grants Management Table 5: Title III and V Eligibility Status of Postsecondary Institutions Table 6: A Comparison of the Status of Education's Monitoring Initiatives in 2004 and 2008 Table 7: Site Visits to Title III and V Grantees, Fiscal Years 2003 through 2008 Table 8: Summary of Findings from Financial Site Visits Table 9: Number of 2002 to 2006 Applications Reviewed during Content Analysis Table 10: Summary of GAO Contacts with Title III and V Grantees
9 11 26 29 31 40 42
Figures
Figure 1: Location of Institutions Currently Eligible for Title III and V Funding and Projected Change in College-Age Minority Population by 2015 Figure 2: Race and Ethnicity, by Eligibility Status, 2006 Figure 3: Fiscal Year 2006 Grantee Expenditures by Focus Area Figure 4: Before-and-After Photos of Science Facilities on Native Hawaiian Campus Figure 5: Monitoring Index Criteria Used to Assess Institutional Risks Figure 6: Desk and Chair Purchased by Grantee Figure 7: Fiscal Years 2002 and 2003 Grantee Expenditures, by Focus Area Figure 8: Fiscal Years 2004 and 2005 Grantee Expenditures, by Focus Area
14 16 20 21 28 32 45 46
Page ii
GA0-09-309 Low-Income and Minority Serving Institutions
Abbreviations
Education
HEA IDUES
IPEDS NPSAS OPE
Department of Education Higher Education Act of 1965 Institutional Development and Undergraduate Education Service Integrated Postsecondary Data Systems National Postsecondary Student Aid Study Office of Postsecondary Education
This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
Page iii
Accountability
GAO
~
Integrity ~ Reliability
United States Government Accountability Office Washington, DC 20548
August 17, 2009 The Honorable Ruben Hinojosa Chairman Subcommittee on Higher Education, Lifelong Learning, and Competitiveness Committee on Education and Labor House of Representatives Dear Mr. Chairman: With more than two-thirds of 2008 high school graduates estimated to enroll in college soon after graduating, higher education has become more accessible than ever before. Yet students from some demographic groups still face challenges in attending college. For example, in 2006 only half of low-income students enrolled in college soon after completing high school, compared to 80 percent of students from high-income families. Similarly, African American and Hispanic high school graduates enrolled at lower rates than white students, and those who do enroll are at greater risk of dropping out before earning a degree or certificate than other students. Given current population projections showing the proportion of college-age minorities may increase by as much as 54 percent for some minority groups over the next decade, the federal government has a continuing interest in ensuring the needs of these students are met. Beginning in 1965, Congress enacted several grant programs under the Higher Education Act (IlEA) to strengthen and support developing postsecondary institutions. In subsequent reauthorizations, Congress expanded the HEA to include programs that support institutions that provide low-income and minority students with access to higher education. These programs have been authorized under Title III and Title V of the HEA, as amended. 1 Institutions eligible to receive these grants include Historically Black Colleges and Universities, :Hispanic-serving
These programs include three Title lll, Part A programs: Strengthening Institutions, American Indian Tribally Controlled Colleges and Univers ities, and Alaska Native and Native Hawaiian Serving Institutions. It also includes Title liT, Part 8 Strengthening Historically Black Colleges and Universities, and Title V, Part A Developing Hispanic Serving Institutions. Throughout the report when we refer to Title III and Title V programs or grants we are referring to these specific programs. Our review did not include Title III, Part B Historically Black Professional or Graduate Institutions; Part D 1-lBCU Capital Financing; or PartE Minority Science and Engineering Improvement Program.
Page 1
institutions, Tribal colleges and universities, Alaska Native-serving institutions, and Native Hawaiian-serving institutions, and other undergraduate postsecondary institutions that serve low-income student.'). In fiScal year 2008, $667 million in grants were awarded to over 500 institutions. Under the Department of Education's (Education) program guidance, participating institutions are allowed to spend these grants on challenges in four focus areas: academic quality, student support services, institutional management, and fiscal stability. Within these areas, activities might include renovating existing buildings to upgrade technological capacity, providing remedial classes or tutoring, developing faculty, or building endowments, among others. In 2004 and 2007, we reported on Education's administration of Title ill and V programs and found that it had made limited progress in implementing initiatives to enhance monitoring of and technical assistance for grantees.2 In this requested report, we address the following questions:(!) what are the characteristics of institutions eligible to receive grants under Titles ill and V, including the characteristics of students served; (2) what challenges do grantees face, and how have they spent Title III and V funds to address these challenges; and (3) to what extent does the Department of Education monitor the financial and programmatic performance of Title III and V grantees, and use this information to target its technical assistance? To describe the characteristics of postsecondary institutions eligible to receive grants under Titles III and V and the characteristics of their students, we analyzed the most recent data available from Education data systems. Specifically, we analyzed 2006 data from Education's Integrated Postsecondary Education Data System (IPEDS) to identify institutions eligible to receive Title ill and V grants and to describe both institutional and student characteristics. 3
tGAO, Lo1.v-Income and MinO'rity Serving JnstituUons: Depa:rt:ment of Education Could fmpmve lL<; Monito1ing and Ass1.stance, GA0-04-961 (Washtngton, D.C. : Sept. 21, 2004) and GAO, Low-income and M-in01ity Se1ving InstUutions: Education Has Taken Steps to Improve Monitoring and Assistance but, Further Progress Is Needed, GA0-07-926T (Washington, D.C.: June 4, 2007). srPEDS is a system of surveys destgned to collect data from all primary p roviders of postsecondary education on tnstitution-level information such as enrollments, p rogram completions, faculty, staff, fmances, and academic libraries. Data are collected annually from approximately 9,600 postsecondary institutions, including over 6,000 institutions eligible for the federal student aid p rograms.
Page 2
We also analyzed data from Education's 2004 National Postsecondary Student Aid Study (NPSAS) to provide additional insight into student characteristics. 1 Because NPSAS data are based on a representative sample of students enrolled in postsecondary education, it does not include the universe of in~'titutions as reported in !PEDS. As a result, it is not possible to discuss the NPSAS data in terms of eligible and ineligible institutions, as can be done with !PEDS data. Instead, when discussing NPSAS data, we refer to minority serving and non-minority serving institutions. While only Historically Black Colleges and Universities, Hispanic-serving Institutions, and Tribal Colleges are classified as minority serving institutions for NPSAS, these data are the most complete source of information on the characteristics of students attending minority serving institutions. We determined that !PEDS and NPSAS data are sufficiently reliable for the purposes of this report by testing it for accuracy and completeness, reviewing documentation about systems used to produce the data, and interviewing agency officials. We also conducted a review of the literature to gain a better understanding of the characteristics of minority serving institutions and the students they serve. To describe the challenges that grantees face and how they used grant funds to address these challenges, we reviewed grant applications and annual performance reports. Specifically, we conducted a content analysis of grant applications using a representative sample of 78 of the 511 fiscal year 2006 grantees, allowing us to generalize our findings to the entire population of grantees with a 95 percent degree of confidence. Additionally, we analyzed data from annual performance reports detailing expenditures of fiscal year 2006 grant funds-the most recent data available-for 503 of 511 fiscal year 2006 grantees that submitted these data electronically. 5 We also interviewed officials from 27 grantee institutions-including 11 conducted on-site-about the challenges they face and their experiences with the grant programs. We selected this nonprobability sample based on program participation, size of grant, and geographic location. To determine how Education monitors and provides technical assistance, we conducted interviews with officials at Education and reviewed grant program requirements, policies, procedure manuals, and monitoring plans. Finally,
NPSAS is a comp rehensive nationwide study designed to determine how students and their families pay fo r p ostsecondary education and to describe some demographic and other characteristics of those enrolled. The surveys use a nationally representative samp le of postsecondary education institutions and students within those institutions.
~ ight grantees submitted paper filings of these reports and these were not included in our analysis.
Page 3
we conducted additional site visits at seven grantee institutions to evaluate their fiscal policies and internal control practices, and determine whether program funds were properly used. These institutions were selected using a nonprobability sample based on factors such as program participation, size of grant, and geographic location. A more detailed explanation of our methodology can be found in appendix I. We conducted this performance audit from September 2007 through June 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit ob,jectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit ob,jectives. Title III and Title V of the Higher Education Act (HEA) authorize federal funding for postsecondary institutions that provide large proportions of low-income and minority students access to higher education. In 1965, Congress authorized grant programs6 to strengthen and support developing postsecondary institutions, leading to today's Strengthening Institutions Program. This program provides discretionary grant'5 to help institutions that serve large numbers of low-income students improve their academic quality, institutional management, and fiscal stability. 7 In subsequent reauthorizations, Congress established several programs to target grant funding to certain institutions that serve large numbers of minority students. Specifically, in 1986, a program was created to designate formula grant funding for historically black colleges and universities.8 In 1998, further amendments to the HEA created new grant programs specifically for tribally controlled colleges and universities, Alaska Native and Native Hawaiian-serving institutions, and Hispanicserving institutions. 0 Prior to these amendments, these institutions
Background
6
7
J-Iigher Education Act of 1965, Pub. L. No. 89-329, TitJe m, 79 Stat. 1219, 1229.
See 20 U.S.C. 1057-1059g. While not specified in the Act, Education's guidance also allows grantees to use grant funds to improve student support services.
"see Higher Education Act of 1986, Pub. L. No. 99-498, Title![[, 100 Stat. 1294. For Education's Strengthening nstitutions Program regulations, see 34 C.F.R. pt. 607.
9
See Higher Education Act. of 1998, Pub. L. No. 105-244, Title m, 112 Stat. 1581, 1636, 1639, 1641 , 1765.
Page 4
competed for funding under the Strengthening Institutions program. Collectively, these institutions are referred to as minority serving institutions. Institutions that participate in the Historically Black Colleges and Universities and Tribal programs receive mandatory grants based on two distinct formulas. 10 Institutions that participate in all other programs receive grants based on a ranking of applications by a competitive peerreview evaluation. Such institutions may apply individually or as part of a cooperative partnership for development grants to develop capacity in specified areas on selected campuses. Institutions that receive cooperative grants partner and share resources with another postsecondary institution-which may or may not be eligible for Title III or V funding- to achieve common goals without costly duplication of effort. In addition to 5-year individual development and cooperative grants, Title III, Part A and Title V institutions may apply for a 1-year grant for the purposes of planning an application for a 5-year grant, 1-year construction grant, or 1year renovation grant. Table 1 briefly describes the characteristics and eligibility criteria of Title III and V programs.
~e Historically Black Colleges and Universities program formula considers, in part, the amount of funds appropriated, the number of Pell Grant recipients, the number of graduates, and the number of students who enroll in graduate school in degree p rograms in which African Americans are underrepresented within 5 years of earning an undergraduate degree. Institutions that participate in the Title Ill, Part A, Tribally Controlled Colleges and Universities program receive grants based on a formula which also allows the Secretary of Education to reserve 30 percent of appropriations for 1-year construction, maintenance, or renovation p rojects for grants not less than $1 million beginning in fiscal year 2009. The majority of other funds available are to be distributed based on Native American student head count.
Page 5
Table 1: Characteristics and Eligibility Criteria of Title Ill and V Grant Programs Wait-out period 2 years
Grant program Title Ill, Part A, Strengthening Institutions
Type of grant Competitive
Duration Up to 5 years
Eligibility criteria An institution of higher education which (1) has an enrollment of needy students- at least 50 percent of students receive need-based federal financial assistance or its percentage of students receiving Pell Grants exceeds that of comparable institutions; (2) has average educational and general expenditures that are low compared to other institutions that offer similar instruction; (3) is accredited or making reasonable progress toward accreditation; and (4) is legally authorized by the state in which it is located to be a junior college or award bachelor's degrees. Must meet the same eligibility criteria as the Strengthening Institutions program. Additionally, must meet the statutory definition of "tribally controlled college or university." Must meet the same eligibility criteria as the Strengthening Institutions program. Additionally, must have an undergraduate enroll ment of at least 20 percent Alaska Native or at least 10 percent Native Hawaiian, as applicable. Any college or university established prior to 1964 and whose principal mission was, and is, the education of African Americans, and is accredited or is making reasonable progress toward accreditation. Must meet the same eligibility criteria as the Strengthening Institutions program. Additionally, must have an undergraduate enrollment of full-time equivalent students that is at least 25 percent Hispanic, of which no less than 50 percent are low-income individuals. Institutions receiving grant funds through Title V may not simultaneously receive funds through Title Ill , Parts A or
Title Ill, Part A, Tribal Formula Colleges noncompetitiveb
Up to 5 years
None
Title Ill, Part A, Alaska Native and Native Hawaiian
Competitive
Up to 5 years
None
Title Ill , Part 8, Historically Black Colleges and Universities Title V, Part A, Hispanic-Serving Institutions
Formula noncompetitive
Up to 5 years
None
Competitive
Up to 5 years
None
B.
Sources: Higher Education Act of 1965, as amended, and Department of Education regulations.
The minimum number of years institutions receiving an individual development grant must wait before they are eligible to receive another grant under the same program. "The Tribal College program awarded the first formula grants in 2009.
From fiscal year 1999 to fiscal year 2008, total appropriations for these programs increased from $230 million to $667 million. In fiscal year 2008, the range of new annual institutional awards was $172,560 for a 1-year planning grant to $3 million for an individual development grant (see table
2).
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Table 2: Title Ill and V Funding, Fiscal Years 1999 and 2008 Dollars in millions Funding Program Title Ill, Part A, Strengthening Institutions Title Ill , Part A, Tribal Colleges Title Ill , Part A, Alaska Native/Native Hawaiian Institutions Title Ill, Part 8, Historically Black Colleges and Universities Title V, Part A, Hispanic Serving Institutions Total 1999 2008
$60 3 3 136 28
$230
$78 53 20 323 193

$667
Source: Department of Education, Budget of the Unfted Slates Government- Appendix. Fiscal Year 2001, at 362, Fisca l Year 2010, at 372-73.
The HEA outlines broad goals for Title lli and V programs to strengthen participating institutions but provides institutions flexibility in deciding what approaches will best meet their needs. An institution can use the grants to focus on one or more activities to address the challenges articulated in its comprehensive development plan, which is required as part of the grant application and must include the institution's strategy for achieving growth and self-sufficiency. Under Education's program guidance, institutions are allowed to address challenges in four broad focus areas: academic quality, student support services, institutional management, and fiscal stability. More specifically, funds can be used for activities such as supporting faculty development; purchasing library books, periodicals, and other educational materials; hiring tutors or counselors for students; improving educational facilities; or building endowments. Although each Title Ill and V program allows funds to be used in the same broad areas, there are variations in the rules for allowable activities across each of the Title Ill and V programs (see table 3).
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Table 3: Comparison of All Title Ill and V Allowable Activities by Program Program Historically Black College or University Hispanic Serving Institution
Allowable activity Acquisition of scientific or laboratory equipment Construction or improvement of instructional facilities, including the integration of computer technology into instructional facilities Faculty exchange and development for attaining advanced degrees Development and improvement of academic programs Purchase of educational materials Tutoring, counseling, and other services to improve academic success Management of funds and administration Joint use of facilities Establishment or improvement of development office Establishment or improvement of an endowment Creation or improvement of facilities for distance learning capabilities Academic instruction in disciplines for underrepresented groups Establishment or enhancement of a teacher education program Increase the number of underrepresented graduate or professional students served through expanded courses and institutional resources Establishing community outreach programs that encourage elementary and secondary school students to develop the academic skills and interest to pursue postsecondary education Other activities approved by the Secretary of Education
Strengthening Institutions
Tribal
Alaska Native/ Native Hawaiian
Source: GAO analysis of the Higher Education Acl
Title III and V programs are administered by the Institutional Development and Undergraduate Education Service (IDUES) within Education's Office of Postsecondary Education (OPE). In addition to the Title III and V programs we examine in this report, IDUES administers the Strengthening
Page 8
Historically Black Graduate Institutions, Minority Science and Engineering Improvement, and the Robert C. Byrd Honors Scholarships programs. Additionally, in 2007, IDUES assumed responsibility for several new grant programs for other categories of minority serving institutions, including Native American-serving Nontribal Institutions and Asian American and Native American Pacific Islander-serving Institutions. 11 IDUES currently has 32 program staff members to administer more than 1,000 grants across its portfolio. The Comptroller General's Domestic Working Group highlights areas of opportunity and promising practices in grants management-focused both on ensuring grant funds are spent properly and on achieving their desired results 12 (see table 4). Effective grants management calls for establishing adequate internal control systems, including efficient and effective information systems, training, policies, and oversight procedures, to ensure grant funds are properly used and achieve intended results.
Table 4: Summary of Opportunities for Improvement in Grants Management Areas of opportunity
Internal control systems
Promising practice issue areas

Preparing policies and procedures before issuing grants Consolidating information systems to assist in managing grants Providing grant management training to staff and grantees Coordinating programs with similar goals and purposes Assessing applicant capability to account for funds Competing grants to facilitate accountability Preparing work plans to provide framework for grant accountability Including clear terms and conditions in grant award documents
Preaward process
These p rograms were first authorized in the College Cost Reduction and Access Act ( Pub. L. No. 11 0-84) p rior to inclusion in the Higher Education Opport unity Act (Pub. L. No. 11 03 15).
12
11
Domestic Working Group, Grant Accountability Proj ect, Gv.ide to ()pJ.?o?tunities for
lmpn>Ving Grant. Accountability (October 2005).
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Areas of opportunity
Managing performance
Promising practice issue areas

Monitoring the financial status of grants Ensuring results-through-performance monitoring Using audits to provide valuable information about grantees Monitoring subrecipients as a critical element of grant success Providing evidence of program success Identifying ways to improve program performance
Assessing and using results

Source: Oo'"""'itic Working Group.
Internal controls provide federal managers with reasonable assurance that their program is (1) achieving its primary objectives of effective and efficient operations, reliable fmancial reporting, and compliance with applicable laws and regulations; (2) safeguarding assets; and (3) preventing fraud, waste, abuse, and mismanagement. Like other federal departments and agencies, Education is expected to implement internal control systems consistent with the requirements established by the Office of Management and Budget and GAO. 13 Entities that receive federal funds, such as institutions of higher education, are also expected to implement effective internal control systems consistent with federal requirements.
\Jnder 31 U.S. C. 3512 (c), (d), conunonly known as the Federal Managers' Financial Integrity Act of 1982, agency management is responsible for establishing, maintaining, and assessing internal control to provide reasonable assurance that it is meeting the Act's broad internal control objectives consistent with t,he standards GAO prescribes and the evaluation guidance Office of Management and Budget (OMB) issues. For more information on internal control standards and guidance, see GAO, Standa:rds jo1 Inter nal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999); and OMB, Management's R esponsil>ility for Internal Control, Circ ular No. A-123 (Washington, D.C.: Dec. 21, 2004).
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Eligible Institutions Had Fewer Resources to Serve Proportionately More Students at Academic Risk
Lower Revenues May Make It Difficult for Eligible Institutions to Meet Needs of Current and Future Students
We estimate that 28 percent of 2-year and 4-year public and private not-forprofit postsecondary institutions are eligible to participate in the Title III and V programs, and together these institutions enrolled just over 4 million students. About one-half of all eligible institutions are 2-year colleges, such as community colleges, compared to 31 percent of 2-year institutions that are ineligible to participate in the programs (see table 5). The substantial representation of 2-year public institutions that are eligible to participate in the programs appears to amplify some of the overall differences in both institutional and student characteristics between eligible and ineligible populations discussed throughout this section.
Table 5: Title Ill and V Eligibility Status of Postsecondary Institutions 2-year private, not-for-profit Number Percent 4-year private, not-for-profit Number Percent
2-year public Number Percent Eligible Ineligible
4-year public Number Percent
Total Number Percent 878. 2,289 3,167 28 72 100
400 654 1,054
46 29 33
47 66 113
5 3 4
154 489 643
18 21 20
277 1,080 1,357
32 47 43
All
institutions
Source: GAO analysis of 2006 1 PEDS data.
postsecondary institutions with branch campuses can decide whether to report I PEDS data for the entire system or individually for each branch campus. Totals do not fully account for branch campuses that are otherwise eligible but did not report as an individual campus into I PEDS.
Overall, eligible institutions had access to fewer revenue sources, including endowment holdings and tuition and fees, to serve their students. Endowments provide additional funds for activities, such as providing scholarships and constructing facilities, which would be unaffordable if institutions relied solely on tuition, private philanthropic gifts, or government funding. The median per-student endowment holdings at eligible institutions were lower than the holdings of their ineligible peers. For example, the median per-student endowment for eligible 4-year
Page 11
private, not-for-profit institutions was nearly three times less per student ($7,297) than the median for ineligible 4-year private, not-for-profit institutions ($20,391). Another ma,jor source of revenue for institutions is the tuition and fees charged to students. For all eligible institutions, the median tuition and fees reported were lower than what was reported at ineligible institutions. Median tuition and fees at eligible institutions were 12 percent less than at ineligible institutions for 2-year private, not-forprofit institutions, and 38 percent less at 4-year private, not-for-profit institutions. Lower revenues may limit an institution's ability to undertake activities that build institutional capacity, such as improving campus facilities and enhancing academic offerings. In 2006, per-student spending on instructional equipment at eligible institutions was almost 47 percent less than spending at ineligible institutions. Eligible institutions also spent almost 60 percent less per student on expenses related to day-to-day operations, such as fmancial aid and registration, and about two times less per student on certain services, such as providing technology in classrooms and activities related to student life and development. While eligible institutions had lower revenues and per-student spending, they more often had admissions policies associated with the enrollment of students who need greater academic support. Research has shown that students attending institutions that accept any student who applies for admission-lrnown as open-enrollment institutions-are less likely to be prepared to successfully undertake college-level coursework. About 60 percent of eligible institutions had open enrollment, compared to 35 percent of ineligible institutions. Almost all2-year public institutionsboth eligible and ineligible-reported open enrollment policies, which is consis-tent with the mission most community colleges have to work with students of all ability levels. Open-enrollment policies were much less common at eligible 4-year institutions. Less than 30 percent of these schools had open enrollment, but it was still more prevalent than at ineligible 4-year institutions, of which 10 percent or less had such policies. Limited revenues may also impact the ability of eligible institutions to meet the demand of future students based on population pro.jections. Specifically, about two-thirds of eligible institutions are located in southern and western states, many of which are projected to experience an increase in the number of college-age students in coming years (see fig. 1). Studies also project long-term growth in the number of minority and low-income high school graduates in these two regions beginning in 2015 and extending through 2022, driven in part by accelerated growth in the
Page 12
Hispanic population. 14 Given the importance many students enrolled at minority-seiVing institutions place on geographic proximity to home when choosing a college, eligible institutions in high-growth states could experience proportionately more growth in numbers of students and changes in the demographics of the college-age population may result in an expansion in the number of eligible institutions. For example, a 2008 Education study found that in some states including Texas, Arkansas, and North Carolina, over 80 percent of entering freshmen are state residents.15 Additionally, Education's 2004 NPSAS survey found that 80 percent of students enrolled at Hispanic-serving institutions and almost 73 percent of students enrolled at Historically Black Colleges and Universities stated that geographic location was a key reason for selecting their postsecondary institution.
Western Interstate Commission for Higher Education, Knocking al lhe College Dom, Projections of High School Oradua,tes by State and RaceiEI.Imicity (Boulder, Colo., 2008).
11 '
'M. Planty, et. al., "Mobility of College Students" (Indicator 10, Supplemental Table 10-2), The Condition of Education 2008, NCES 2008-031, a report for the U.S. Department of Education, National Center for Education Statistics, lnstitute of Education Sciences (Washington, D.C., 2008).
1
P age 13
GA0-09-309 Low-Income and Minorit y Serving Institu tions
Figure 1: Location of Institutions Cur rently El igible for Title Ill and V Funding and Projected Change in College-Age Minority Population by 2015
NORTHEAST
N.H.
(2)
Mass. (14)
R.I.
(0)
Conn. (4)
N.J.
Kans.
(11)
(11)
Del. Md. Okla. D.C. (1)
(8)
(3)
(17)
Alaska (4)
0
Hawaii
SOUTH
(3)
Outlying Pacific territories and commonwealths (6) Northern Mariana Islands (1), Guam (2), Marshall Islands (1), Federated States of Micronesia (1), American Samoa (1), Palau (information not available)
0 L.......-P' Puerto Rico (48)
.r--:, --. Virgin

~
Islands (1)
( ) =Number of Title Ill and V eligible institutions in states, territories, and commonwealths Projected percentage change in total college-age minority population by 2015
c=J c=J c=J c::::J
Less than 0 percent (negative projected grO\Nih) 0.01 to 5 percent 5.01 to 10 percent 10.01 to 20 percent
lill]illTil Greater than 20 percent

Source: GAO analysis; Map Resources (map).
Note: Demographic projection data were not available for U.S. territorial and commonwealth holdings.
Page 14
Eligible Institutions Enrolled More Minority and Low-Income Students Than Ineligible Institutions
On average, eligible institutions enrolled more minority students than ineligible institutions. In 2006, about one-half of all students emolled at eligible institutions were minority, compared to about one-quarter at ineligible institutions (see fig. 2). While eligible ins-titutions represent 28 percent of all postsecondary ins'titutions, they enrolled over 43 percent of all minority students. Eligible institutions were largely comprised of the minority group associated with their program eligibility. For example, at Historically Black Colleges and Universities the predominant student population was African American, and at Hispanic-serving institutions, it was Hispanic. Almost 60 percent of all students enrolled at eligible and ineligible institutions were women.
Page 15
Figure 2: Race and Ethnicity, by Eligibility Status, 2006
Racial/ethnic composition of eligible institutions
Racial/ethnic composition of ineligible institutions
Non-Hispanic White
Non-Hispanic White African American Hispanic
African American
1%
Native American Asian Other
Hispanic
2%
Nonresident
1%
Native American Asian Other
2%
Nonresident
[=::J Percentage of white students enrolled [=::J Percentage of minority students enrolled [=::J Percentage of students with unknown race/ethnicity enrolled
c=J Percentage of nonresidents enrolled

Source GAO analysis of Department of Education 2006 !PEDS data.
Note: The sum of individual race/ethnicity percentages may not equal total minority enrollment due to rounding.
Eligible institutions also served more low-income students, a central requirement for participation in Title III and V programs. Specifically, 44 percent of students enrolled at eligible institutions received Pell grants
Page 16
compared to 26 percent at ineligible institutions. 16 In addition, eligible institutions reported that half of all first-time, full-time students enrolled received some form of federal student aid, compared to 25 percent of students enrolled at ineligible institutions. 17 Students at eligible institutions also may have characteristics that put them at academic risk, including attending part-time and delaying their enrollment following high school. In 2006, 47 percent of students at eligible institutions attended part-time compared with 34 percent of students at ineligible institutions. This difference is largely driven by the substantial proportion of 2-year public institutions in the eligible population. At both eligible and ineligible 2-year public institutions, more than 60 percent of students attended part-time. In particular, about twothirds of students attending both eligible and ineligible 2-year public, Hispanic-serving institutions attended part-time. At 4-year institutions, rates of part-time attendance were much lower. However, eligible institutions enrolled more part-time students than ineligible institutions: 29 percent of students at eligible 4-year public institutions attended part-time, compared to 19 percent at ineligible 4-year public institutions. One possible explanation for the difference in part-time enrollment may be related to the extent to which a student works while enrolled. According to Education's 2004 NPSAS survey, almost 40 percent of students attending minority serving institutions worked 35 hours or more per week and considered themselves as employees enrolled in college instead of students who work, when compared to students attending non-minority serving institutions. A greater percentage of &i.udents at eligible institutions delayed enrollment in college than students at ineligible in~i.itutions. Research has shown, however, that students who delay enrollment are at greater risk of not completing a po&'tsecondary credential, as compared to their peers who enroll soon after completing high school. At 4-year private, not-for profit
1 6peu Grants are grants to low- and middle-income undergraduate students who have federally defined fmancial need and who are enrolled in a degree or certificate program. In general, a student's PeU Grant award is determined by s ubtracting a student and family's expected fam ily contribution from either the maximum allowable Pell Grant award, $5,350 for the 2009-2010 school year, or the cost of attendance, whichever is less.
17
Grants provided by federal agencies such as Education, include Title IV Pell Grants and Supplemental Educational Opportunity Grants, as well as need-based and merit-based educational assistance .funds and training vouchers provided from other federal agencies and/or federally-sponsored educational benefits programs.
Page 17
institutions, for example, 34 percent of students at eligible institutions compar ed to 21 percent at ineligible institutions enrolled in college for the first time when 25 or older. Rates at 2-year public colleges were similar with more than 40 percent of students at eligible and ineligible institutions enrolling for the first time at age 25 or older. One exception to this trend among eligible institutions was students at Historically Black Colleges and Universities, where almost three-quarters of the students enroll right after high s chool. Eligible institutions had lower retention rates, on average, than ineligible institutions. 18 For example, in 2006, eligible institutions retained 60 percent of their full-time students compared to 69 percent at other institutions. Research has shown that a number of factors, including attending parttime, working full-time, and delaying enrollment in college for more than a year after high-school, put students at a greater risk of leaving postsecondary education without a credential. 10 The retention rate for 2year public institutions was lower, but similar, at eligible and ineligible institutions. Graduation rates were lower as well. 20 Specifically, 39 percent of students at eligible 4-year institutions received a bachelor's degree within 6 years of enrolling, compared to 60 percent of students at ineligible 4-year institutions. According to a recent Education study, graduation rates may decline as the percentage of an institution's low-income student population increases.21 This may be for a variety of reasons, including a student's academic preparation, working full-time while enrolled, parents' educational attainment, as well as an institution's selectivity in admissions. However, the report also found that several highly selective minority serving institutions enrolled a significant number of low-income students
For 4-year institutions, retention rate is defined as the percentage of lirst-time degreeseeking undergraduates from the p revious fall who are enrolled the following fall semester. For all othe r institutions, this is the pe rcentage of tirst-time degree or cert ificate-seeking students from the prior faU who either re-enrolled or successfully completed their program by the following fall.
~. S. Department of Education, College Pe1"si,stence on the Rise? Changes in 5-year Deg1ee CO?nplet:ion and Postsecondary Persisten ce Rates between 1994 and2000 (Washington, D.C., 2004).
1
18
20
Graduation and completion rates a re measured by the p roportion of students who earn a degree within 150 percent of the expected time- 6 years for a bachelor's degree and 3 years for an associate degree. The formula counts only first-time, full-time students. U.S. Department of Education, Placing College Graduation Rates in Context: How 4Year College Graduation Rates Vary With Selectivity and the Size of Low-Income EnTollment (Washington, D.C., 2006).
21
Page 18
and were high performers with respect to graduation. Another possible explanation for the difference in graduation rates may also be tied to institutional expenditures. One study reported that those institutions with lower expenditures on student support services had lower graduation rates. 22 Graduation rates for both eligible and ineligible 2-year public institutions were similar; however, the relevance of graduation rates at 2year institutions has been widely debated since students may enroll in these institutions for a variety of reasons other than completing a degree or certificate program. See appendix II for more information on institutional and student characteristics. In their grant applications, Title III and V grantees reported challenges across all four grant focus areas: academic quality, student support, institutional management, and fiscal stability. According to data collected through Education's annual performance reports, fiscal year 2006 grantees reported spending almost $385 million in total grant funds on activities across all four focus areas, with over three-quarters of the funds expended in the areas of academic quality and student support services (see fig. 3). See appendix III for additional information on Title ill and V expenditures of grant funds for fiscal years 2002 to 2006.
Institutions Faced Challenges across the Grant Programs' Four Focus Areas but Spent Most of Their Funds in Two Areas, Academic Quality and Student Support
The Pell lnstitute, Demogr-aphy Is Not Destiny: Increasing Uw G-raduation Rates of LowIncome College Students at La1ye Public Unive?'Sities ( Washington, D.C., 2007).
22
Page 19
Figure 3: Fiscal Year 2006 Grantee Expenditures by Focus Area

Percentage of total dollars, by focus area Percentage of grantees undertaking at least one activity, by focus area
~--------------~1 27
~--------------~
28
166
~----------------------------------------~
L-----------------------------------~ 0 20 40
157
60
80
c=J c=J c=J
Fiscal stability lnsmutional management Student support Academic quality
CJ
So urce: GAO analysis of Department of Education fr.;cal year 2006 annual performance report data.
Academic Quality
Based on our review of a representative sample of grant applications, we estimate that all grantees reported challenges in improving academic quality, such as recruiting and training highly qualified faculty, using the latest technology in the classroom for instruction, improving academic space, and tailoring courses to student needs. Fifty-seven percent of fiscal year 2006 grantees dedicated at least one activity to improving academic quality, and expenditures in this focus area represented about 43 percent of total grant funds spent. Specific examples of how institutions used grant funds to address academic quality challenges follow: A 2-year Alaska Native institution seeking to provide access to students in seven remote villages--covering roughly 88,000 square miles--began offering classes online. However because access to computers and highspeed Internet in the villages was costly, unreliable, or nonexistent, most lesson plans limited the use of multimedia. By leveraging its Title ill grant with funds from the Department of Housing and Urban Development's Assisting Communities program, the school obtained wireless capability and now offers 8 to 12 online courses each semester.
Page 20
A 4-year Native Hawaiian institution said that it has struggled to provide science instruction to students due to outdated laboratory facilities. These facilities were reportedly so antiquated that the television show "Lost" used the facilities to replicate a 1950s laboratory. The institution leveraged $2.3 million in Title III grant funds to renovate 12,000 square feet of un-airconditioned, termite-damaged laboratory space that did not comply with federal safety and health regulations (see fig. 4).
Figure 4: Before-and-After Photos of Science Facilities on Native Hawaiian Campus
Source: C haminade University. Honolulu, Hawaii .
Student Support Services
Nearly all grantees reported difficulty providing student support services, including remedial courses, tutoring, and academic counseling. Many of these grantees reported that the unique needs of their students underscore the importance of providing student support services. Over three-quarters of grantees cited difficulties associated with retaining and graduating their students, which most atttibuted to incoming students arriving underprepared for college-level course work Two-thirds of flScal year 2006 grantees reported dedicating at least one activity to improving student support services, and expenditures in this area represented 34 percent of total Title ill and V grant funds spent. Most of these
Page 21
expenditures were for tutoring and counseling. Specific examples of how institutions used grant funds to address student support challenges follow: A 2-year strengthening institution in Illinois reported in 2005 that 75 percent of its first-year students were at risk of leaving college without a degree because the institution could not provide adequate academic support and advisement. To reduce the likelihood that students would fail or drop out, the school reported spending $360,000 in grant funds to provide training to 175 faculty members on the use of multimedia and technology, active learning, and strategies to support various learning styles. Additionally, all 46 of its academic advisors were provided training in techniques for advising students with different learning styles. A 2-year Hispanic-serving institution in Texas reported using almost $350,000 in fiscal year 2006 grant funds to conduct an outreach program at area high schools for students at risk of dropping out without earning a diploma, as well as to provide bilingual financial aid services to better serve its students. By providing support services to students while they are in high school, the college aims to improve high school graduation and college enrollment rates in Dallas County high schools where 63 percent of Hispanic and 52 percent of African American students left high school in 2001 without a diploma. The outreach program provides students with career exploration courses in math, science, and technology, as well as peer mentors who are enrolled in 4-year colleges or universities. College officials credit the 5-year Title V grant as contributing to a 12 percent increase in students pursuing postsecondary education and a 45 percent increase in the number of associate degrees awarded between 2004 and 2007. A 2-year tribal college in South Dakota reported it relied on faculty and staff to provide additional tutoring and counseling support to at-risk students because it lacked resources to fully address student needs. Because almost all of its students come from low-income families, or are the first in their families to attend college, additional support could only be provided for one-third of the students in need. According to school officials, in fiscal year 2006, the school spent nearly $32,000 of its Title III grant to hire additional staff and peer mentors to provide tutoring and counseling services for 120 additional students, an increase of 169 percent.
Institutional Management
Nearly all grantees reported institutional management challenges, including recruiting and retaining qualified staff, updating technology on campuses, addressing administrative challenges such as financial aid or student registration, undertaking strategic planning, or tracking student performance. Twenty-eight percent of all fiscal year 2006 grantees funded
Page 22
at least one activity in this area, and expenditures on institutional management represented about 17 percent of total grant funds spent. Specific examples of how institutions used grant funds to address institutional management challenges follow: A 2-year Alaska Native-serving institution reported significant staffing shortages due to its isolated location, and its staff had to perform a variety of jobs. For example, the business office director also occasionally performs building and grounds maintenance tasks, such as shoveling sidewalks and handling computer problems. Additionally, a staff member assigned to manage the bookstore was also responsible for providing financial aid advice. While it is not possible to address all challenges with Title III funds, the grant was a critical first step in establishing four fulltime financial aid positions that have since become part of the college's budget. A 4-year historically black university in North Carolina that ranks high nationally in the production of computer science graduates reported it has difficulty maintaining its ongoing investment in its technology infrastructure. After spending $1.2 million of Title III funds in 2000, the college used an additional $834,000 from subsequent Title III grants to upgrade telecommunications, implement Web-enabled administrative software, and increase classes with wireless capabilities by 34 percent. A 4-year Hispanic-serving institution in Puerto Rico said its ability to expand is limited by its location in an historic building that cannot be altered, hindering service to the island's growing college-age population. While delays in obtaining construction permits have limited the college's progress, the college is completing renovations for a new academic building. It has spent $740,000 in grant funds to renovate its library, increasing the space dedicated to this building by 32,000 square feet. A tribal college in South Dakota reported using more than $85,000 in grant funds to develop a comprehensive training program for its grants management staff to address internal control weaknesses identified by federal auditors. According to school officials, auditors reported that prior practices resulted in $2.3 million in federal grants at risk of fraud, waste, and abuse. In 2006, the college used grant funds to create a Human Resources Office, increase its administrative staff from four to six and provide them with training, and post it." internal control policies and practices online. Officials reported that a federal agency that rescinded a $50,000 grant award in 2005 later returned the grant upon completion of these activities.
Page 23
A 4-year historically black college in Tennessee reported spending $101,795 in Title III funds to strengthen institutional management by developing an operating manual and providing training for members of its Board of Directors. A school official told us that most board members do not have professional experience related to higher education administration, and their staggered 3-year terms result in new members joining the board periodically.
Fiscal Stability
We estimate that nearly all grantees reported fiscal stability challenges, including decreases in state and local government funding, an overreliance on tuition-based revenue, and lack of donations from private sources. Twenty-seven percent of fiScal year 2006 grantees funded at least one activity in this focus area, and fiScal stability expenditures represented 6 percent of all grant funds spent. Specific examples of how institutions used grant funds to address fiScal stability challenges follow: A 2-year strengthening institution in Iowa cited declining ~;tate funding as a challenge, reporting that in 2002, it fell below other Iowa community colleges in per-credit hour funding from the state and was forced to raise tuition and fees. Officials said many of its students are low-income and cannot pay more. As a result, the college ranks last among Iowa community colleges in general fund balance, threatening its long-term viability. To address these challenges, the college established three new academic programs-dental hygiene, biotechnology, and advanced manufacturing-that are in high demand in the surrounding community. The dental hygiene and biotechnology programs are anticipated to provide the college with an additional $200,000 in revenues annually and $1 million in federal and state appropriations. 23 Officials at a tribal college in South Dakota reported that despite having a large, active donor list of 40,000, the college lacked staff with the requisite skills to request major gifts from these donors. The college reported using $170,000 in Title III grant funds to improve operations at its development office by acquiring software to track such information as donor giving history and by centralizing its direct mail operations for requesting gifts. Additionally, nearly 20 percent of its $2.5 million grant was used to increase its existing endowment of $13 million.
23
At the time of publication, the institution did not have data available for the advanced manufacturing technology program.
Page 24
Long-standing Deficiencies in Grant Monitoring and Technical Assistance Limit Education's Ability to Ensure That Funds Are Used Properly and Grantees Are Supported
Education Has Made Limited Progress in Improving Its Monitoring, and Still Lacks a Systematic Approach to Coordinate Its Efforts
Five times since 1996, GAO and Education's Inspector General have recommended that Education implement a systematic approach to monitoring to better assess the fiscal and programmatic performance of Title III and V grantees. Such an approach would include implementing formal monitoring and technical assistance plans based on risk models and developing written procedures for providing technical assistance. When we previously reported on Education's management of the programs in 2004, the department had begun several initiatives to improve monitoring, including the development of annual monitoring plans to identify potential risk with grants and guide the work of program staff. However, we found that the lack of progress it made in implementing these initiatives had resulted in uneven monitoring of Title III and V grantees. 2 1 Accordingly, we recommended that Education take steps to ensure its monitoring plans were carried out and targeted toward at-risk grantees by completing its electronic monitoring system and training programs. While Education has taken some steps to better target its monitoring plans in response to our recommendation, many of its initiatives have yet to be fully realized (see table 6).
21 ' GA0-04-961.
Page 25
Table 6: A Comparison of the Status of Education's Monitoring Initiatives in 2004 and 2008 Monitoring initiative
Implement electronic monitoring system
2004 status
Education implemented electronic monitoring of Title Ill and V grantees at the end of2004.
2008 status
Redesigned in fiscal year 2007 because the original system did not achieve its intended goal of presenting a comprehensive view of risk based on an institution's portfolio of higher education grant programs. The new system, while fully operational, will continue to be enhanced through fiscal year 2010. OPE established preliminary risk-based criteria for all its grant programs in fiscal year 2008. Criteria have been used to create a monitoring index of schools on which to focus additional monitoring, but only a small portion of these criteria are being utilized to set priorities. Once the requirement to submit these plans to Education's OPE was rescinded in 2006, the program office ceased to develop monitoring plans.
Establish risk-based criteria
Education's OPE developed risk-based criteria in fiscal year 2003, but used these criteria inconsistently within the program office.
Develop monitoring plans Following a fiscal year 2002 effort to place greater emphasis on performance monitoring for all grantees, annual monitoring plans were developed to guide monitoring and technical assistance. Design comprehensive approach to site visits While program staff were required to complete at least two site visits annually, the majority of staff did not fulfill the requirement. Site visits that were conducted lacked a standard approach and varied in quality. Education developed a corrective action plan to provide additional courses over a 3year period to address training needs of its staff.
Source: GAO analysis.
The requirement for program officers to complete a minimum number of site visits has been eliminated. Since 2004, few site visits have been completed, and most of those did not include financial monitoring to determine whether program funds were properly used. Education has developed courses to enhance monitoring, but most staff have not completed coursework and one key course has yet to be offered.
Develop training for enhanced monitoring
In 2007, the Office of Postsecondary Education (OPE) reestablished an office to oversee monitoring across all of its higher education grant programs. The program oversight staff is responsible for overseeing OPE monitoring policies, procedures, and standards, and training staff in these areas. The establishment of the oversight staff was designed to increase consistency in monitoring practices throughout more than 40 grant programs administered by OPE, including Title III and V programs, and to supplement the responsibilities of individual program offices with regard to monitoring and technical assistance.
Electronic Monitoring System
In 2007, Education redesigned its electronic monitoring system to provide several key enhancements lacking in the system that was originally introduced 4 years earlier. The original system was not designed to share key information across grant programs administered by OPE. The redesigned system brings together information about an institution's performance in managing its entire portfolio of higher education grants,
Page 26
increasing Education's ability to assess the risk of grantee noncompliance with program rules. Program officers can also enter updates about a grantee's performance in the system, based on routine interactions with the grantee. According to Education officials, this information can be used to reflect real-time information about institutional behavior. Because the system integrates fmancial and programmatic data, such as institutional drawdown of grant funds and annual performance reports, staff will have ready access to information needed to perform monitoring tasks. Given that each program officer is responsible for managing around 50 grants, electronic monitoring, if fully integrated into the oversight activities of program staff, has the potential to improve the quality and consistency of monitoring. Another feature of the system is a monitoring index, implemented in 2008, that determines an institution's need for heightened monitoring or technical assistance based on nine weighted criteria designed to assess risk related to an institution's ability to manage its grants (see fig. 5). For example, an institution that has lost accreditation (30 percent of the index) or has grants totaling more than $30 million (5 percent of the index) is automatically prioritized for heightened monitoring, which may involve site visits or other contacts with the school. Education has identified over 130 institutions across all higher education grant programs for heightened monitoring, of which 43 percent participate in the Title III and V programs. Education officials said they will review the criteria and make revisions, as necessary, to better assess risk.
Page 27
Figure 5: Monitoring Index Criteria Used to Assess Institutional Risks

Accreditation status Funds not completely expended during grant cycle Total number of higher education grants Total grant funds exceed $30 million (5%) Other Number of earmarks held (5%)
Independent audits with findings Past operating deficit Decline in enrollment by 25 percent
Source: GAO analysos of Department of Educatio n data.
Institutional matches required (5%)
Annual Monitoring Plans
While Education has made recent progress in automating its monitoring tools and developing risk-based criteria, it lacks a coordinated approach to guide its monitoring efforts. Specifically, Education officials told us they discontinued the development of annual monitoring and technical assistance plans for Title TII and V programs, one of the initiatives that we reported on in 2004. In 2002, Education directed each program within the agency to develop a monitoring plan to place greater emphasis on performance monitoring for all grantees. In addition to asking whether grantees were achieving results, program officials were also to consider what assistance Education could provide to help grantees accomplish program objectives and incorporate an increased departmental emphasis on compliance with the law into their planning. Education developed a plan for Title TII and V programs that called for staff to ( 1) conduct risk assessments, (2) perform a minimum number of site visits each year, and (3) follow up with grantees regarding their performance reports. However, in 2006, Education rescinded the requirement for each program office to submit annual monitoring plans because the practice did not achieve its intended purpose of better targeting its monitoring resources. Since then, OPE has not developed any plans to guide its monitoring activities for
Page 28
Title III and V programs, although such plans are in place for other OPE grant programs.
Site Visits
Since our 2004 report, site visits to Title III and V grantees, a critical component of an effective grants management program, have declined substantially. For example, Education conducted 26 site visits in fiscal year 2003, but only visited 22 grantees over the 4-year period of fiscal year 2005 through fiscal year 2008 (see table 7). We were unable to fully determine the nature or quality of these site visits because Education could not account for most of the reports required to document site visit findings. Additionally, since the issuance of our 2004 report, which found that about three-quarters of the program staff were not meeting the requirement to complete at least two site visits per year, Education has discontinued the two site visit requirement. Instead Education officials said they have changed the focus to improve the quality of monitoring by relying on the risk criteria to target grantees most in need of site visits to make the best use of the department's limited resources.
Table 7: Site Visits to Title Ill and V Grantees, Fiscal Years 2003 through 2008 Program Title Ill, Part A, Strengthening Institutions Title Ill , Part A, Alaska Native/Native Hawaiian Institutions Title Ill , Part A , Tribal Colleges Title Ill , Part 8 , Historically Black Colleges and Universities Title V, Part A , Hispanic Serving Institutions Total
Source: GAO analysis of Department o f Education data.
2003
2004
2005
2006
2007
2008
14
14
0
3
0
3
0 0
0 0 0
1
1
0 0
4
0
4
26
2
1
3
0
10
1
18
0
5
Note: As of April 2009, Education had completed six site visits for fiscal year 2009 to an equal number of Strengthening Institutions, Historically Black Colleges and Universities, and Hispanic Serving Institutions.
One former senior Education official told us that site visits had declined because the program office has limited staff and few have the requisite skills to conduct financial site visits. According to Education, the OPE office responsible for administering Title III and V grant programs cunently has 32 staff to monitor more than 1,000 grants across its assigned programs, compared to 2003 when it had 38 staff responsible for approximately 750 grants. To address concerns that program officers do not have the right skill mix to conduct comprehensive site visits, OPE's
Page 29
program oversight staff assumed responsibility for conducting site visits for Title III and V programs in 2008. However, because the office is responsible for conducting site visit." across more than 40 higher education grant programs, the number of Title III and V grantees it can visit will be limited. In fiscal year 2008, for example, five site visits that program oversight staff conducted were to Title III grant recipients. With the implementation of an electronic monitoring system and riskbased monitoring index, Education now has tools to enhance its ability to select grantees for site visits. However, officials said that aside from referrals from the Inspector General, the criteria they used in selecting schools for fiscal year 2008 and 2009 site visits was the total amount of higher education grants awarded (i.e., grantees receiving $30 million or more), which represents only 5 percent of the monitoring index ctiteria. In ftScal year 2008, this limited criteria resulted in a narrow subset of schools being visited, with four of the five site visits being made to Historically Black Colleges and Universities. Ideally, Education's risk-based approach would consider not only grant amounts, but also the full list of weighted criteria on its monitoring index, along with other factors such as grant program participation and institution type to ensure that risk is considered across each of the grant programs and a mix of schools are visited.
Staff Training
Education has made progress in developing grant monitoring courses to enhance the skills of Title III and V program staff, but skill gaps remain and limit the ability of program staff to fully carry out their monitoring and technical assistance responsibilities. Since our 2004 report, Education has developed courses on internal control and grants monitoring, but these courses have been attended by less than half of the program staff. For example, of 28 staff members only 2 have completed a new internal control course and 13 have completed a course on grants monitoring. Senior officials at Education we spoke to also identified critical areas where additional training is needed. Specifically, one official told us that the ability to conduct comprehensive reviews of grantees has been hindered because program staff have not had training on how to review the fmancial practices of grantees. A course on this topic was developed in 2007 but has yet to be offered. Another official said Education needs to provide training for program staff on how to incorporate the results of the external evaluations that grantees are required to complete into their reviews.
Page 30
Education Lacks Assurance That Grant Funds Are Used Appropriately
Education has not fully implemented its planned monitoring initiatives and lacks assurance that grantees appropriately manage federal funds, increasing the potential for fraud, waste, or abuse. During the course of this study, we reviewed financial and grant project records at seven institutions participating in Title III and V programs in fiscal year 2006. We identified $142,943 in questionable expenses at 4 of 7 institutions we visited25 (see table 8).
Table 8: Summary of Findings from Financial Site Visits Total dollars reviewed
$300,438 353,963 226,670 427, 180 175,388 108,977 299,846 6,441 105,1 17
Grantee
A
State Texas Puerto Rico Illinois Maryland Tennessee California North Dakota
Questionable grant expenses

$2,127 29,258
c
0
E
F
G
Total
$1,892,462
$142,943
Source: GAO analysis of grantee disbursement records conducted during site visits.
At one institution, we identified significant internal control weaknesses and $105,117 in questionable expenditures. Specifically, a review of grant disbursement records for Grantee D revealed spending with no clear linkage to the grant and instances in which accounting procedures were bypassed by grant staff at the institution. Of the questionable expenditures we identified, $88,195 was attributed to an activity designed to promote character and leadership development. Of that amount, we found that the institution used more than $79,975 to pay for numerous student trips to locations such as resorts and amusement parks. According to the grant agreement, the funds were to be used for student service learning projects. Additionally, $4,578 in grant funds was used to purchase an airplane global positioning system even though the school did not own an airplane. Over $6,000 of grant funds was used to purchase a desk and chair (see fig. 6). In
Questionable expenses are expenditures that appear to have been made for incorrect amounts, for unauthorized purposes, or for personal use. They can be inadvertent errors, such as duplicate payments and calculation errors, or violat ions of grant agreement terms, such as payments for unsupported or inadequately supported claims or payments resulting from fraud and abuse.
25
Page 31
purchasing the global positioning system and office furniture, a school official split the payments on an institutionally issued purchase card to circumvent limits established by the institution. Officials at the institution ignored multiple warnings about mismanagement of this activity from external evaluators hired to review the grant. Education visited the school in 2006 but found no problems, and recommended we visit the institution as an example of a model grantee. We referred the problems we noted at this institution to Education's Inspector General for further investigation.
Figure 6: Desk and Chair Purchased by Grantee
Source: GAO.
Examples of the questionable expenditures we identified at three other institutions we visited follow: We were unable to complete testing for about $147,000 of grant fund transactions at Grantee A due to a lack of readily available supporting documentation. For one transaction that was fully documented, the grantee improperly used $2,127 in grant funds to pay late fees assessed to the college. Once we pointed out that grant funds cannot be used for this purpose, the college took corrective action by writing a check to reimburse the grant.
Page 32
Grantee Bused $27,530 to prepay subscription and contract services that would be delivered after the grant expired. Grantee Fused more than $1,500 in grant funds to purchase fast food and over $4,800 to purchase t-shirts for students. We presented Education with the results of our analysis supporting each of our findings related to our grantee visits, and senior officials expressed commitment to follow up on each of the findings in coordination with grantees. The annual performance reports that grantees are required to submit to receive continued funding provide a key tool for monitoring grantee performance, but we found evidence that the program office is not consis-tently reviewing these reports. In reviewing seven annual perfonnance reports that fiscal year 2006 grantees submitted late, we found six that lacked detail, provided inaccurate information, or were incomplete. For example, one grantee reported that 80 percent ($2.3 million) of total funds allotted for the year were committed to "other unspecified activities" instead of clearly listing how the funds were spent, as required. Another institution in the fmal year of its grant submitted a report that was mostly blank, but it was counted as complete by program staff until we pointed out the discrepancy. The lack of information provided by the institution limits OPE's ability to follow administrative requirements for closing the grant, and it also significantly impairs its ability to understand the impact federal funds had on this particular campus or whether funds were used appropriately. Education subsequently requested that the school finalize its performance report a full year after it was originally due. While such reports will now be easily accessible through the electronic monitoring system, program staff will still have to take the initiative to review the infonnation to determine whether grantees have demonstrated adequate progress to justify continued funding.
Education's Ability to Target Technical Assistance Remains Limited
While Education provides technical assistance for prospective and current Title III and V grantees through preapplication workshops and routine interaction between program officers and grant administrators at the institutions, it has not made progress in developing a systematic approach to target the needs of grantees. According to one senior Education official, technical assistance is generally provided to Title III and V grantees on a case-by-case basis at the discretion of program officers. There are no
Page 33
particular criteria to determine when a program officer should provide technical assistance. For example, officials at a few of the institutions we spoke to told us that Education should provide technical assistance whenever the grant administration staff at an institution changes. Another senior Education official said that technical assistance should be provided when annual performance reports show numerous grantees experiencing similar problems, or if program officers receive numerous calls on a particular issue. Since we found evidence that program staff may not consistently review these rep01ts, the extent to which this type of followup is occurring is unclear. According to grantees we interviewed, the technical assistance Education provides is not consistent throughout the grant cycle. Specifically, several officials from schools at which we conducted interviews were complimentary of the technical assistance Education provided when they were applying for grants. Some of those officials, however, noted a precipitous drop in assistance during the first year after grants were awarded when grantees often need help with implementation challenges, such as recruiting and retaining highly qualified staff, securing matching funds for endowments, and overcoming construction delays. In the past, grantees had an opportunity to address such challenges at annual conferences sponsored by Education, but these conferences have not been held since 2006. Nearly 40 percent of the 113 grantees that provided comments in their annual performance reports requested that Education resume providing the conferences on a regular basis. According to Education officials, resource constraints have prevented them from holding the conferences, but plans are under way to hold a conference in fall2009. Since Education &'topped convening conferences, schools, and in some cases higher education advocacy groups, have hosted conferences at which Education staff participated. For example, five conferences or workshops held for the Title V program in 2008 were hosted by schools or advocacy groups. Officials from a few schools we interviewed said it is important for Education to take the lead in planning conferences to ensure that grantees receive information that is consistent with program rules. They also noted that when conferences were held in locations such as Washington D.C., participation could be expensive and suggested Education consider holding regional conferences to make it more affordable for grantees to attend. Officials from about half of the schools and some officials from advocacy groups we interviewed also reported that Education could strengthen grantee performance by more broadly disseminating information about successful projects. Education has included limited information on its
Page 34
Web site about six current and past pro.jects. However, the information for each project is maintained on the specific Title ill or V program pages, rather than being presented in a centralized location for the benefit of all grantees. For example, one of the projects that highlighted student retention efforts at a Native Hawaiian institution, a topic that has wide applicability across the grant programs, was only located at the Strengthening Institutions Program Web site. Additionally, this Web information did not consistently include contact information to allow interested schools to contact the featured grantees. School officials said such information sharing would provide lessons learned from similar projects and better leverage the federal investment. For example, an official at a 2-year Strengthening Institutions grantee in North Carolina told us he independently identified a contact at a Title III grantee to discuss the application process, but suggested that a clearinghouse of successful projects would be helpful for connecting institutions with similar challenges.
As we reported in 2004 and 2007, Education's ability to target technical
assistance is also limited in that the annual performance reports used to obtain feedback about program improvements may discourage candor because the reports identify grantees and are used to make continued funding decisions. The department also does not readily use the feedback it obtains from grantees to improve the programs. In 2004, we recommended that Education use appropriately collected feedback from grantees to target its technical assistance. While Education agreed with the recommendation and officials said they were considering ways to obtain feedback separate from the annual performance reporting process, Education continues to rely on these reports to obtain feedback. Education has separate feedback mechanisms in place to measure customer satisfaction and gauge the need for program improvement for some of its other programs. 26 One senior Education official said the current process for obtaining feedback is adequate for assessing the needs of Title III and V grantees. However, our review of the annual performance reports that fiscal year 2006 grantees submitted found that only 22 percent provided feedback. Additionally, a representative from the contractor responsible for compiling information from the reports said that the narrative data-where feedback from grantees can be found-is not
2 ~ducation has coU ected customer satisfaction data for selected grant programs and federal student aid programs through the American Customer Satisfaction Index to use in decision making for p rogram improvement.
Page 35
summarized for Education. The 113 grantees that provided feedback in these reports made a number of suggestions for improving the program, including requests for improved communications from Education, consis-tency in timing of events and reporting requirements, re-establishing annual conferences for grantees, and clarifying program regulations. For instance, Education has posted program regulations on its Web site, but 61 of 113 grantees that provided feedback specifically requested that Education clarify the regulations.
Conclusions
Given the current challenges low-income and minority serving institutions face, and the prqjected growth in the college-age population, Title lli and V funds will continue to play an integral role in helping these institutions address some of their most critical needs. Because these institutions have limited resources, they may need additional assistance to successfully implement their grant projects. Education's role in monit01ing and providing assistance to Title III and V grantees is critical to ensuring that the substantial investment the federal government makes in these programs leads to improvements in institutional capacity and student outcomes. When we reviewed the management of these programs in 2004 and 2007, Education had begun several initiatives to improve its monitoring and assistance. However, many of these initiatives never achieved their intended purpose or remain unfinished. Education has made progress in developing tools, such as an electronic monitoring system and risk-based criteria, to assess potential risks associated with Title lli and V grants, but it lacks a comprehensive risk-based monitoring and technical assistance approach to target its efforts. Previously, we recommended that the Secretary of Education take steps to ensure that monitoring and technical assistance plans are canied out and targeted to at-risk grantees and the needs of grantees guide the technical assistance offered. At the core of such an approach, which Education has not fully implemented, would be plans to guide its monitoring and technical assistance efforts following a thorough assessment of the risk and needs of grantees. Such an approach would also ensure that more information is shared among grantees about common implementation challenges and successful pro.jects to better leverage the considerable federal investment, and ensure that grantees have an opportunity to provide feedback on areas for program improvement. Additionally, Education has not adequately addressed skill gaps that limit the ability of program staff to carry out monitoring and technical assistance. Consequently, Title lli and V funds continue to be at risk for fraud, waste, or abuse. The internal control weaknesses and questionable expenditures we identified at ce1'tain grantees we reviewed demonstrate the importance of having a s-trong
Page 36
monitoring and assistance program in place. In an environment where Education is called on to administer additional programs with limited resources, a coordinated approach to guide it." efforts is critical to ensuring that grant funds are appropriately spent and the needs of grantees are met. We recommend that the Secretary of Education take the following five actions:
Recommendations for Executive Action
Develop a comprehensive, risk-based approach to target grant monitoring and technical assistance based on the needs of grantees. In doing so, Education should take steps to ensure that all available tools, including its electronic monitoring system, risk-based criteria, site visits, and grantee annual performance reports, are fully integrated to better target its limited resources. Follow up on each of the improper uses of grant funds that were identified in this report. Provide program staff with the necessary training to fully carry out monitoring and technical assistance responsibilities. Disseminate information to grantees about common implementation challenges and successful projects to leverage the investment that has been made across the programs. Develop appropriate mechanisms to collect and use feedback from grantees.
Agency Comments
We provided a draft of this report to officials at the Department of Education for review and comment. In written comments, Education agreed with our findings and recommendations. Officials indicated that they have begun to undertake a number of corrective actions to respond to these recommendations, such as convening a task force to better coordinate program resources toward grantees most in need of monitoring and/or technical assistance. Officials also agreed to provide additional training to new and existing program staff, reinstitute the annual Title III and V project director's meeting in an effort to better disseminate information about the program and successful grants, and implement an email address that grantees can use to provide feedback.
Page 37
Reinstituting the annual Title III and V project director's meeting is an important step in strengthening Education's technical assistance for grantees, but it will be important for Education to develop an approach for disseminating key information to grantees on a more routine basis than annual meetings. Additionally, Education's plan to provide grantees with an e-mail address that is monitored by staff outside the program office may encourage grantees to provide more candid feedback However, unless Education develops an approach to systematically collect and use the feedback, it may miss opportunities to further improve its oversight efforts. Education also provided technical comments, which we incorporated where appropriate. Education's comments appear in appendix IV. As arranged with your office, unless you publicly announce its contents earlier, we plan no further di~1:ribution of this report until 30 days from its issue date. At that time, we will send copies of this report to relevant congressional committees, the Secretary of Education, and other interested parties. The report will also be available at no charge on the GAO Web site at http://www.gao.gov.
If you or your staff have questions about this report, please contact me at
(202) 512-7215 or scottg@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. Sincerely yours,
George A. Scott Director, Education, Workforce, and Income Security Issue
Page 38
Appendix I: Objectives, Scope, and Methodology

We reviewed Title III and V grants programs to determine (1) what are the characteristics of institutions eligible to receive grants under Titles III and V, including the characteristics of students served, (2) what challenges do grantees face , and how have they spent Title III and V funds to address these challenges, and (3) to what extent does the Department of Education (Education) monitor the financial and programmatic performance of Title III and V grantees, and use this information to target its technical assistance. To describe the characteristics of postsecondary institutions eligible to receive grants under Titles III and V, we analyzed 2006 data on 2-year and 4-year public and private, not-for profit institutions from Education's Integrated Postsecondary Education Data System.1 Historically Black Colleges and Universities and Tribal Colleges that receive formula grants through Title III were automatically included in our eligible population. To determine the number of institutions eligible for discretionary grant programs under Title III and V, we identified postsecondary in&'titutions that had low educational and general expenditures and enrolled more Pell grant recipients, as compared to comparable institutions. To determine eligibility for specific types of grant programs, we also analyzed racial and ethnic data for students enrolled at eligible institutions. Eligible institutions reporting Hispanic student enrollment of 25 percent or more were categorized as Title V eligible. The 2,283 institutions that did not meet any of the criteria mentioned above were categorized as ineligible for participation in the Title III and V grant programs. 2 We also analyzed data from Education's 2004 National Postsecondary Student Aid Study (NPSAS), the most recent year for which data were available, to provide insight into student characteristics. Because NPSAS data are based on a representative sample of students enrolled in postsecondary education it does not include the universe of institutions as reported in Integrated Postsecondary Education Data Systems (!PEDS). As a result, it is not possible to discuss the NPSAS data in terms of eligible and ineligible institutions as can be done with !PEDS data. Instead, when
1 Because participation in Title III and V programs is restricted to public and private not-forprofit institutions, for-profit institutions are not included in our analysis.
Decisions institutions with branch campuses make about whether to report their Integrated Postsecondary Education Data Systems data separately for each branch campus or in the aggregate for an entire system of campuses may have resulted in the number of eligible institutions being underestimated in this report. Branch campuses may apply for the Titl.e UI and V p rograms il' they independently meet the eligibility criteria
Page 39
Appendix T: Objectives, Scope, and Methodology
discussing NPSAS data, we refer to minority serving and non-minority seiV:ing institutions. wnile only Historically Black Colleges and Universities, Hispanic-serving institutions, and Tribal Colleges are classified as minority serving institutions for NPSAS, these data are the most complete source of information on the characteristics of students attending minority serving institutions. To determine the completeness and reliability of this data, we reviewed the documentation from the National Center for Education Statistics on how the data were collected, inteiV:iewed Education officials responsible for handling the data, and performed electronic tests to look for missing or out-of-range values. Based on our reviews and tests, we found the data sufficiently reliable for our purposes. To describe the challenges that grantees face and how they used grant funds to address their challenges, we reviewed a representative sample of grant applications, all electronically submitted annual performance reports, and inteiV:iewed officials from 27 Title III and V grantees. Specifically, we conducted a content analysis of grant applications using a representative sample of 78 of the 511 fiscal year 2006 grantees, allowing us to generalize our findings to the entire population of grantees (see table 9.).
Table 9: Number of 2002 to 2006 Applications Reviewed during Content Analysis Sample size and total cases reviewed
Grant program Title Ill, Part A, Strengthening Institutions Title Ill , Part A, Tribal Colleges Title Ill , Part A, Alaska Native Institutions Title Ill , Part A, Native Hawaiian Institution Title Ill , Part B, Historically Black Colleges and Universities Title V, Part A, Hispanic Serving Institutions Total
Source: GAO calculations based on Department of Education data
Total number of grantees
222 27 10 9 97
20 14 5 5 16
146
511
18
78
We stratified our sample by the six programs and, within these strata, randomly selected grantees. Our sample was statistically drawn and weighted so that we could generalize the results of our review across programs. As with all samples, our review of grant flies is subject to sampling errors. The effects of sampling errors, due to the selection of a
Page 40
sample from a larger population, can be expressed as confidence intervals based on statistical theory. Sampling errors occur because we use a sample to draw conclusions about a larger population. If a different sample had been taken, the results might have been different. To recognize the possibility that other samples might have yielded other results, we express our confidence in the precision of our particular sample's results as a 95 percent confidence interval. Each sample element was subsequently weighted in the analysis to account for all members of the population, including those that were not selected. In conducting our content analysis, we developed a code tree that consisted of potential challenges identified through our review of the literature and interviews with grantees and higher education advocacy groups. Two analysts independently coded each application, and then reconciled any differences in their analysis to ensure inter-rater reliability. To describe how Title III and V grantees used grant funds to address their challenges, we analyzed data from 503 of 511 fiscal year 2006 grantee annual performance reports that were submitted electronically. To determine the reliability of these data, we interviewed officials from Education and its contractor about limitations with the data collected and how its uses these data. We peliormed a number of data reliability checks, such as establishing frequency tables for certain variables to check for outliers and missing values. We also ran tests to check for out-of-range values for specific variables. Based on information about outliers provided by Education for a small percentage ofthese dat.a (about 1 percent), we decided to keep data for all variables supplied by the department. As a result of our tests, we found these data to be sufficiently reliable for our purposes. To better understand the nature of grantee challenges and how Title III and V grant funds were used to address them, we also interviewed officials from 27 grantee institutions about the challenges they face and their experiences with the grant programs. We selected a nonprobability sample based on program participation, size of grant, and geographic location (see table 10).
Page 41
Table 10: Summary of GAO Contacts with Title Ill and V Grantees Number of institutions contacted Grant program Strengthening Institutions Historically Black Colleges and Universities Hispanic Serving Institutions Tribal Colleges Alaskan Native Serving Institutions Native Hawaiian Serving Institutions Total
Source: GAO.
Location North Carolina and Virginia North Carolina, South Carolina, and Virginia New Mexico and New York New Mexico and Montana Alaska Hawaii
Site visit Interview
3 3 3
2
0 0
0 0
4
3
8
11
16
We also conducted a review of the literature to gain a better understanding of the challenges that specific types of minority serving institutions face. To determine how Education monitors and provides technical assistance, we conducted interviews with officials at Education and reviewed program requirements, policies, procedure manuals, and monitoring plans. We also conducted additional site visits at seven Title III and V fiscal year 2006 grantees to evaluate their fiscal policies and internal control policies and determine whether program funds were properly used. These institutions were selected using a nonprobability sample based on factors such as program participation, size of grant, and geographic location. The grantees selected were located in California, Illinois, Maryland, North Dakota, Puerto Rico, Tennessee and Texas. Our grantee site reviews were lhnited in scope and were not sufficient for expressing an opinion on the effectiveness of grantee internal controls or compliance.
Page 42
Appendix II: Institutional and Student Characteristics, by Program Eligibility Status
Eligible 2-yr private, not-forprofit $2,125 8,055 4-yr private, not-forprofit $6,610 11,826
Ineligible 2-yr private, not-forprofit $2,781 10,868 4-yr private, not-forprofit $20,391 19,455
2-yr public Endowment Tuition and fees Instructional equipment Academic support Institutional support Student services Yes No Yes No Average undergraduate enrollment African American Asian Hispanic Native American Total minor ity White Other Gender (% of students) Male Female Part-time attendance 41% 59 62% $273 2,163
4-yr public $1 ,251 4,005
Total $1 ,069 3,687
2-yr public $287 2,183
4-yr public $2,623 5,445
Total $5,451 6,952
Institutional resources (median $ per student)
Institutional expenditures (median $ per student) $1,276 449 862 568 96% 4 100% 0 $2,417 780 2,778 1,623 49% 51 85% 15 $3,648 1,065 1,642 993 29% 71 88% 12 $5,909 1,318 3,922 2,185 28% $2,177 675 1,402 878 60% 40 90% 10 $1,288 490 901 595 95% 5 99% $3,405 $4,747 846 3,100 1,341 33% 67 67% 33 1,414 1,697 1,106 9% 91 74% 26 $8,118 $4,690 1,916 4,665 3,192 10% 90 62% 38 1,163 2,463 1,495 34% 66 75% 25
Open admission(% of institutions)
72
78% 23
Offers remedial services (% of institutions)
5,995 16% 7 19 1 43 56
497 16% 8 15 7 46 54
7,712 22% 6 25 54 45
1,552 24% 3 29 56 41 3
4,595 18% 6 22 1 48 51 1 41% 59 48%
5,870 11% 6 11 1 30 70
291 13% 3 15 30 70
9,199 8% 7 6 1 22 76 2
1,956 8% 5 6 1 29 68 3 43% 57 17%
4,575 9% 6 8 1 24 75 1 44% 56 34%
Race/ethnicity (% of students)
34% 66 34%
42% 58 29%
38% 62 22%
42% 58 62%
37% 63 28%
46% 54 19%
Page 43
Appendix II: Institutional and Student Characteristics, by Program Eligibility Status
Eligible 2-yr private, not-forprofit 2 51 47 58% 68 49% 39% 4-yr private, not-forprofit 3 64 34 48% 67 65% 38%
Inel igible 2-yr private, not-forprofit 2 65 33 40% 39 67% 59% 4-yr private, not-forprofit 2
2-yr public Age at time of first enrollment Under 18 18 to 24 25 or older Pell grants Federal grant aid Retention rate Graduation rate 7 51 42 41% 50 55% 20%
4-yr public 4 70 26 43% 53 67% 40%
Total
2-yr public 6 53 41 33% 33 56% 22%
4-yr public 2 80 18 23% 23 74% 56%
Total 4 69 27 15% 25 69% 60%
5 58
37 44% 54 60% 39%
77
21 23% 22 75% 67%
Financial aid (% of students receiving)
Source: GAO analysis of 2006 1 PEDS data and 2006 to 2007 Pell Grant recipient data.
Federal grant aid reported in IPEDS captures data for first-time, full-time students only.
Page 44
Appendix III: Fiscal Year 2002 to 2005 Grantee Expenditures by Focus Area
Figure 7: Fiscal Years 2002 and 2003 Grantee Expenditures, by Focus Area
Total expenditures, by focus area, fiscal year 2002 grantees Percentage of fiscal year 2002 grantees undertaking at least one activity, by focus area
1 32 133 1 64
I
0
67
20
40
60
80
Total expenditures, by focus area, fiscal year 2003 grantees
Percentage of fiscal year 2003 grantees undertaking at least one activity, by focus area
1 34 135 166
I
0
69 80
20
40
60
CJ
~
Fiscal stability lnsmutional management Student support Academic quality
c::::::J
Source: GAO analysis of Department of Education annual performance report data.
Note: Due to rounding, totals may not add to 100 percent.
Page 45
Appendix ill: Fiscal Yea.r 2002 to 2005 Grantee Expenditures by Focus Area
Figure 8: Fiscal Years 2004 and 2005 Grantee Expenditures, by Focus Area
Total expenditures, by focus area, fiscal year 2004 grantees Percentage of fiscal year 2004 grantees undertaking at least one activity, by focus area
1 30 1 33
164
I66
0
10
20
30
40
50
60
70
Total expenditures, by focus area, fiscal year 2005 grantees
Percentage of fiscal year 2005 grantees undertaking at least one activity, by focus area
1 29 127
]so
I63
0
10
20
30
40
50
60
70
Fiscal stabimy lnsmutional management Student support
c=J
c=J Academic quality
Source: GAO analysis o f Department o f Education annual performance report data.
Page 46
Appendix IV: Comments from the Department of Education
UNITED STATES DEPARTMENT OF EDUCATION

OFFICI: OF POS!'Sl'CONDARY EDUCATION
THE ASSISTAm SCRTARY
JUN 3 0 2009
Mr. George A.. Scott Director Education, Workforce, and fncome Security lssues United States Oovellllt1ent Accountability Office Washington, DC 20548 Dear Mr. Scott: Thank you for providing the U.S. De~ent of Education (the Department) with a draft copy of the U.S. Government Accountability Office's (GAO's) report enriucd, "LOWINCOME AND M[NORJTY SRVINO INSTITUTIONS: Management Attention to Longstanding Concerns Needed to lmprove Education's Oversight of Grant Programs"
(GA0-09-309).
This study focuses on insti tutiolU that serve Large proportions of low-tocome and minority students. GAO was asked to dctcnnine; (I) characteristics of instjtutions eligible to receive grants under Titles III and V, including characteristics of students served, (2) any challenges grantees face, and how they s~t Title ill and V ftmds to address these cr..allengcs, and (3) to what extent the Department of Education monitors the fmancial and programmatic perfonnance of Title ru and V grantees, and uses this information to target its technical assistance. As a rcsuh of study, GAO made five recommendations to the Department. Oelow are the Department's responses to eaeh recommendation.
us
Rc~ommendation l: Develop a comprehensive, risk-based approach ro largeI gr0111 monitoring and ~cechnical assiStance based on the needs a/grantees. In doing so. Education should /.alee slept to ensure that all availabl~ tools, ii!Ciudlng its eleclronic monitoring S)l.sttn~ risk-based crileria, site vLrits, and grantee annual perform<mce reports are fully integrated Jo belief' target its limited resources.
Response: We agree with this recommendation. 1n May of2009, the Department convened a Postsecondary Oversight Improvement Task Force to help ensure that the Department's oversight of postsecondary schools is sufficient to protect the in vcstmcnL<> made with federal aid and to ensure that institutions are able to make informed decisions and accomplish their postSecondary goals. This task force serves as a vehicle for exchanging information and coordinating rcsourtcs strategically to C!Uure that U1ose grantees most in need of technical assistance and oversight from the Department receive it.
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Page 47
Appe ndix IV: Comments from the Departme nt of Educat ion
Page 2-.\ltr. George 1\ . Scott
Recommendation 2: Follow up on each oftlu improper uses ofgrant fonds that we~e identifted In Jhis report. Response: We agree with this recommendation. The Institutional Development and Undergraduate Education Service (tDUES) program officers will coordinate with the Program Oversight staffin the Office of Postsecondary Education (OPE) to conduct site visits at the institution.~ mentioned in the repon. The site visits will include both a programmatic and fiscal review, with corrective actions as appropriate. Reco mmendation 3: Provide program staff with rh necessary training to fully carry out monitoring and technical assistance respoiiSibi/illes. Response: We agree witll this recommendation. OPE will coordinate With the Department's Risk Management Service to continue to offer grant monitoring training and strongly encourage program staff to participate. OPE will also implement a mentoring process through which each new program officer is paired with an experienced program officer. The two progtam officers will meet regularly foru full year so that the more ~pericnccd program officer can provide the less experienced program officer with detailed training about grants monitoring. In addition, each new program officer will conduct an on-site review with the Program Oversight staff in order to gain valuab1e field experience in offering technical assistance and providing fiscal review and oversight of grant funds. Furtller, OPE will continue 10 offer regular training to its staff on the Grants Electronic Monitoring System as well as training on how to interpret Annual Performance Rcpon data to ensure greater consistency in awarding oo.ncompetitive continuati011 grants. Recommendation 4: Di.tstminate /nformafion to grantees about common implementation challenges and SIICCCs.'iful pro}ec1s to levtrage the inl!estment that has been mode across the programs. Response: We agree with this recommendation. JDUES recognizes the need to increase its interactions with grantees and to facilitate interactions among grantees. lDUES will reinstitute the annual meeting of Title Ill and Title V grantees, which allows grantees to sh~ promising practices and common concems. ReC(>mmendation 5: Develop appropriate mechonisms to collect and use foedbackfrom grantees. Response: We agree witll this recommendation. To capture the kind of fe.edback necessary for continuous program improvement, we will implement an e-mail address to provide grantees ao opponuoity to submit comments, questions, pmise and criticism to the Department. To cncoura&e CM.dor, an lndividual not associated with OJ>E program offices will monitor the mailbox so that grantee input remains anonymous. We will usc both e mail and pm&ram office Web sites to encourage grantees to provide this feedback.
Page 48
Appendix IV: Comments from the Department of Education
Page 3-Mr. George A. Scott
Responses will be redacted as needed and distributed to program office directors regularly for appropriate haodJing. We greatly appreciate your exrunination of this important issue.
Daniel T. Madzelan Delegated the Authority to Perform the Functions and Duties of tbe Assistant Secretary for Postsecondary Education Attachment
Page 49
Appendix V: GAO Contact and Staff Acknowledgments

George A. Scott, (202) 512-7215 or scottg@gao.gov
GAO Contact Staff Acknowledgments
Debra Prescott (Assistant Director) and Carla Craddock (Analyst-inCharge) managed this assignment. In addition, the following individuals made important contributions to this report: Susan Aschoff, Jenna Aurand, Carolyn Boyce, Muriel Brown, Sunny Chang, Alisha Chugh, Bonnie Derby, Lauren Fassler, Doreen Feldman, Jeanette Franzel, Alice Feldesman, Lisa Galvan, Jeremie Greer, Melissa Jaynes, Angela Leventis, Sheila McCoy, John Mingus Jr., Lauren Mohlie, Mimi Ngyuen, Dae Park, Susan Ragland, Glenn Spiegel, Sabrina Springfield, Nicholas Weeks, and Doris Yanger.
(130805)
Page 50
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" ..;
Please Print on Recycled Paper
United States Government Accountability Office
GAO
August 2009
Report to the Chairman, Subcommittee on Higher Education, Lifelong Learning and Competitiveness, Committee on Education and Labor, House of Representatives
PROPRIETARY SCHOOLS
Stronger Department of Education Oversight Needed to Help Ensure Only Eligible Students Receive Federal Student Aid
Accountability
GAO
* Integrity * Reliability
GA0-09-600
August2009
G A 0
Accountability lntegri!y Reliability
PROPRIETARY SCHOOLS
Stronger Department of Education Oversight Needed to Help Ensure Only Eligible Students Receive Federal Student Aid
Highlights
Highlights of GA0-09-600, a report to the Chairman, Subcommittee on Higher Education, Lifelong Learning, and Competitiveness, Committee on Education and Labor, House of Representatives
Why GAO Did This Study

For-profit schools-also known as
What GAO Found

The Department of Education makes loans available to students to help them pay for higher education at public, p1ivate non-profit, and proprietary schools, and the students who attend proprietary schools are most likely to default on these loans, according to analysis of recent student loan data. As shown in the graph below, students from prop1ietary schools have higher default rates than students from other schools at 2, 3, and 4 years into repayment. Academic researchers have found that higher default rates at proprietary schools are linked to the characteristics of the students who attend these schools. Specifically, students who come from low income backgrounds and from families who lack higher education are more likely to default on their loans, and data show that students from proprietary schools are more likely to come from low income families and have parents who do not hold a college degree. Borrowers who are not successful in school and drop out also have high default rates. Ultimately, when student loan defaults occur, both taxpayers and the government, which guarantees the loans, are left with the costs.
Proprietary Schools Have Higher Default Rates than Public and Private Non-Profit Schools
Percentage of defaults
$16 btlhon m federal loans, grants, and campus-based aid under Title IV of the Higher Education Act in 2007/08. GAO was asked to determine (1) how the student loan default profile of prop1ietary schools compares with that of other types of schools and (2) the extent to which Education's policies and procedures for monitoling student eligibility requirements for federal aid at prop1ietary schools protect students and the investment of Title IV funds. To address these objectives, GAO analyzed data and records from Education, examined Education's policies and procedures, reviewed relevant research studies, conducted site visits and undercover investigations at prop1ietary schools, and interviewed officials from Education, higher education associations, and state oversight agencies.
prop1~e~ry: schools-received over
25
D D D
2-year rate 3-year rate 4-year rate
Public
Privale non-profil Proprielary
What GAO Recommends

GAO is making three recommendations for Education to strengthen its monitoring and oversight of federal aid eligibility requirements. Specifically, GAO recommends Education (1) improve its monitoring of basic skills tests and target schools for further review; (2) revise regulations to strengthen controls over basic skills tests; and (3) provide information and guidance on valid high school diplomas for use in gaining access to federal student aid. The Department of Education noted the steps it would t.ake to address GAO's recommendations.
Source: GAO analysis o f Education's 2004 cohort data from the National Student l oan Data System.
Note: Education provided official 2-year default rates and modeled 3- and 4-year default rates, by sector, using December 2007 student loan data.
View GA0-09-600 or key components. For more information, contact George A. Scott at (202) 512-7215 or scottg@gao.gov.
Although students must meet certain eligibility requirements to demonstrate that they have the ability to succeed in school before they receive federal loans, weaknesses in Education's oversight of these requirements place students and federal funds at risk of potential fraud and abuse at proprietary schools. Students are required to pass a test of basic math and English skills or have a high school diploma or GED to qualify for federal student aid. Yet, GAO and others have found violations of these requirements. For example, when GAO analysts posing as prospective students took the basic skills test at a local proptietary school, the independent test administrator gave out answers to some of the test questions. In addition, the analysts' test fonns were tampered with-their actual answers were crossed out and changed-to ensure the individuals passed the test. GAO also identified cases in which officials at two proprietary schools helped prospective students obtain invalid high school diplomas from diploma mills in order to gain access to federal loans. GAO's fmdings do not represent nor imply widespread problems at all proptietary schools. However, GAO's work has identified significant vulnerabilities in Education's oversight. Education's inadequate monitming of basic skills tests and lack of guidance on valid high school diplomas enables unqualified students to gain access to federal student aid. Unqualified students are at greater risk of dropping out of school, incurring subst.antial debt, and _ _ __;;__ federal loans. _ _defaulting on _ _ _ _ _ _ _ _ _ United States Government Accountability Office
Contents
Letter
Background Education's Analysis Shows That Default Rates Are Higher at Proprietary Schools than at Public and Private Non-Profit Schools and Studies Link High Default Rates to Borrowers' Characteristics Weaknesses in Education's Oversight of Federal Aid Eligibility Requirements Place Students and Title IV Funds at Risk of Potential Fraud and Abuse at Proprietary Schools Conclusions Recommendations for Executive Action Agency Comments and Our Evaluation
13 22 28 29 30 33
Appendix I
Objectives, Scope, and Methodology
Appendix II
Comments from the Department of Education
37
Appendix III
GAO Contact and Staff Acknowledgments
39
Related GAO Products
40
Tables
Table 1: Age, Dependency Status, and Gender of Students at Proprietary, Public, and Private Non-Profit Schools Table 2: Family Income and Parental Education of Students at Proprietary, Public, and Private Non-Profit Schools 7 20
Figures
Figure 1: School Sectors by Percentage of Enrollments in Different Program Lengths for the 2007-2008 Academic Year Figure 2: Race of Students by School Sector Figure 3: ATB Test Process Figure 4: Defaults Captured by the 2-year Cohort Default Rate 6 8 10 14
Pagei
GA0-09-600 Proprietary Schools
Figure 5: Proprietary Schools Have Higher Default Rates Than Public and Private Non-Profit Schools Figure 6: Among 4-year Schools, Proprietary Schools Have Consistently Higher Default Rates Than Other Schools Figure 7: Among 2-year Schools, Proprietary Schools Have Higher Default Rates Than Other Schools Figure 8: Among Less Than 2-year Schools, Private Non-profit and Proprietary Schools Have Nearly Identical Default Rates
15 16
17
18
Abbreviations
ATB CDR FSA GED !PEDS NCES NPSAS NSLDS OIG ability-to-benefit cohort default rate Office of Federal Student Aid general equivalency diploma Integrated Postsecondary Education Data System National Center for Education Statistics National Postsecondary Student Aid Study National Student Loan Data System Office of the Inspector General
This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately.
Page ii
Accountability
GAO
~
Integrity ~ Reliability
United States Government Accountability Office Washington, DC 20548
August 17, 2009 The Honorable Ruben Hinojosa Chairman Subcommittee on Higher Education, Lifelong Learning and Competitiveness Committee on Education and Labor House of Representatives Dear Mr. Chairman: Institutions of higher education, including public colleges, private nonprofit, and private for-profit schools, receive billions of dollars each year from the Department of Education (Education) to help students pay for school. In the 2007-2008 school year, private for-profit schools-also known as proprietary schools-received over $16 billion in loans, grants, and campus-based aid for disbursement to students under Title IV of the Higher Education Act. Currently, there are over 2,000 proprietary schools of higher education that participate in Title IV programs. Title IV funds for the proprietary sector have increased 164 percent since the 2001-2002 school year, and grown at a substantially faster rate than Title IV funds for the public and private non-profit sectors. 1 Moreover, institutions of higher education, including proprietary schools, are poised to receive additional Title IV funds under the American Recovery and Reinvestment Act of 2009. In recent years, the scale and scope of proprietary schools have changed considerably. Once comprised of local, sole proprietor ownership, the nation's proprietary institutions now range from small, privately-owned schools to profitable publicly traded corporations such as the Apollo Group, Corinthian Colleges, and Career Education Corporation. Traditionally focused on certificate and associate programs ranging from cosmetology to medical assistance and business administration, proprietary institutions have expanded their offerings to include bachelors, masters, and doctoral level programs. Both the certificate and degree programs provide students with training for careers in a variety of fields. Under current economic conditions, more students may attend proprietary schools to acquire additional work skills and training to help
Tit le IV funding daLa beginning in the 2001-2002 school year are more accurate than data from prior years.
Page 1
them obtain jobs. Proprietary schools also provide course offerings through online education, and many prop1ietary schools have open admissions policies to accept any student who applies. Students can only receive Title IV funds, provided in the form of grants, loans, and campus-based aid, when they attend schools approved to participate in the Title IV program. The schools must ensure that the students receiving the funds meet certain eligibility requirements: generally, students must have a high school diploma, or a general equivalency diploma (GED), or demonstrate that they are ready for higher education by passing an independently administered "ability to benefit" (ATB) test of basic math and English skills or completing 6 credit hours applicable toward a degree or certificate offered at an institution of higher education. Students who receive loans under the Title IV program are responsible for repaying the loans, and those who default increase the cost of the Title IV program to the federal government and taxpayers. Given your interest in learning more about proprietary schools, we examined: (1) how the student loan default profile of proprietary schools compares with that of other types of schools and (2) the extent to which Education's policies and procedures for monitoring eligibility requirements for federal aid at proprietary schools protect students and the investment of Title IV funds. To determine how the student loan default profile of proprietary schools compares with that of other types of schools, we analyzed Education data on school default rates from the National Student Loan Data System (NSLDS), reviewed studies on factors that contribute to student defaults, and conducted interviews with officials from Education and higher education associations. As part of our analysis of default rates at proprietary schools, we also looked at information on student characteristics and outcomes. We analyzed the most recent student survey data available from the 2004 National Postsecondary Student Aid Study (NPSAS), data on students during the 2007-2008 school year from the Integrated Postsecondary Education Data System (IPEDS), and data on student outcomes from a 6-year study following students beginning in the 1995-1996 school year conducted by the National Center for Education Statistics (NCES). To assess the reliability of those data elements needed for our study, we ( 1) performed electronic testing of required data elements, (2) reviewed existing infonnation about the data and the systems that produced them and (3) interviewed agency officials knowledgeable about the data. We determined that the data are sufficiently reliable for the purposes of this report. To determine the
Page 2
extent to which Education's policies and procedures for monitoring student eligibility requirements for federal aid at proprietary schools protect students and the investment of Title IV funds, we reviewed Education's policies and procedures for monitoring the administration of ability-to-benefit tests and for enforcing high school diploma requirements; reviewed relevant program reviews, independent audits, relevant laws and regulations, and enforcement actions taken against schools; and interviewed officials from Education, state education licensing agencies, and higher education associations. We also gathered information during school site visits conducted in California, illinois, New York, and Virginia. We selected these sites for geographic diversity and a mixture of ownership types (independently-owned and publicly-traded schools) and degree and certificate programs. In addition, GAO anonymously tested institution compliance with Title IV eligibility requirements and sent, on two separate occasions, analysts posing as prospective students to take and purposely fail ATB tests at a local proprietary institution. We supplemented this work with a review of investigations conducted by Education's Office of Inspector General and the New York Department of Education. We conducted this performance audit from October 2007 to August 2009, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit ob,jectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. For additional information on the methodology used for this review, see appendix I.
Background
Title IV Programs
The Department of Education's Office of Federal Student Aid (FSA) manages and administers student financial assistance programs authorized under Title IV of the Higher Education Act of 1965, as amended.2 These programs include, among others, the William D. Ford Federal Direct Loan Program (Direct Loan program), the Federal Family Education Loan Program (FFEL program), the Federal Pell Grant Program (Pell Grant
20 U.S.C. 1001 et seq.
Page 3
program), and campus-based aid programs. 3 In the 2007-2008 school year, Title IV programs provided more than $85 billion in student aid. In 1990, we placed Education's student financial aid programs on our high risk list of programs at risk of fraud, waste, abuse, and mismanagement. At the time, Education had various problems, including poor financial management and fragmented and inefficient information systems. In 2005, we removed these programs from the list due to improvements made to Education's financial management of federal student aid programs and better integration of its information systems. However, we continue to monitor Education's administration and oversight of federal student aid programs.
'JYpes of Title IV Eligible Institutions
The Higher Education Act provides that a variety of institutions of higher education are eligible to participate in Title IV programs, including: Public institutions-Institutions operated and funded by state or local governments, which include state universities and community colleges. Private non-profit institutions- Institutions owned and operated by nonprofit organizations whose net earnings do not benefit any shareholder or individual. These institutions are eligible for tax deductible contributions in accordance with the Internal Revenue code (26 U.S.C. 501(c)(3)). Proprietary institutions-Institutions that are privately-owned whose net earnings can benefit a shareholder or individual; that is, for-profit institutions. These institutions can be further classified by their program lengths: 4-year and above-The program length for colleges and universities. Such schools typically offer bachelor's degrees and higher-level degrees. Some 4-year and above schools also offer associate's degrees, which generally take 2 years to complete.
1-he Federal Supplemental Educational Opportunity Grant (FSEOG), Federal Work-Study (FWS), and Federal Perkins Loan p rograms are called campus-based programs and are administered directly by the financial aid office at each participating school.
Page 4
2-year-The program length for many community colleges and other institutions offering associate's degrees. These schools often also offer certificate programs.~ Less than 2-year-Includes schools, often referred to as "vocational and technical schools," that offer certificate programs, but typically do not offer degrees. Overall, the proprietary sector receives the smallest percentage of Title IV funds-about 19 percent-compared with the public and private non-profit sectors, which receive about 48 and 33 percent, respectively. 5 However, the amount of Title IV funding going to the proprietary sector has risen significantly in recent years and some of the schools receiving the most Title IV funds are proprietary schools. Four-year and above schools account for the majority of eruollments in the public, private non-profit, and proprietary sectors. Two-year schools account for a significant percentage of the enrollments in the public and proprietary sectors, but only about 2 percent of enrollments in the private non-profit sector. Less than 2-year schools account for 19 percent of the enrollment in the proprietary sector, but are less than half of 1 percent of the enrollments at both public and private non-profit sectors. Figure 1 shows school sectors by the percentage of enrollments in different program length categories.
1 ' Education refers to these schools as "2-3 year schools." Based on our analysis of the schools included in the 2-3 year category, we refer to this school group as "2-year schools" as most of them are schools with programs that are 2 years in length.
:>por the purposes of this report, we refer to public, private non-profit and proprietary schools as separate sectors. The NCES uses the tenn "sector" differently and defmes school sector as a combinatJon of school control, such as public, private non-profit, and proprietary, and program length, such as 4-year and above, 2-year and less than 2-years.
Page 5
Figure 1: School Sectors by Percentage of Enrollments in Different Program Lengths for the 2007-2008 Academic Year
Percentage 0 / 100
80
48
60
98
40 52 20
57
~--~----~----Type of school
CJ Less than 2-year CJ 2-year c=J 4-year and above

Source: GAO analysis of I PEDS data.
Under Title IV of the Higher Education Act, a school can receive student aid if it offers courses of study such as certificate, associates, bachelor's, graduate, or professional degree programs. Vocational and technical training, in which skills related to a specific trade, vocation or occupation are taught, are generally offered at community colleges as well as proprietary schools. Relative to the total number of schools in the Title IV program that award degrees and certificates, the proprietary sector awards a small percentage of bachelor's degrees and above, but a substantial percentage of certificates.
Page 6
Characteristics of Students Students who attend proprietary schools generally have characteristics that differ from students at public and private non-profit schools. First, Attending Proprietary over half of the student population at proprietary schools is comprised of Schools
"non-traditional" students, such as students who are 25 years old and older. Second, more students at proprietary schools are financially independent compared to students at public and private non-profit schools. 6 Third, proprietary schools serve a higher percentage of women than schools in other sectors. See table 1 for analysis of Education's data on age, dependency status, and gender of students in the three school sectors.
Table 1: Age, Dependency Status, and Gender of Students at Proprietary, Public, and Private Non-Profit Schools Financially independent students (percentage)
School sector Proprietary Public Private non-profit
Students age 25 and older (percentage)
Female students (percentage)
56 35 38
76 50 39
63 54 56
Source: GAO analyses of 200712008 IPEOS and 2004 NPSAS datasets.
Lastly, proprietary schools have a higher percentage of minority students, specifically African-American and Hispanic students, than public and private non-profit schools. However, a higher percentage of AsianAmerican students attend both public and private non-profit schools than proprietary schools. See figure 2 for analysis of Education's data on student race in the three school sectors.
~he NCES at the Department of Education classifies all graduate students and undergraduate students age 24 or older as independent. Students under the age of 24 can also be classU"ied as independent if they are married or have dependents, are veterans or active mmtary, or have been wards of the court.
Page 7
Figure 2: Race of Students by School Sector

Percentage of students by race
100 90 80 70 60 50 40 30 20 10 0
(l,.::;
CJ
American Indian/Alaska Native Asian/Pacific Islander Hispanic African-American
CJ CJ c::J
jB
Wh~e. non-Hispanic
,_<> ;s
So urce: GAO analysis of 2007/2008 I PEDS dataset.
Eligibility Criteria for School Participation in the Title IV Program
In order for students attending a school to receive Title IV funds, a school must be: (1) licensed or otherwise legally authorized to provide higher education in the state in which it is located, (2) accredited by an agency recognized for that purpose by the Secretary of the U.S. Department of Education, and (3) deemed eligible and certified to participate in federal student aid programs by Education. This is commonly referred to as the triad. Under the Higher Education Act, Education does not determine the quality of higher education institutions or their programs; rather, it relies on recognized accrediting agencies to do so. As part of its role in the administration of federal student aid programs, Education determines which institutions of higher education are eligible to participate in Title IV programs. Education is responsible for overseeing school compliance with Title IV laws and regulations and ensuring that only eligible students receive federal student aid. As part of its compliance
Page 8
monitoring, Education relies on department employees and independent auditors of schools to conduct program reviews and audits of schools.
ATBTest
Generally, students without a high school diploma or GED can qualify for Title IV loans, grants, and campus-based aid if they pass an independently administered test of basic math and English skills, called an "ability-tobenefit" or ATB test. 7 The intent of the test is to measure whether students have the basic skills needed to benefit from higher education and succeed in school. The test must be approved by the Secretary of Education and administered by an independent party. Students must pass the test prior to enrolling in classes and receiving Title IV funds. Since the inception of ATB test requirements, hundreds of thousands of non-high school graduates have qualified for Title IV aid by taking these tests. Under the ATB test program, Education is responsible for overseeing test publishers, who, in turn, are responsible for certifying and monitoring test administrators to ensure the independent and proper administration of ATB tests. Test publishers are required to conduct and submit to Education an analysis of test scores every 3 years to identify any test irregularities that would suggest ATB tests are not administered in accordance with test rules. Certified test administrators administer ATB tests to prospective students at schools. Figure 3 describes the ATB test process and how it is carried out.
While eligibility for federal student aid is based on a number of factors, such as financial need and U.S. citizenship, for the purposes of our report we focus on whether a student has a high school diploma, Gl'~D or recognized equivalent, or has passed an independently administered ATB test.
Page 9
Figure 3: ATB Test Process
Department of Education
Approves tests submit1ed by test publishers for ATB use
t
Send test score analysis to Education every 3 years to identify test score irregularities suggesting improper test administration
Test publ ishers

Certify independent test administrators; decertify test administrators who improperly administer tests
t
Independent test administrators {ITAs)
Send test answer sheets to test publisher for official scoring Administer ATB test to prospective students at the school -
Prospective students
Take ATB test at school
School
Sources: GAO analysis; images. Art Explosion.
Education computes default rates for all schools with students who Default Rates Calculated for Schools Participating in receive Title IV loans through the FFEL Program or the Direct Loan Program. Education calculates default rates each year by tracking whether Title IV Loan Programs borrowers in a cohort-a group of students who begin repaying their loans in a given fiscal year-at each school default on their federal student loans over a 2-year period. The resulting calculation is called the cohort default rate. For example, to calculate the 2-year default rate for the 2006 cohort, Education divided (1) the number of borrowers who began their repayment period in fiscal year 2006 and defaulted before the end of fiscal year 2007 (the numerator) by (2) the number of borrowers who began their repayment period in fiscal year 2006 (the denominator). The resulting default rate is expressed as a percentage with a higher percentage indicating more defaults. The majority of schools now have default rates under 10 percent, which is a qualifying rate for favorable loan
Page 10
disbursement and delivery terms. 8 These terms allow schools to disburse loans in a single installment rather than in two or more installments. Borrowers begin repayment after dropping below half-time enrollment, graduating, or leaving their program. 9 Borrowers generally default when they do not make any payments on their loan for 270 days (about 9 months) or more and they have not obtained a temporary cessation or reduction of payments-referred to as a deferment or forbearance-for reasons such as economic hardship, disability, or enrollment in another school that is eligible to participate in the Title IV program. 10 Starting in January 1991, the Secretary of Education initiated proceedings for immediate loss, suspension, or termination of schools' eligibility to participate in Title IV loan programs if their default rates were above specified thresholds. From 1992, the first year from which Education data were available on numbers of schools by sector subject to immediate loss, suspension, or termination from the Title IV program due to high default rates, until1999, 1,846 schools, including 1,580 from the proprietary sector, were subject to sanctions. More recently, from 2000 until2008, four schools were subject to immediate loss, suspension, or termination from the Title IV program due to high default rates, including three from the proprietary sector. According to an Education official, there are several possible explanations for the drop in defaults and, subsequently, for the drop in the number of schools subject to sanctions. For example, the Education official noted that the Department's efforts to provide schools with default prevention training may have reduced default rates. In addition, he pointed out that many proprietary schools with chronically high default rates lost Title IV eligibility and subsequently went out of business in the early 1990s.
A.c; of fiscal year 2011, the qualifying rate for favorable loan disbursement and delivery terms will change to 15 percent. Higher Education Opportunity Act, Pub. L. No. 110-315, 427(a).
Prior to entering repayment, borrowers who drop below half-time enrollment, graduate, or leave their program generally have a 6- to 12-month grace period.
1 o,fhls default defmition applies to loans that require repayment on a monthly basis. Loans that require repayment on a less frequent basis default when payments are not made for 330 days (about 11 months).
Page 11
Consequences of Student Loan Defaults
When students do not make payments on their federal loans and the loans are in default, the federal government and taxpayers assume nearly all the risk and are left with the costs. For example, in the FFEL program, the federal government and taxpayers pick up 97 percent of the cost on defaulted loans. In the Direct Loan program, the federal government and taxpayers pick up 100 percent of the unpaid principle and accrued interest on defaulted loans. Though the federal government and taxpayers pick up the ma,jority of the costs on defaulted loans, students who default are also at risk of facing a number of personal and financial burdens. For example, defaulted loans will appear on the student's credit record, which may make it more difficult for them to obtain an auto loan, mortgage, or credit card. A negative credit record could also harm the student's ability to obtain a j ob or rent an apartment. Students will also be ineligible for assistance under most federal loan programs and may not receive any additional Title IV federal student aid until the loan is repaid in full. Furthermore, the Department of Education can refer defaulted student loan debts to the Department of the Treasury to offset any federal and/or state income tax refunds due to the borrower to repay the defaulted loan. In addition, Education may require employers who employ individuals who have defaulted on a student loan to deduct 15 percent of the borrower's disposable pay toward repayment of the debt. Garnishment may continue until the entire balance of the outstanding loan is paid.
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Education's Analysis Shows That Default Rates Are Higher at Proprietary Schools than at Public and Private Non-Profit Schools and Studies Link High Default Rates to Borrowers' Characteristics
Default Rates of Borrowers from Proprietary Schools Are Higher than Those of Borrowers from Other Schools and Increase over Time
Default rates measured 2 years after students begin repaying their loans show that students from proprietary schools have higher default rates than students from public and private non-profit schools. According to Education's calculations from the group, or cohort, of students who entered repayment in fiscal year 2004, the proprietary sector's 2-year cohort default rate is 8.6 percent. 11 This rate is higher than the public and private non-profit sectors, which have rates of 4. 7 percent and 3 percent, respectively. Although the proprietary sector's rate is higher than other sectors, it is still below the threshold cut-off rates-25 percent for 3 years or 40 percent for 1 year-used by Education to disqualify schools from Title IV eligibility. 12 While the cohort default rate is one of the means by which Education monitors schools' eligibility to participate in Title IV programs, the rate captures only a small portion of all student loan defaults at schools. First, any defaults that occur over the life of the loan after tl1e 2-year period are
Fiscal year 2004 cohort data were the most recent data available that aUowed us to make comparisons of default rates at 2 years in 2006, 3 years in 2007, and 4 years in 2008. The 2year default rate was the officia l measurement used to track defaults until fiscal year 2009, when the 3-year default. rate became the official default measurement. Higher Education Opportunity Act, Pub. L. No. 110-315, 436(e).
12 In 2008, Congress increased the 3-year maximum default rate threshold from 25 percent to 30 percent, which will take effect in 2011. Higher Education Opportunity Act, Pub. L. No. 110-315, 436(a)(1).
11
Page 13
excluded from schools' cohort rate calculations. 13 Second, during the 2year period, borrowers are generally considered in repayment as long as they have made a payment in the last 270 days, or about 9 months. Third, borrowers who seek forbearances or deferments on their loans during that 2-year cohort period are also considered to be in repayment. 14 Figure 4 illustrates the 2-year cohort default rate.
Figure 4: Defaults Captured by the 2-year Cohort Default Rate
epayme~
period
2 year
,.
Defaults not counted
1-~~~1
Defaults counted
Borrowers Who d,o not make payments for 270 days (9 months) before cohort period ends, while not in forbearance or deferment
VfV'
Cohort
Year
,.
...
0
Cohort
period begins
Cohort
period ends
..
2
..
5
Sources: GAO analysis; images, Art Explosion.
10
..
15
..
While borrowers from all sectors are defaulting at higher rates after the 2year period, Education's default rate calculations of borrower's repayments in the third and fourth years show that proprietary schools'
Based on recent changes made to the default. measurement, any defaults that occur after a 3-year period will be excluded from a school's cohott default. rate calculation. GAO report about default rates (GAOIH EHS-99-135) noted tJ1ese limitations in its finding tha t Education's cohort default rate calculations are understated because borrowers who are in forbearance or deferment are considered to be in repayment even though they are not making any loan payments. Furthermore, these borrowers are not included in any subsequent cohorts after their period offorbearance or deferment is over . GAO recommended that Congress consider amending the Higher Education Act to exclude borrowers f rom schools' cohort default rate calculations if the borrowers are in deferment or forbearance. To date, Congress has not made this change.
11 ' A previous
13
Page 14
default rates increase more than those of public and private non-profit schools. For example, 4 years after borrowers entered repayment, 23.3 percent of proprietary school borrowers have defaulted, compared to 9.5 percent of borrowers from public schools and 6.5 percent of borrowers from private non-profit schools, as shown in figure 5.
Figure 5: Proprietary Schools Have Higher Default Rates Than Public and Private Non-Profit Schools
25
23.3
22
r----
20 17
-16.7
15 12
10
8.6
r----
,---
9.5
7.2
- 6.5
4.7 f--
4.7 5 r---2
3 f--
0
2-year rate 3-year rate 4-year rate
t=J t=J t=J
Public Private non-profit Proprietary
Source: GAO analysis of 2004 cohort data from N SLDS, provided by the Department of Education of 2-year, 3-year, and 4 -year defa u ~ rates by sector.
Generally, higher default rates in the proprietary sector persist for programs of different lengths. Among 4-year schools, the default rates at 2, 3, and 4 years into repayment are higher among proprietary schools than other schools. Further, at 4-year school'>, the default rate 4 years into repayment for proprietary schools is more than twice the rate of public and private non-profit schools. See figure 6.
Page 15
Figure 6: Among 4-year Schools, Proprietary Schools Have Consistently Higher Default Rates Than Other Schools
20
18 16 14 12 10
8 6
,..---
19.2
-13.7
~
,.----
7.1 ,.---5.3
4.5 f--
6.2
4
2 0
3.5
r--
2.8
2-year rate 4-year schools
3-year rate
4-year rate
c=J Public c=J c=J
Non-profit Proprietary
Source: GAO analysis of 2004 cohort data fro m NSLDS, provided by the Depa rtment of Education of 2-year, 3-year, and 4-year default rates by sector.
Similarly, among 2-year schools, proprietary schools have higher default rates than other schools. For example, the default rate 4 years into repayment for proprietary schools is the highest-27.2 percent-of the three school sectors. See figure 7.
Page 16
Figure 7: Among 2-year Schools, Proprietary Schools Have Higher Default Rates Than Other Schools
30
-27 .2
25
20
19.5 ,..---
16.6 16.2 15
9.9
12.2 I--
10
~ 1--7.4
r--
0 2-year rate 2-year schools 3-year rate 4-year rate
c=J c=J c=J
Public
Private non-profit Proprietary
S o urce: GAO analysis of 2004 cohort data fro m NSLDS, provided by the Department of Education of 2 -year, 3year, and 4 year defau~ rates by sector.
Among less than 2-year schools, proprietary schools have higher default rates than public schools, but nearly identical rates to those of private nonprofit schools.15 See figure 8.
15 According to 2004 cohort data of individual schools for which Education calculated a 3year cohort default rate, among programs less than 2 years in length, there were 556 p rop rietary schools, but only 86 public schools and 19 non-p rofit schools.
Page 17
Figure 8: Among Less Than 2-year Schools, Private Non-profit and Proprietary Schools Have Nearly Identical Default Rates
30
26.7 26 6
25
21 18.7
17
18.5
12
9 8 8.9
14.1
.---
9.7
-5.7
4 0 2-year rate Less than 2-year schools 3-year rate 4-year rate
[:=J [:=J [:=J
Public
Private non-profit Proprietary
Source: GAO analysis of 2004 cohort data from NSLDS, provided by the Department of Education of 2year, 3year, and 4year defa u~ rates by sector.
Even though the proprietary sector generally has higher cohort default rates than the public and private non-profit sectors, many individual proprietary schools have lower rates than the sector as a whole. Using a fiscal year 2004 dataset of 3-year cohort default rates for individual schools, we found that some proprietary schools had among the lowest default rates of all schools in the country.16 Our results indicated that 121 proprietary s chools, or about 9.3 percent of all proprietary schools for which Education calculated cohort default rates, had rates under 5
~ducation's fiscal year 2004 dataset was the only one available for ind ividual schools that measured default rates for longer than 2 years.
Page 18
percent. 17 Furthermore, 18 of those schools had no students who defaulted on their loans over the 3-year period. These proprietary schools with relatively low default rates represent a variety of ownership types and program offerings.
Various Student Characteristics Contribute to Higher Default Rates, according to Research
Variations in default rates across school sectors may reflect the characteristics of the students who attend the schools, according to academic research studies. Although the research linking explanatory factors to federal student loan defaults is limited, especially in recent years, we found in 8 of the 11 studies that we reviewed that there are multiple demographic characteristics of borrowers that correlate with higher default rates. 18 In several of the studies, two borrower characteristics closely linked to higher default rates are low family income and parents who lack a higher education degree. Analysis of Education's data shows that the annual median family income of ~'tudents at proprietary schools is significantly lower than that of students at public and private non-profit schools. Data analysis also show that a significantly lower percent of parents of proprietary school students have an associate's degree or higher, compared to parents of public and private non-profit school students. See table 2 for data on family income and parental education of students at proprietary, public, and private non-profit schools.
17
Across all sectors, schools w ith cohort default rates of less than 5 percent qualify for the most favorable loan disbursement and delivery terms. Such schools can disburse student loans in a single payment at the start of the year for study-abroad students. Further, schools that have a coho rt default rate under 10 percent for the 3 most recent fiscal years can disburse federal student loans at the start or the semester and in a single installment if the period or enrollment does not exceed l term or 4 months. 20 U.S.C. 1078-7(a)(3) anct (e). 8.t'he remaining three studies examined factors other than demographic characteristics that may correlate with high default rates.
1
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Table 2: Family Income and Parental Education of Students at Proprietary, Public, and Private Non-Profit Schools Annual median family income Parents with associate's degree or higher (percentage)
37
School sector
Proprietary Public Private non-profit
Source: GAO analysis of 2004 NPSAS dataset
$24,300 40,400 49,200
52
61
Note: These numbers are estimates and include both dependent and independent students.
Student age was also linked to default rates in some of the research studies, with borrowers who take out student loans at an older age being more likely to default on their loans. One of the studies that linked age to default rates suggested that older students may default at higher rates because they tend to have other obligations besides paying for college. These obligations may include paying a mortgage or paying for child care. Our analysis of Education's data shows that proprietary schools serve a higher percentage of older students than public and private non-profit schools and the majority of students at proprietary schools are 25 years old and older. Research also shows that borrowers' success in school may help predict whether they will default. We found studies published in national journals that showed that borrowers who have a low grade point average and who are not continuously enrolled in school before they leave their programs are more likely to default. Across the three school sectors and program lengths, a factor closely associated with increased default rates was dropout rates. In six different research studies-three that examined default rates from national datasets and three that examined default rates from state-specific datasets-default rates were positively correlated with drop outs, or students who failed to complete their programs. A 6-year study by Education's NCES, which followed students who began higher education in the 1995-1996 school year, found that a larger estimated percentage of students at 4-year proprietary schools dropped out than students at private non-profit schools. 19 The same ~'tudy e~'timated no statistically significant difference in drop-out rates between students at 4-year proprietary and
w The study p resented results for whether students attained a degree from or were still enrolled at the first institution they attended. For the purposes of our study, we considered those who h ad neith er a degree nor where still enrolled as drop-outs.
Page 20
public schools. In addition, the study estimated that 6 years after beginning a 4-year school, a significantly smaller percentage of proprietary students attained their bachelor's degree compared to those at public and private non-profit schools. In contrast, data show that for students who first started at 2-year proprietary schools, there is a significantly higher percentage who attained their associate's degrees compared to students at public schools. 20 While program completion was an important factor in predicting default rates, we reviewed one study that found that completing associate's and bachelor's degrees were significantly correlated with lower default rates, but completing a certificate or license was not. Characteristics of borrowers' loans and their repayment options may help predict default rates as well. For example, a factor in predicting defaults can be the amount that borrowers take out in loans; those who borrow smaller amounts, according to one study, may have a higher likelihood of defaulting than those who borrow larger amounts. Researchers estimated that borrowing larger amounts is correlated with higher levels of education-such as graduate or professional programs-which give borrowers an increased earning potential so that they are better able to repay their loans. In another study that examined characteristics of borrowers' loans and repayment options, researchers estimated that those who graduated with a bachelor's degree and used the forbearance or deferment options after entering repayment were more than twice as likely to default. Finally, borrowers who had consolidated loans and incomecontingent repayment plans were also more likely to default than those who had not used those options. 21
There is no significant difference in associate's degree attainment between students at proprietary schools and students at, private non-profit schools.
21 I.ncome-contingent repayment plans are based on a borrower's income, family size, and loan amount. Consolidated loans are those tl1at are generally based on tlle weighted average of tlle interest rates on tlle loans being consolidated.
20
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Weaknesses in Education's Oversight of Federal Aid Eligibility Requirements Place Students and Title IV Funds at Risk of Potential Fraud and Abuse at Proprietary Schools
Education's Weak Oversight of ATB Test Requirements Allows Ineligible Students to Receive Federal Aid
Through separate investigations at proprietary schools, we, along with other federal and state investigative agencies, found test administrators or school officials violating rules to ensure prospective students without high school diplomas passed required tests and obtained access to Title IV aid. Generally, prospective students without high school diplomas or GEDs must pass ATB tests to become eligible to receive federal financial aid, and test administrators are responsible for administering ATB tests at schools in accordance with test publisher rules. When we conducted our own investigation of compliance with ATB requirements, we found improper activities that compromised the integrity of the test process. For example, in 2008 we sent two GAO analysts who posed as prospective students to a local branch of a publicly traded proprietary school to deliberately flunk an ATB test. Each analyst was sent separately to the school and on both occasions, the independent test administrator gave them and all the test takers in the room-about 20 in total-answers to some of the test questions. We later obtained copies of the analysts' test forms and found that they had been tampered with-their actual answers had been crossed out and changed-to ensure the analysts passed and would become eligible to receive Title IV funds. We turned over the information on testing violations to Education's Office of Inspector General (OIG), which then used the information to further investigate the ATB tests at this school. Investigators at the OIG and the New York Department of Education have previously reported finding similar problems. For example, in one case the
Page 22
OIG found personnel at a proprietary school in Louisiana had changed the failing test scores of prospective students to allow 80 individuals to pass and inappropriately qualify for federal funding. 22 Likewise, in two separate New York investigations in which multiple undercover operatives were sent to flunk ATB tests at local proprietary schools, test answers were changed by either the test administrator or school officials to ensure all people posing as students passed and gained access to federal aid. 23 In addition to giving out test answers and falsifying test results, test administrators and officials at proprietary schools have violated other ATB test rules, impairing the independence of the testing process and allowing ineligible students to access federal financial aid. Regulations governing the test process require test administrators, who are certified by test publishers to administer ATB tests, to be independent of the school at which tests are taken and to submit test answer sheets directly to the test publisher for scoring. However, Education's Office of Inspector General previously found violations of the requirement for independent te~1: administration, in which proprietary school officials inappropriately administered tests. In another case involving improper testing at a proprietary school, the Education OIG found that test administrators failed to follow test rules that govern when students can retake the test on the same form. As a result, 724 students who passed improper retests received over $3 million in federal financial aid. 24 While OIG officials told us that some of their cases have involved public schools, they reported that most of their findings regarding abuse of ATB tests have involved proprietary schools. When ATB tests are not properly administered , a prospective student's ability to benefit from higher education may not be accurately assessed. As a result, prospective students who are academically unqualified are more likely to be admitted to a school and receive federal student aid. Such students are at greater risk of dropping out of school, incurring substantial debt, and defaulting on their federal student loans. These problems result, in part, from key weaknesses in Education's oversight of ATB testing, which were previously identified in a 2002
22
/ nves tigation of Moler B eauty College (Department of Education OIG Investigative Reports: Apr. 12, 2006).
23
/ nter"bor-o Institute, Admission Requ,irements Re~riew (New York St.ate Education Department: Oct. 5, 2005); Investiga.tive Report: CaliberTraining Instil?J,te (New York State Education Department: Apr. 10, 2007). Au dit of Won derf.ic's Abil:ily to Benefit (A TB) Progr am (Department of Education OlG Audit Control Number ED-OfG/03-80022: FebnJary 2002).
21 '
Page 23
Education Office of Inspector General report. 25 As part of its report, the OIG recommended changes to strengthen Education's monitoring of test publishers. Education approves the tests for ATB use and test publishers monitor how tests are administered. However, Education has done little since then to strengthen its oversight of test publishers. Although test publishers are required to conduct and submit to Education test score analyses every 3 years to help identify test score irregularities, Education has not followed up with test publishers to ensure that all comply with these requirements. For example, as of early 2009, one of the four approved test publishers had yet to submit test score analyses due in April 2005 and in April 2008 for two of its approved tests. Further, the same test publisher had failed to submit test score analysis also due in April 2008 for another of its approved tests. Similarly, two of the four test publishers failed to submit test score analyses due to Education in January 2008. Education officials told us the employee responsible for te~1; publisher oversight and review of test submissions retired in 2008. Since that time and until March 2009, no one at Education had followed up to obtain unsubmitted test score analyses, increasing the risk of unidentified test violations and fraudulent access to federal student aid. In response to our review, Education followed up with test publishers in the spring of 2009 to obtain missing test score submissions. In addition to ensuring the timeliness of submissions, Education should also ensure that the analyses conducted by test publishers are sufficient to identify improper testing. When we spoke with OIG and Education officials, they told us that one test publisher provides thorough analyses that have led to the identification of possible violations; however, other test publishers provide only cursory analyses of test scores. According to the Standa:rds for Internal Controls 'i:n the Federal Govern:ment, federal agencies need to have systems in place that ensure timely, effective, and efficient oversight of government programs and continually monitor programs to address potential risks. 26 Weaknesses in Education's systems of controls for monitoring test publishers may not adequately guard against fraud and abuse in the ATB test program.
25
Audit of FSA 's Contr-ols Ove-r ED-Appro ed A 'l'B Prwrrams (Department of Education v
O!G Audit Report ED-OfG/A03-B0001: Aug. 22, 2002).

26 GAO, Standanlsjo? Internal Cont-rol i:n the Feder-al Govemment, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). Internal control standards and the defmition of internal control in Circular No. .i\-123 are based on the aforementioned GAO standards.
Page 24
In addition to problems with Education's monitoring of test publishers, Education regulations do not allow for timely identification of improper test administration. Education's regulations only require test publi'5hers to conduct test score analyses every 3 years. Consequently, test administrators who improperly administer tests can go undetected for 3 years before violations are discovered, resulting in an increased risk of fraud and abuse. As part of the internal control standards for federal agencies, the evaluation of a program should depend on the risks associated with the program and should ensure that timely information is available to allow for effective monitoring.27 Given the risks of potential fraud and abuse associated with the ATB test program, the analysis of test scores every 3 years may leave the program vulnerable to violations. Education and test publisher officials we spoke with suggested that more frequent analyses of test scores by test publishers could improve the integrity of the testing process. Education's regulations also do not specifically require tes-t publishers to follow up on test score irregularities or report any corrective actions to Education. While test publishers are required to identify test score irregularities tl1at raise suggestions that tests are not being properly administered, there is no requirement that test publishers further investigate irregularities to determine if actual violations occurred. In addition, regulations require that test publishers decertify test administrators who fail to properly administer tests; however, Education regulations do not require test publishers to report to Education on the implementation of their decertification process. Because test publishers are not required to provide Education with the results of their decertification activities, Education cannot be assured that test administrators found in violation of test rules are dece1'tified. Likewise, without further requirements in regulation for test publishers to provide information on test administrators, Education has no way to determine whether test administrators decertified by one publisher are instead administering tests for other publishers, and therefore cannot protect against the risk of future violations.
27
GAO, Internal Control Managernenl a,nci Evalual'inn Tool, GA0-01-lOOSG (Washington, D.C.: August 2001).
Page 25
Education's Weak Oversight of High School Diploma Requirements Does Not Adequately Protect against the Use of Diploma Mills to Obtain Federal Aid
During our review, we identified cases in which proprietary schools helped students obtain high school diplomas from diploma mills-entities that provide invalid diplomas, usually for a fee and little academic work-in order to obtain access to federal student loans. Through one of our site visits and interviews with students and student interest groups, we learned of cases where recruiters at two separate publicly traded proprietary schools referred students to diploma mills for invalid high school diplomas in order to gain access to federal loans without having to take an ATB test. In one case, a student interest group told us a student who dropped out of high school in the 9th grade was guided by the proprietary school to take an online test to receive a high school diploma. Based on our discussion with a state education agency, we confirmed that the entity that provided the diploma was a diploma mill. In another case, a student told us he was flunking out of high school when a recruiter at the proprietary school directed him to a place where he could pay a fee to take a test and obtain a high school diploma. Based on our review of that county's listing of high schools considered diploma mills, we later determined that the entity offering the high school diploma was a diploma mill. Although Education has also identified some cases of high school diploma mills- including one in which a proprietary school had arrangements with a diploma mill to secure high school diplomas for 30 students who obtained $76,000 in federal financial aid-Education regional officials told us that the problem may be more widespread than is known. Despite evidence of invalid high school diplomas being used to gain access to federal student loans, Education has not established clearly written policies to help ensure high school diploma requirements are met for Title IV funding. Although senior Education officials told us that the department's official policy is that high school diplomas from diploma mills are not acceptable for Title IV eligibility and the department prosecutes diploma mill cases, Education officials told us they do not explicitly assert this policy in any written form. Rather, Education notes in its Federal Student Aid Handbook that a high school diploma is one that comes from a school recognized by the state in which the school is located. Internal control standards provide that federal agencies should employ effective ways to record and communicate important information to employees and others, such as in policy manuals, to enable them to cany out their duties and responsibilities. 28 Without a written policy that
28
GAO, I nternal Control M anagernenl a,nci Evalu al'inn Tool , GAO-OI-1008G (Washington, D.C.: August 2001).
Page 26
clearly communicates Education's position against the use of diploma mills to obtain access to federal student aid, Education staff and external parties such as schools and independent auditors-who must comply or monitor compliance with Title IV rules-lack important information regarding eligibility requirements. Education officials have acknowledged that the use of high school diplomas from diploma mills to obtain access to federal student aid is a problem and that more guidance would be helpful. In May 2009, Education announced plans to convene public forums to help inform the development of proposed regulations that would address matters related to Title IV program integrity, including the definition of a high school diploma as a condition of receiving federal student aid. In addition to weaknesses in its policies governing high school diploma requirements, Education provides limited guidance and tools that Education program review staff, schools, and independent auditors can use to help identify high school diploma mills. Though Education, in its Federal Student Aid Handbook, advises officials to contact state education agencies if they question the validity of a high school diploma, Education officials told us that program review staff have no other guidance to help them judge whether there is a potential problem. Further, they acknowledged that in many cases, the identification of an invalid high school diploma is based on the experience of the program review staff and whether something appears to be wrong. For example, when a reviewer finds an unusually large number of students with high school diplomas coming from the same school located outside the state, this may prompt the reviewer to look into the origin of the diplomas further. As we noted earlier, standards for internal controls in the federal government require federal agencies to communicate relevant and reliable information to help agency staff and external stakeholders carry out their responsibilities. Education provides limited information and resources that would help internal and external reviewers and schools better monitor compliance with high school diploma requirements. Education officials told us that a comprehensive list of recognized high schools could help Education staff and schools better identify diplomas from diploma mills. Several states already provide lists of the high schools they recognize and make them available to the public on their Web sites. However, Education provides little information on these already available resources that could help officials identify invalid high school diplomas. In contrast, Education already maintains information and resources on its Web site to help
Page 27
individuals identify and avoid higher education diploma mills by listing colleges and universities that are eligible to participate in federal student aid programs. 29 Education's limited guidance to help both internal and external parties detect the use of high school diploma mills for Title IV eligibility may hinder its efforts to ensure that students receiving federal financial aid have the ability to succeed in higher education.
Conclusions
Proprietary schools have become a rapidly growing sector of higher education in this country and will likely continue to grow with the availability of additional federal funding and an increased demand for education and job training. Many of these schools play an important role in providing a range of students, including non-traditional and disadvantaged students, with an opportunity to obtain the education they need to increase their work skills and find jobs. However, students who attend proprietary schools are more likely to default on their federal student loans, which can tarnish their credit records, make it difficult for them to obtain employment, and jeopardize their long-term financial well-being. Students from lower-income backgrounds can be particularly hurt when they default on their loans. In addition, taxpayers and the government, which guarantees the loans, are left with the cost when students default on their school loans. To decrease the likelihood that students will default on their loans, it is critical that Education increase its oversight of federal student aid eligibility requirements to make sure that only students who have the ability to benefit receive federal funds to attend college. While our findings do not represent nor should they be interpreted as implying widespread problems at all proprietary schools, our work has identified significant vulnerabilities in Education's oversight that should be addressed. Without better oversight of the ATB testing process to ensure more frequent identification of improper testing, and stronger processes for handling and reporting improper testing, both the integtity of the testing process and the qualifications of students who receive federal funding cannot be assured. In addition, without stronger controls, such as clear guidance from Education banning the use of high school diploma mills to obtain federal
~e Higher Education Opportunity Act, which reauthorized and amended the Higher Education Act, provides that the Secretary shall maintain information and resources on the department's Web site to assist students, families, and employers in understanding what a coU diploma mill is and how to identify and avoid such diploma mills Pub. L. No. 110ege 315, 109.
Page 28
aid and information on how to identify diploma mills, the government cannot be assured that its student aid funds are only provided to students who have an ability to benefit from higher education. Unqualified students who receive federal financial aid for higher education programs are at greater risk of dropping out of school, incurring substantial debt, and defaulting on federal loans. Targeted improvements in these areas would help provide greater assurance that the federal investment in higher education and students are adequately protected. In order to help ensure the eligibility of Title IV recipients, the Secretary of Education should strengthen the department's process for monitoring the ATB program. Education should: Conduct regular follow-up of ATB test analyses submissions to ensure federally approved test publishers provide complete submissions as required; and Use data provided by test publishers on schools where test administrators improperly administered test." and were later decertified to target schools for further review.
Recommendations for Executive Action
In order to help ensure that only eligible students receive Title IV funds, the Secretary of Education should revise regulations to strengthen controls over the ATB testing process. For example, under its authority to regulate the administration of tests, Education could consider: Requiring test publishers to conduct an interim or mid-point analysis-a supplement to the 3-year test score analysis and submission requirement-to provide a preliminary review of potential testing problems, and submit a copy of their results to the Secretary; or Requiring test publishers to have a process to follow-up on identified test score irregularities, take action to decertify test administrators if test irregulruities suggest improper test administration, report actions taken as a result of test score analyses to the Secretary and prohibit test publishers from using ATB test administrators who have been decertified by any test publisher.
In order to protect against the use of high school diplomas from diploma mills to obtain Title IV eligibility and help ensure that only students with
Page 29
the ability to benefit from higher education receive federal aid, the Secretal-y of Education should: Create guidance, using information gathered from public hearings or other forums regarding the definition of a high school diploma, to clearly communicate to Education staff, schools, and independent auditors the department's position that diplomas from high school diploma mills cannot be used for Title IV eligibility purposes. For example, Education could provide this guidance through regulation or the Federal Student Aid Handbook; and Establish a cost-effective and readily available source of information that the department's program review staff, schools, and independent auditors can use to help them determine whether a high school diploma is from a diploma mill. For example, Education could obtain existing lists of stateapproved high schools and make them available on the department's student fmancial aid Web site.
Agency Comments and Our Evaluation
We provided a draft of this report to the Department of Education for review and comment. The agency provided written comments, which are reproduced in appendix II. In its comments, Education noted the steps it will take to address our recommendations: In response to our recommendation that Education strengthen its oversight process for monitoring the ATB program, Education commented that it is changing its procedures for monitoring ATB test publishers to ensure that required reports and analyses are submitted in a timely manner, and program compliance staff are provided the information.
In response to our recommendation that Education strengthen regulations that govern the ATB test process, Education commented that it is considering the management of the ATB testing process as a topic to include in the new round of upcoming negotiated rulemaking sessions.
In response to our recommendation that Education provide guidance and establish a cost-effective and readily available source of information to protect against the use of diplomas from high school diploma mills, Education provided the following comments. With regard to providing guidance, Education noted that it is considering revising the regulations regarding high school diplomas through the upcoming negotiated rulemaking process. Education noted that fmal regulations would become effective no sooner than July 1, 2011, as provided under the Higher Education Act of 1965, as amended. In the interim, Education will provide
Page 30
additional guidance in the next revision of the Federal Student Aid Handbook. However, in regards to providing a source of information to help protect against the use of diplomas from high school diploma mills, Education commented that there is no centralized source for information about all high schools and no specific ~'tatutory authority for Education to create and maintain one, making it unlikely that it will be able to establish a readily available source of such information. Further, Education stated that it can only expend appropriated funds for authorized purposes, and this use is not authorized under the Department of Education Organization Act or other federal education laws. We acknowledge that there is no centralized source for information about all high schools and we do not recommend that Education investigate the status of all high schools. Rather, we recommend that Education collect readily available information, such as already existing lists of state-approved high schools, and make them available on its student fmancial aid website. Under the Higher Education Act, as amended, Education is responsible for administering and overseeing the Title IV student aid programs, including the eligibility requirements for obtaining Title IV funds. Education's oversight includes the responsibility to protect against the improper use of Title IV funds. Given that publishing information on state-recognized high school diplomas on its Web site will assist Education in carrying out its oversight responsibilities, in our view, Education's appropriations are available to fund this effort. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Education and interested congressional committees. The report will also be available at no charge on the GAO Web site at www.gao.gov.
Page 31
If you or your staff have any questions about this report, please contact me
at (202) 512-7215 or scottg@gao.gov. Contact points for our Offices of Congressional Relations and Public Mfairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Sincerely yours,
George A. Scott, Director Education, Workforce, and Income Security Issues
Page 32
Appendix I: Objectives, Scope, and Methodology

This appendix discusses in detail our methodology for addressing two research questions: (1) How does the student loan default profile of proprietary schools compare with that of other types of schools? and (2) To what extent do Education's policies and procedures for monitoring student eligibility requirements for federal aid at proprietary schools protect students and the investment of Title IV funds? To address these questions, we analyzed data and records obtained from Education; reviewed federal laws, regulations, agency policies, and relevant research studies and investigations; conducted interviews with Education officials and with other representatives of the higher education community; and conducted site visits and undercover visits to schools. We conducted our work from October 2007 through August 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and recommendations based on our audit objectives.
Analysis of Education Data
To determine how proprietary schools compare to public and private nonprofit schools in regard to federal student loan default proflles, we analyzed fiscal year 2004 cohort default rate data that Education calculated from the National Student Loan Data System (NSLDS). NSLDS includes data from schools, agencies that guaranty loans, the Direct Loan program, and other Education programs. We used fiscal year 2004 cohort default rate data to analyze default rates 2, 3, and 4 years after students entered repayment. These data were drawn from NSLDS in December 2007. From the dataset of 3-year cohort default rates for individual schools, we conducted our own analysis to calculate the numbers of proprietary schools that had default rates of 0 and under 5 percent. We chose 5 percent because it is a qualifying rate for the most favorab le loan disbursement and delivery terms in all school sectors. In addition, we used Education calculations of Title IV funding for the various sectors over time from NSLDS for background information. We began our data analysis of Title IV funding in the 2001/02 award year after learning from a dat.a specialist at Education that data prior to 2001/02 are considered less accurate because the Department used different methodologies to identify and calculate Title IV funding data. To ensure that the Title IV funding and cohort default rates from NSLDS were accurate for us to report Education's data and for us to conduct our own analysis, we reviewed information about the data itself and the NSLDS system and interviewed an Education official knowledgeable about the data and the system.
Page 33
App e ndix T Objectives, Scope, and : Methodology
Additionally, we reviewed the analyses that Education performed and determined that the data were accurate and reliable for our purposes.
As part of our analysis of student default rates, we examined data on student demographics and outcomes. To identify information on borrowers' dependency status and their parents' education and income levels, we analyzed the most recent student survey data available from the 2004 National Postsecondary Student Aid Study (NPSAS). NPSAS is a nationally representative sample of students in postsecondary education institutions, including undergraduate and graduate students from all types of institutions. To provide information on borrowers' age, gender, enrollment, and racial status, we analyzed the most recent data available on schools during the 2007/08 school year from the Integrated Postsecondary Education Database System (IPEDS). IPEDS contains data on postsecondary institutions such as student demographics, enrollments, and fmances. Finally, to provide information on student outcomes, specifically degree attainment and drop-out rates, we used data from the Descriptive Su'Ymnary of 1995-96 Beginni:ng Postsecondary Students: Six Yea-rs Later study, conducted by the National Center for Education Statistics (NCES). The NCES study provides information on enrollment, persistence, and attainment of students from the time they began higher education for the first time in academic year 1995-1996 until the 2000-2001 academic year. We tested results from this study for statistical significance and reported on our findings. The 1995/96 study was the most recent that included data on bachelor's degree attainment 6 years from the time that students started school. NCES's study of its most recent cohort-those who began their postsecondary education in 2003/04-is now in progress; therefore, 6-year results are not yet available.
We assessed the reliability of the datasets we used from NPSAS, IPEDS, and NCES for our study by: (1) performing electronic testing of required data elements, (2) reviewing existing information about the data and the system that produced them, and (3) conducting interviews with a data specialist from Education. Based on these assessments, we determined that data were sufficiently reliable for the purposes of reporting. To determine the extent to which Education's policies and procedures for monitoring student eligibility requirements for federal aid at proprietary schools protect students and the investment of Title IV funds, we reviewed Education's policies and procedures for monitoring the administration of ability-to-benefit (ATB) tests and high school diploma requirements. We also reviewed relevant program reviews and independent audits of schools
Analysis of Education Policies and Records
Page 34
GA0 -09-600 Proprietary Schools
found to be in violation of ATB test administration procedures, relevant laws and regulations, and enforcement actions taken against schools. To assess the number of schools subjected to sanctions due to their high cohort default rates, we also examined Education's records from 1992 through the present. We selected 1992 as it was the first year from which Education data were available on numbers of schools by sector that were subject to immediate loss, suspension, or termination from the Title IV program.
Research Studies
To understand the different factors that are linked to high default rates, we reviewed 11 academic studies about student defaults. Our criteria for selecting studies were those that were original research, peer-reviewed, or performed with a strong methodology and focused on explanatory factors for default rates. The studies we used were published from 1994 through 2008. For each of the selected studies that are used in this rep01t, we determined whether the studies' findings were generally reliable. We evaluated the methodological soundness of each study and only reported on those results deemed statistically significant.
Department of Education and Expert Interviews
To examine Education's oversight of proprietary schools, we interviewed officials from Education, 10 state education licensing agencies, ATB test publishers, and education associations. At Education, we spoke with officials in Federal Student Aid, field offices, the General Counsel's office, the Office of Inspector General, and the Office of Postsecondary Education. The ATB publishers we spoke with were Wonderlic Inc., ACT, and College Board. We interviewed experts from a broad range of higher education associations and interest groups including the Ame1ican Association of Community Colleges, the Career College Association, the American Association of Collegiate Registrars and Admissions Officers, the "I Have a Dream" Foundation, the National Association for Collegiate Admission Counseling, the National Association of Student Financial Aid Administrators, and the National Consumer Law Center.
Site Visits
To understand schools' administrative, admissions, and financial aid practices as they relate to Education's policies and procedures for monitoring Title IV funds, we conducted site visits at proprietary schools in California, Illinois, New York, and Virginia. We selected these sites for geographic diversity and chose schools that represented a mixture of own ership types (independently-owned and publicly-traded schools), and degree and certificate programs. We also conducted site visits at
Page 35
community colleges in Maryland and illinois to provide us with a perspective of comparable programs in the public sector. We selected these schools based on geographic diversity and their breadth of both certificate and degree programs. During all site visits, we interviewed administrators, faculty, staff, and students to learn about topics including admissions practices, financial aid disbursement, and program offerings. To examine the extent to which Education's policies and procedures for monitoring student eligibility requirements for federal aid at propriet.ary schools protect students and the investment of Title IV funds, we tested compliance with ATB tests. To do so, GAO analysts, acting in an undercover capacity, posed as prospective students on two separate occasions to take and purposely fail ATB tests at a local proprietary school. We chose this proprietary school chain based on geographic proximity. We supplemented this work with a review of investigations conducted by Education's Office of Inspector General and the New York Department of Education.
Undercover Visits
Page 36
Appendix II: Comments from the Department of Education
CIIIH <WillA liNG ~HHCI R
JUL 2 'f 2001

.Mr. George A. Scott Dtrcctor. Educ:uion. Wotkforc~. and Income Security Issues Gowrnmetll Accoumobilil} Otlke 441 G Sm.-et. NW Washington. DC 20548
Ucar \1r Scott:
In accord;mcc wtth 31 U.S.C.
no. I ;un 1\ riting ro rcspml<l to recommend~tions maJc 111 the
Gov.:nunent Accour>tal,ilil} Office (GAO) rcpon. 'Proprietary Schools: Stronger Deportment of Education Oversight Needed to llelp Ensure Only Eligible St\ldents Rccervc Federal Student Aid'' tGA0-09-(j()()). The report recommendations focus<..xl on monitoring bas1c skills tests. or
Abtlit)'tOBcnelit (ATB) tests, rcvrsing rcglliauous r<:l:uing to those t<lsts. rutd providing information and guidance on 'a ltd l11gh school <IJplomas for use 111 gai111ng access to federal student .nd Below is the Depanmem of Education's (0cpm1mcnt"s) fCS[>OliSC to each recommendation. Rccottuneudatioo l: The Secrewry of&l11mtion shoultl strcmgthen the department's prQCr<s for momtormg rheA 71l program. conductwg regularfollou up ofATB te.tl tlllttf)'IWS submisSIOIIS to cnsure_(edemflt apprO'ecltest puJJllslu:rs prmirle complete subnusswns rr~ rcquireJ: ,md using data prmided by t.~t publishers on sc/1(}()1.~ wllt-re test ntlnlimstrutors mrproperf.r ndmniiSit-red tests cmd were Iuter deccrttfled to wrgct schools forjitrther rt'Vit'w. Re ponse: federal Studeut Atd is changlllg its procedure~ to ensure th~t ATB t<:st pllblishers lrc subrtutung require<! rcpons :tnd an:tlys.:s 111 timerramcs consistent'' ith the regulatory requirements. and "Will provide that in1om1ation to Progrmn C"omphanre staff. Recommendat ion 2: The Setn'ICU)' o( l'Aluc<IIIOII should rcw~c regulallons tn $/rtn.r:tlren control.\ eve,- the A Til testing procCS;>, retftliriug test publishers 10 conduct m1 mtenm or mhlpomt mw~~-sts- a supplemi!Jtf 0 tlte 3-year test scote mtuly!u~ lt'ml.mbmb.sitm N.'<flllremem 10 prcwide tt prl!lullliiW')' t'el't<'ll ofpolelltmltesung proble11~~. wul submit '' copy of1heir rcsul1:r to the Sectetary, Ot' riU{Uirmg te.rt publishe-rs to hate a process 10 follow up 011 identific'fl test scorl!
in-eguhmtics, take (I(;/ion ''' dto:t.crtif> test ttdmmistnrtors ifwst irregularities .<uggest impmptr te.sl aclmmtstration. report ucnom wken as a result of l~t.~corot una!vses to the Sec.ret11nancl prohibatest pubUshi!J-sjrom usmg ATH lt!St udmi11istrators 1vho /ral't> hetm clecl!rlijied by tttiJ' test publisher
1130 HrM Sr. ~.l:.. W....,tungmn. IX: 211::!02 '' ww.f~dcraiStudooiAiu.ed.tw

1-SOO-.!-fF.D-1\ ID
FEDFRAL STUDENT AID
.]:!~START
HERE. GO FURTt l ER.
Page 37
Appendix II: Comments from the Department of Education
Rcspous~: 'll:c Office ofPostsccond.rry Educ:uion {OPE) hM begun a new tlll1d ofnegountcd rulemaking, huvmg conducted public hearings ln D.:lwer, Lmle Rock, and Philadelphia :mJ rece1ved additional public comm<!nts bye-mail. The D~:n1mcnl is cons1derm~ u1Ciuding managcmtcnt of the ATB ti!Sling proces~ as a topic within the upcomiJJg negotiated rulcmaking sessions.
Recommendation 3: 771!> Set-retcLY)"Qj Edu<atian sltoultl create guidtmc.:, usmg ttl)OY!nfltiou gtt(/Ulrcdfrom public luwrmgs or nrlu:rfontmsrcgttrding th~ d~jimtiJ)IJ Of a/ugh sd<Ool diploma, co clear(r coJmnwtit'tJJe to dm:aJicw swjf. school.; nnrf independem t111tlitors che dl!f'lll'/111('/l/ $ posillontltru 1hplomas from !ugh sd10ol diploma mills canno1 f>e used for Title 1 V ellgihilt(' purposes: and estabbslz tl cost<1Jcctile wtd rc(t(b~vavmlnble source c!finformaliou t/t(lt the rlepmtment progmm rt>\'1<'"' stuff. schools. and imleptmdenl muluors cnnu.ve 10 help them d(!tcmwtc whetlt"r (/ high school drp/om/1/S from u diplomltnlllf.
ftl'sponse: 1\s indic:~tcd pre,iously in meetings with GAO staff, lhc Dcparunern IS cons1dcnng using the negotiatC<l ntl<!m:lking process to make changes to the ex1st1ng regulatory l'l."tJUiremems related to high :\chool diplomas u.s a component of chgibilily fot' feder.:tl stnde.ut oid. OC(;ause of the sMutocy rcqwn.:111cnts related to negotiated J'Uleonaking. incl1tding the delayed e!Tc<:tivc dote rcquircn,.::nls cont;oilwd in the muster l'lllcndar provisions oflhe Higher Educution Act of 1965, as amended, this process would result in final regulations becoming cffecuvc no sooner th~n July I. 20 I 1. ln the interim. the Department will provide addition:tl g\tidancc. based on tltt: current r..:gulatory requircme..tts, m the next rc\'ision to the Feder.~ I Student AiJ llandbook. As there is no ceru.rali~cd source Jor information about all high schools and no specific statutory authority for the Dcpanntcru to cre:te aud maintain one, i11s unlikely that the Oeparrmcnt will be able to CSt3b1isb a r~dily available sourcc of such irlli'>rm:ttion. The Department can only expend appropriated funds for authorized purposes. and this usc is not authorized under the Department of Education Organuation Act or other fcdcr.tl cduc:uion laws. If you or )'Oltr staff has any quesuons regarding these responses. please contact Jeff Baker at 202-377-4009.
Page 38
Appendix III: GAO Contact and Staff Acknowledgments

George A. Scott (202) 512-7215 or scottg@gao.gov
GAO Contact Staff Acknowledgments
In addition to t he contact name above, the following staff members made important contributions to this report: Melissa Emrey-Arras, Assistant Director; Kathy Peyman and Claudine Pauselli, Co-Analysts-in-Charge; Karen Febey; Jessica Mace; and Lauren Mohlie. Also, Jean McSween, John Mingus, and George Quinn provided guidance on the study's design and data analysis; Jessica Botsford provided legal advice; Mimi Nguyen and Cheron Brooks assisted with report graphics; and Ashley McCall provided library services. In addition, Paul Desaulniers, Kim Perteet, and Ashanta Williams made contributions to the report. Susan Aschoff and Charlie Willson advised the team on writing the report and Nagla El-Hodiri, Carla Craddock and Michelle St. Pierre verified our findings.
P age 39
GA0 -09-600 Proprietary Schools
Related GAO Products
Student Loans: Default Rates Need to Be Computed More Appropriately.

HEHS-99-135. Washington, D.C.: July 28, 1999.
PrO']Yrietary Schools: Analysis of Comments ReceivedfrO'rn an Association ofSchools. HEHS-98-12R. Washington, D.C.: October 1997. Proprietary Schools: Poorer Student Outcomes at Schools That Rely More <Yn Federal Student Aid. HEHS-97-103. Washington, D.C.: June 1997. Proprietary Schools: Millions Spent to Train Students for Oversupplied Occupations. HEHS-97-104. Washington, D.C.: June 1997. School Accreditation: Activities of Seven Agencies That Accredit Proprietary Schools. HRD-90-179BR. Washington, D.C.: September 1990. Man-y Proprietary Schools Do Not Comply With Department of Education's Pell (}rant. HRD-84-17. Washington, D.C.: August 1984.
(130811)
Page 40
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" ..;
Please Print on Recycled Paper
From: Finley, Steve To: Macias Wendy CC: Date: 9116/2010 10:40:48 AM Subject: FW: new report on GE
The report described below is attached.
Here is the linlc
http://www.educationsector.org/sites/defaul tlfileslpublications/Gainful-Report_RELEASE. pdf
Are You Gainfully Employed? Setting Standards for For-ProfitDegrees Education policy events in Washington, D.C., attract a familiar cast of characters: think tank representatives, members of organizations with eight-letter acronyms, and the occasional retired college professor. But an event at the New America Foundation this summer attracted a different crowd: organizations with names that ended in "markets," "capital," and "fund." The questions from the audience weren't about quality teaching or common curriculum standards; they were about income vs. earnings, access to federal databases, and student debt thresholds. Someone hearing just the audio feed might have easily mistaken the conference for the quarterly earnings call of a Fortune 500 corporation. The subject of the event was for-profit higher education. Representatives from the financial sector had come to New America, a nonpartisan public policy institute, to hear a high-level Obama administration official talk about a regulatory controversy that could make them-or lose themhundreds of millions of dollars. Just a few days before, the U.S. Department of Education had released a new proposal that would make it more difficult for for-profits to access billions of dollars in federal funds. At the center of the proposal is a rule called "gainful employment" that would penalize forprofit colleges and other vocational training programs for saddling students with more debt than they can pay back. For-profits have grown by leaps and bounds in recent years, largely free of federal regulation. That freedom would be significantly curtailed if the gainful employment standard takes effect. Vocational training programs would be judged by the ratio of the debt that graduates assume relative to their current earnings and the rate at which they are able to repay it. If programs offered by for-profit colleges exceed certain thresholds on those measures, they risk losing eligibility for federal student aid. Given that many for-profit colleges receive close to 90 percent of their revenue from federal grants and loans, losing access to these dollars would be a death sentence. With such high stakes, the proposed gainful employment standard has generated intense debate. While the owners of for-profits see a $29 billion industry that produces some of the best earnings ratios in the stock market, a group of wellfunded short-sellers paints a picture of a fraudulent, over-leveraged industry that's poised for a subprime mortgage-style collapse. The institutions argue that they serve a class of students excluded from traditional higher education and that they are crucial for meeting the Obama administration's college completion goals. But many lawmakers worry that in fulfilling
that mission, for-protits have relied too heavily on federal aid, forced students to borrow too much money, and produced degrees of questionable worth. Sen. Tom Harkin, the Iowa Democrat who chairs the Senate committee overseeing these schools, has warned that "even good actors in this industry are lured into the vortex of bad practices in order to compete and meet investors' expectations." Critics of the gainful employment standard, meanwhile, have claimed the proposaJ "will eliminate quality programs while doing little or nothing to address the issue of excessive student debt." Some have even gone so far as to say it "will attack our freedom and individual liberty to make decisions that have consequences." Yet despite aJl the noise and controversy, important questions have been left unanswered: Which institutions are most vulnerable to the proposed rules? What types of programs are most likely to be affected? This report tries to answer these questions, using publicly available data to present, for the first time, a picture of what effect the gainful employment proposaJ could have at more than 12,600 vocational programs at colleges and universities across the country. This includes more than 2,350 bachelor's degree programs ....
EDUCATIONSECTOR REPORTS
September 2010
ARE YOU GAINFULLY EMPLOYED?

Setting Standards for For-Profit Degrees
By Ben Miller
ABOUT THE AUTHOR

BEN MILLER is a policy analyst at Education Sector. He can be reached at bmiller@educationsector.org
ABOUT EDUCATION SECTOR

Education Sector is an independent think tank that challenges conventional thinking in education policy. We are a nonprofit, nonpartisan organization committed to achieving measurable impact in education, both by improving existing reform initiatives and by developing new, innovative solutions to our nation's most pressing education problems.
Copyright 2010 Education Sector Education Sector encourages the free use, reproduction, and distribution of our ideas, perspectives, and analyses. Our Creative Commons licensing allows for the noncommercial use of all Education Sector authored or commissioned materials. We require attribution for all use. For more information and instructions on the commercial use of our materials, please visit our website, www.educationsector.org. 1201 Connecticut Ave., N.W , Suite 850, Washington, D.C. 20036
202.552.2840 www.educationsector.org
Education policy events in Washington, D .C ., attract a familiar cast of characters: think tank representatives, members of organizations with eight-letter acronyms, and the occasional retired college professor. But an event at the New America Foundation this summer attracted a different crowd: organizations with names that ended in "markets," "capital," and "fund." The questions from the audience weren't about quality teaching or common curriculum standards; they were about income vs. earnings, access to federal databases, and student debt thresholds. Someone hearing just the audio feed might have easily mistaken the conference for the quarter ly earnings call of a Fortune 500 corporation.
The subject of the event was for-profit higher education. Representatives from the financial sector had come to New America, a nonpartisan public policy instit ute, to hear a high-level Obama administration official talk about a regulatory controversy that could make them- or lose themhundreds of millions of dollars. Just a few days before, the U. S. Department of Education had released a new proposal that would make it more difficult for for-profits to access billions of dollars in federal funds. At the center of the proposal is a rule called "gainful employment" that would penalize forprofit colleges and other vocational training programs for saddling students with more debt than they can pay back. For-profits have grown by leaps and bounds in recent years, largely free of federal regulation. That freedom would be significantly curtailed if the gainful employment st andard takes effect. Vocational training programs would be judged by the ratio of the debt that graduates assume relative t o their current earnings and t he rate at which t hey are able to repay it. If programs offered by for-profit colleges exceed certain thresholds on those measures, they risk losing eligibility for federal st udent aid. Given t hat many for-profit colleges receive close to 90 percent of their revenue from f ederal grants and loans, losing access to these dollars would be a death sentence. With such high stakes, the proposed gainful employment standard has generated intense debate. While the owners of for-profits see a $29 billion industry that produces some of the best earnings ratios in the stock market, a group of well-funded short-sellers paints a picture of a fraudulent, overleveraged industry t hat's poised f or a subprime mortgage-style collapse. The inst itutions argue that they serve a class of students excluded from traditional higher education and that they are crucial for meet ing the Obama administrat ion's college completion goals. But many lawmakers worry t hat in fulfilling that mission, for-profits have relied too heavily on federal aid, forced st udents t o borrow t oo much money, and produced degrees of questionable worth. Sen. Tom Harkin, the Iowa Democrat who chairs the Senate committee overseeing t hese schools, has warned t hat "even good actors in t his industry are lured int o the vortex of bad practices in order t o compete and meet investors' expect ations." 1 Critics of t he gainful employment standard, meanwhile, have claimed t he proposal "will eliminate quality programs while doing little or not hing to address the issue of excessive st udent debt. " 2 Some have even gone so far as t o say it "will attack our freedom and individual liberty to make decisions that have consequences. " 3
Yet despite all the noise and controversy, important questions have been left unanswered: Which institutions are most vulnerable to the proposed rules? What types of programs are most likely to be affected? This report tries to answer these questions, using publicly available data to present, for the first time, a picture of what effect the gainful employment proposal could have at more than 12,600 vocational programs at colleges and universities across the country. This includes more than 2,350 bachelor's degree programs. Much of the focus in Congress and in the media has been on institutions, particularly those that are publicly traded. But this analysis suggests that individual programs within those institutions may vary widely in how they perform under the proposed gainful employment standard. An institution could very well offer both programs that are unaffected and programs that become ineligible for federal student
Overall, the programs most likely to be affected are those tied to high-tech fields, such as e-commerce or graphic design, or those tied to jobs with low expected starting salaries, such as medical assistant or chef. Although these programs cover a range of different jobs, they employ similar marketing tactics. Colleges are forbidden by law to make false promises of jobs or to inflate salary data, so they play on emotions, appealing to students' desires to be valued in their careers.5 TESST College of Technology in Beltsville, Md., a school owned by Kaplan Higher Education, tells would-be medical assistants that they are joining a "growing field that allows [them] to assist others in need."6 Students looking at Le Cordon Bleu Institute of Culinary Arts, owned by Career Education Corporation, are encouraged to "follow [their] passion" and "explore [their] creativity. " 7 Kaplan advertises its information technology degrees as a chance for students to "be the most valued person at work. "8 And at the Art Institute of Pittsburgh's Online Division, the ads for the interior design program tell prospective students that they can have a "profound impact on people's lives."9 These marketing pitches also often tout the benefits of an entire industry, like health care, rather than the realities of the specific job for which the program is preparing students- jobs that are entry-level with low pay and typically have little opportunity for advancement. And as this analysis shows, many of these programs are poor investments for students. While these at-risk programs comprise only a small minority of all programs at for-profit colleges, it would be wrong to conclude that most for-profit programs will emerge from the new federal standards unscathed. A much larger number-some 65 percent-are likely to fall in a middle ground between full eligibility and total ineligibility called "eligible with a debt warning," which requires colleges to, among other things, post prominent cigarette pack-style "debt warnings" alerting potential students to the likelihood that enrolling could be hazardous to their financial health. The gainful employment standard would not lead to a wholesale shutdown of the for-profit sector. But it would probably force many for-profits to substantially change their pricing and approach to student debt.
Colleges are forbidden by law to make false promises of jobs or to in late salary data, s hey play on emotions, appealing to students' desires to be valued in their careers.
aid. This analysis also finds that the type of programs that could lose eligibility under the gainful employment standard vary significantly. For instance, there are a large number of ineligible programs for medical assistants, but these programs only exceed the proposed debt-to-income standard by a few thousand dollars, meaning they could avoid penalties if they slightly reduced their costs. Others programs, like those in culinary arts, are less likely to be ineligible, but those that miss the mark often miss by a wide margin. Out of more than 12,600 programs, about 4 percent, or just over 500 programs, would lose eligibility because of the new standard. This includes 8 percent of bachelor's degree programs, 6 percent of associate degree programs, and 1 percent of programs that are generally certificate programs of two years or less. 4
More broadly, it would establish a new federal perspective on higher education, involving close examination of college prices relative to graduates' future earnings, an idea that was first contemplated decades ago but is only now seeing the light of day.
requirement, Congress and f ederal agencies turned their attention to closing schools, tracking the rate at which borrowers defaulted on their loans, and limiting the percentage of revenue for-profit colleges could receive from federal aid programs. Today, for-profits are again in the spotlight. Enrollment at these schools grew by 160 percent in the last decade. 11 And despite enrolling only about 10 percent of all students, for-profits consume 25 percent of all Pell Grant dollars disbursed and 21 percent of all federal student loan dollars.12 That's a large investment for a sector in which the average graduation rate is 20 percent for bachelor's degrees and just over 60 percent for programs of two years or less, and in which it's estimated that as many as 40 percent of student loans go into default. 13 Those numbers have prompted the federal government to take a fresh look at the sector. The U.S. Senate has held multiple hearings about the quality, recruitment practices, and cost of these institutions, questioning whether the more than $26 billion in federal aid given to these schools each year is a good investment. Likewise, the Obama administ ration is seeking greater control of these schools through the regulatory process. This June, the U.S. Department of Education proposed language on 15 issues that, among other things, would prevent for-profit institutions from paying recruiters based on student enrollment and provide more consumer protections against false advertising. A month later, it released a proposal to define gainful employment by relying upon measures of student borrowing, expected earnings, and student loan repayment rates. That regulation is currently going through a public comment period, and a final version will be released later in 2010. If enacted, it will go into effect on July 1, 2011. It if does, the standard would tie college quality to work-force outcomes for the first time, substantially changing the way vocational programs are judged in the process.
An Undefined Standard
Gainful employment is not a new standard. When Congress passed the Higher Education Act in 1965, it required that non-accredited public or private notfor-profit programs provide gainful employment in a recognized occupation in order to receive federal money for student aid.10 When for-profit colleges later became eligible for these aid programs, Congress required them to meet the same criteria. But Congress never fully defined gainful employment or explained how colleges could meet the standard. Even when for-profits came under intense scrutiny as part of a Congressional investigation into widespread industry fraud in the early 1990s, the term remained unclear. Instead of clarifying the
Categories of Eligibility
Eligible
These programs have a repayment rate of at least 45 percent, and the annual loan payment is less than or equal to 8 percent of the average annual earnings or 20 percent of discretionary income.
Ineligible
These programs have a repayment rate below 35 percent and an annual Joan payment that is both above 12 percent of average annual earnings and 30 percent of discretionary income.
Eligible with a Debt Warning

These programs have either a repayment rate or debt-to-income ratio that exceeds the threshold for an eligible program, but not both. In other words, the repayment rate must be at or above 45 percent, or the debt-to-income ratio must be at or below 8 percent or 20 percent, but both cannot occur.
Restricted
These programs have a repayment rate below 45 percent and a debt-to-income ratio below 8 percent and 20 percent. They also have either a repayment ratio at or above 35 percent or a debt- to-income ratio at or below 12 percent or 30 percent, or both.
Calculating Gainful Employment

To determine whether a program meets the proposed gainful employment standard, the department will consider how much students borrow to attend that
program, the annual income of program graduates, and the rate at which program graduates repay their loans. Using those first two pieces of information, the department will create a ratio of annual earnings to debt payments. Each individual program offered by a for-profit institution and all non-degree training programs at public or private, not-for-profit colleges would have to meet certain thresholds on the debt-toearnings comparison and maintain a certain minimum repayment rate in order to remain eligible for federal student aid funds. A program's repayment rate looks at the status of federal student loans that entered repayment in the last four years. Among those loans, it measures the dollar amount of all loans being actively repaid divided by the amount of loans that entered repayment during that time frame. The regulation defines the numerator of this equation as the original outstanding principal balance of all loans that entered repayment in the past four years and were repaid in full or had enough payments to reduce the principal owed in the last fiscal year.14 Note that the numerator is based on the original principal value of a loan that is being repaid,
The proposed gainful employment standard also judges programs based upon two ratios of students' annual debt payments to their earnings. They are calculated using the following three figures:
Annual loan payment: The median borrowing amount among graduates from the past three years is used to calculate an annual loan payment based on the assumption that the debt is paid over 10 years with an interest rate equal to the standard unsubsidized Stafford loan rate. Average annual earnings: The average annual income earned by program graduates over a three-year period. 15 This data will be collected by a federal agency, most likely the Social Security Administration, and reported as a single figure to the department. Discretionary income: The average annual earnings minus 150 percent of the poverty threshold for a single individual living in the continental United States (about $16,245 in 2009).
Ineligible programs have a repayment rate below 35 percent and an annual loan payment that is both above 12 percent of average annual earnings and 30 percent of discretionary income.
not the amount repaid. In other words, if the principal owed is reduced by at least $0.01 , then the entire balance of the loan is counted in the numerator. For example, consider a school that had two students borrow $1,000 each. One borrower makes no payments and does not reduce the principal, the other pays enough to reduce the principal owed to $999. In this case, the repayment rate is $1,000 divided by $2,000, or 50 percent. The repayment rate can also be thought of as the percentage of loans being repaid, weighted for the size of the loans.
For each program, the department calculates the annual loan payment and then compares it to both the annual average earnings and discretionary income numbers f or that program. The department's proposal establishes thresholds for repayment rates and debt-to-income ratios. Based upon their performance relative to these thresholds, programs are placed into four different categories of eligibility: "eligible," "ineligible," "eligible with a debt warning," or "restricted." These categories rest on three types of ranges. If a program is entirely above the upper bound, then it is eligible; if it is entirely below the lower bound, then it is ineligible. All others that fall somewhere between these two thresholds are either eligible with a debt warning or restricted.
Eligible: These programs have a repayment rate of at least 45 percent, and the annual loan payment is less than or equal to 8 percent of the average annual earnings or 20 percent of discretionary income. Eligible programs are free of any restrictions. Ineligible: These programs have a repayment rate below 35 percent and an annual loan payment that is both above 12 percent of average annual earnings
Table 1. How to Determine If a Program Meets the Gainful Employment Standard
AND
::;8% ::;8% >8% > 8%and::; 12% > 8%and::; 12% >12% >12%
~ 20%
<!
45%
Debt warning Debt warning Debt warning Restricted Restricted Restricted Restricted Debt warning Debt warning Debt warning Restricted Restricted Restricted
Eligible Eligible Eligible Debt warning Debt warning Debt warning Debt warning
>20% ::;20%
> 20% and ::; 30%
>30% > 20% and ::; 30% >30%
INELIGIBlE
and 30 percent of discretionary income. These programs will lose federal student aid eligibility. Ineligible programs may not provide federal student aid to any new students and must warn existing enrollees of debt dangers, in addition to all the other disclosures described below. Eligible with a debt warning: These programs have either a repayment rate or debt-to-income ratio that exceeds the threshold for an eligible program, but not both. In other words, the repayment rate must be at or above 45 percent, or the debt-to-income ratio must be at or below 8 percent or 20 percent, but both cannot occur.16 These programs may still participate in the federal student aid programs, but they must include in all materials and online a prominent warning saying that students may have difficulty repaying their loans. The school must also disclose its recent loan repayment and debt-to-income rates. Restricted: These programs do not meet any of the requirements for an eligible program, but exceed some of the benchmarks for an ineligible program. They occupy a middle ground. These programs have a repayment rate below 45 percent and a debt-toincome ratio below 8 percent and 20 percent. They also have either a repayment ratio at or above 35 percent or a debt-to-income ratio at or below 12 percent or 30 percent, or both. Programs marked as restricted by the department will have their enrollment capped at the average of the past three years, must provide warnings to consumers about debt levels, and must get statements from area employers about why the program should continue.
These last two categories are opposites. A program that is eligible with a debt warning is good enough on one measure to meet the eligible threshold, but falls short in the other. A restricted program doesn't meet any of the eligible standards, but has at least one calculation that is above the ineligible threshold. (See Table 1.)
Other Important Considerations

In addition to the new set of standards and measurements, the proposed gainful employment rule contains a few other provisions worth mentioning. The bottom 5 percent: The gainful employment standard will go into effect in the 2012-13 academic year, but penalties will be administered differently that first year. Rather than preventing all ineligible programs from receiving federal student aid, those with low repayment and debt-to-income rates will be broken down by the type of degree or credential (associate, bachelor's, certificate, etc.) awarded. In each category, the programs will be sorted by repayment rate. The programs with the lowest rates will lose their eligibility for aid until the enrollment of all the ineligible programs equals 5 percent of the enrollment of all programs in that category. The remaining programs will face the same penalties as restricted programs. New programs: Traditionally, new programs have been able to gain access to federal student aid dollars as long as they are offered at an accredited institution.
Methodology
It is possible to estimate potential income levels for individual programs because all institutions are required to report an instructional program code for each of their offerings. 1 Each code corresponds to specific professions and their earnings data-information that is kept by the U.S. Bureau of Labor Statistics.2 Because one code can be linked to multiple professions, the salary estimate reflects the average annual 25th percentile earnings for each instructional code. For codes tied to multiple jobs, the earnings are weighted by the number of people employed in each job. Multiplying the salary amount by 8 percent and 12 percent produced income thresholds for the average annual earnings. Calculating discretionary income required subtracting 150 percent of the poverty threshold for a single individual and then multiplying the remaining amount by 20 percent and 30 percent. Under the proposed gainful employment calculation, the income thresholds will be compared to the annual payment on debt owed by a program's students. Because actual earnings data ~re not available, this analysis instead calculated how much debt a student could take on if his or her annual loan payments were equal to the income thresholds determined earlier. Loan amounts were calculated by dividing the average annual earnings and the discretionary income levels by 12 to determine a monthly payment. The resulting figure was then used to calculate the original amount a student would have borrowed if he was making that payment each month for 10 years and had a fixed interest rate of 6.8 percent? These loan terms are identical to those on an unsubsidized federal Stafford loan. The resulting origin~! loan balance amounts represent the maximum debt load a student could take on. Students with higher debt burdens would be devoting a larger percentage of their income to making annual loan payments than what is allowed under the proposed standard. While the U.S. Department of Education did release estimated federal student loan borrowing levels by institution, these figures did not include average private loan borrowing by school-additional debt that is also included in the proposed gainful employment calculations. Private student loans can be a significant source of additional debt. Moreover, the borrowing information was not reported uniformly-some institutional data reflected both graduate and undergraduate borrowers, while some offered separate figures for the two. The lack of private student loan borrowing is especially problematic because it is a significant source of additional debt.4 Unfortunately, there is no central repository of reliable information on private student loan borrowing at the institutional level. So instead of relying on reported borrowing information, this analysis approximates students' debt levels by looking at the cost of their program, minus federal grant aid received. Where available, program costs were calculated using actual pricing information for tuition, fees, books, and supplies reported by institutions. ~ This information is available for 1,890 schools in the department's Integrated Postsecondary Education Data System, or IPEDS, that also had repayment rate information available. For programs that take more than a year to complete, the total cost figure encompasses all charges that may be spread out across several years. If an institution did not specifically report costs by program, its cost estimate per program is based on the school's published figures for tuition and fees and books and supplies. Bachelor's degree programs reflect the past four ye~rs of cost information; associate degree programs reflect the past two. While students at proprietary colleges and universities do take on large levels of debt, they also receive significant amounts of federal grant aid. To account for this, each program's cost estimate was reduced by the average amount of federal grant aid received by students at that institution, data that are also reported to IPEDS. Bachelor's degree programs had their costs reduced by the average federal grant aid received over the past four years; associate degree programs had their costs reduced by the average grant aid over the past two years. Programs' eligibility under the proposed gainful employment standard was then determined by taking the cost estimates and subtracting from them the borrowing thresholds established using the Bureau of Labor Statistics data. If a program's cost minus the borrowing thresholds yielded a positive number, a student was likely to borrow more than the income estimates would allow. If the subtraction produced a negative number, students were likely to borrow less than the maximum allowable amount. This information was paired with the institutional repayment rates reported by the department to determine whether a school would be affected by the proposed standard. While there is no guarantee that such programs would actually be sanctioned under the new standard, this analysis does suggest which types of programs and institutions may need to consider reining in their borrowing over the next few years. There are several limitations to this approach. Students may borrow less than the full amount to cover program costs, or they may borrow more than the full amount. The assumption that students will borrow the full cost of their education, minus available federal grants, is supported by a number of statistics on student debt and the revenue structure of for-profit colleges. An analysis of data from the National Postsecondary Student Aid Survey published
Methodology, cont.
by Education Sector last year shows that over 92 percent of students at for-profit colleges take out a loan to finance their education. 6 And the debt levels these students assume are quite high. The department estimates that the median debt level of for-profit students ranges from $18,415 for an associate degree to over $31 ,000 for a bachelor's degree.l Similarly, the College Board found that over 53 percent of bachelor's degree recipients at for-profit institutions graduated owing over $30,500.8 And while it is reasonable to expect that not every student would borrow at such a high level, for-profit colleges and their defenders note that they cannot control how much students borrow and that some take out too much debt. That over-borrowing could balance out statistics for students who take out a lesser amount in loans. The revenue structure of for-profit colleges also bolsters the assumptions about student borrowing used in this report. For-profit institutions may not take in more than 90 percent of their revenue from the federal student aid programs, and many, especially the large publicly traded companies are close to this threshold. 9 After subtracting federal grant dollars, the remaining loan money represents a very significant portion of a school's revenue. And there is evidence that the revenue that does not come from federal aid programs still comes in the form of loans. For example, Corinthian Colleges Inc., a large publicly traded company, reported that 89 percent of its revenue comes from federal aid programs and only about 1 to 2 percent comes from cash payments from students. 10 That leaves private student loans as the most likely other source of financing. Students' actual earnings could also be higher than the Bureau of Labor Statistics figures. Estimates of federal grant aid may also be too generous, because they reflect awards given to first-time, full-time students. These amounts are going to be higher than what the large number of part-time students would receive. While this approach could incorrectly identify programs as at-risk for violating the gainful employment standard when they are not, it is also possible for the opposite to occur. Some programs may produce graduates with even lower earnings than the national figures, further lowering the income threshold. This analysis is meant to provide an overall estimate of how the proposed federal rules will change the for-profit higher education sector as a whole and how different program types are likely to be affected. It is not a fool-proof predictor of which individual institutions or programs will meet the standards.
Notes
1. These institutions are known as program reporters and must break down cost by program because their offerings start at multiple times throughout the year and do not follow the standard academic calendar. 2. Each student aid-eligible offering is assigned a six digit Classification of Instructional Programs (CIP) code that identifies the content area covered by a program. For ex;;~mple, a program in cosmetology may be assigned the code 12.()401 , which corresponds to "Cosmetology/ Cosmetologist, General." Using information from the National Crosswalk Service Center, institutions can then link a program's CIP code to the corresponding Bureau of Labor Statistics codes. To continue the example, a program wrth a CIP code of 12.0401 has four corresponding codes in the bureau's database: 39-5012 (hairdressers, hairstylists, and cosmetologists), 39-5091 (makeup artists, theatrical and performance), 39-5092 (manicurists and pedicurists), 39-5094 (skin care specialists). For each profession, the SOC database provides information on the number of people employed in an occupation and their earnings at the 1Oth, 25th, 50th, 75th, and 90th percentiles. 3. Stan Brown, "Loan or Investment Formulas," Oak Road Systems, February 19, 2010, http://oakroadsystems.com/ math/loan.htm#LoanAmount (accessed September 7, 2010). 4. Sandy Baum and Patricia Steele, "Who Borrows Most? Bachelor's Degree Recipients with High Levels of Student Debt," College Board, April 2010, http://advocacy. col!egeboard.org!site$/defaultlfiles/Trends-Who--BorrowsMost-Brief.pdf (accessed September 7, 201 0), 3. 5. Program reporters must provide the total cost for a program. Thus, if a two-year program is listed, the expense figure that goes with it covers both years of enrollment. 6. Kevin Carey and Erin Dillon, "Drowning in Debt," (Washington, DC: Education Sector, July 9, 2009) http:// www.educationsector.org/analysis/analysis_show.htm?doc_ id=964333 (accessed September 7, 201 0). 7. "Program Integrity: Gainful Employment (Notice of Proposed Rulemaking)," Federal Register Page 43647. 8. Sandy Baum and Patricia Steele, "Who Borrows Most? Bachelor's Degree Recipients with High Levels of Student Debt," 1. 9. " Emerging Risk: An Overview of Growth, Spending, Student Debt and Unanswered Questions in For-Profit Higher Education," U.S. Senate Health, Education, Labor, and Pensions Committee, June 24, 2010, http://harkin.senate.gov/ documents/pdf/4c23515814dca.pdf (accessed September 10, 2010), 4. 1o. coco - 02 201 o Corinthian Colleges Earnings Conference Call," Final Transcript, Thomson StreetEvents, February 2, 2010, http://phx.corporate-ir.net/External. File?item=UGFyZW 50SUQ9Mzc3NjM4fENoaWxkSUQ9Mzc2NT14fFR5cGU9MO= =&1=1, (accessed September 7, 2010), 10.
Under the proposed gainful employment standard, new programs will also have to be approved by the department. They will have to file an application with the department and include enrollment projections along with comments from unaffiliated employers about the need for such a program and the availability of related jobs. The department will then determine whether to grant the program eligibility.
Longer time frames: Programs that prepare people for careers in which income levels increase substantially after a few years (such as doctors or social workers) can have their data calculated over the
are protected by federal privacy laws. This analysis estimates how many and what kind of programs are at risk under the proposed standards by comparing program costs to the potential income levels of program graduates and by looking at the repayment rate for the institution overall. In other words, if a student borrowed to cover the entire cost of his or her program, after receiving available federal grant aid, would that amount, coupled with the institution's repayment rate, put that program in danger of losing eligibility? (See "Methodology" sidebar on page 6 for a complete explanation of these estimates.) This analysis examined 12,662 programs offered by 2,667 colleges or universities. It encompasses three different types of programs, all of which are classified by an instructional code known as a CIP. First, the analysis looked at institutions that report the total cost of specific programs. 20 This group includes 793 programs offered at public or private, not-for-profit institutions, only two of which would be negatively affected by the standard. These 6,140 programs at 1,890 institutions report students' exact cost to attend that program. The analysis also included any program offered at a for-profit institution that produced at least one bachelor's or associate degree last year. This includes 2,351 bachelor's degree programs at 431 schools and 4,171 associat e degree programs at 721 schools. In every case, only institutions with repayment rate information were included. Of this sample of more than 12,600 programs, 504-or about 4 percent-would be ineligible for federal student aid funds based upon this analysis. That percentage is a bit lower than the department's estimates. Of the remaining programs, 16 percent would be eligible, 65 percent would be eligible with a debt warning, and 15 percent would be restricted. 21 (See Figure 1 .)
The ineligible programs in culinary arts have an average repayment rate of 27 percent and have costs more than $29,000 above the borrowing limits.
fourth, fifth, and sixth years after their students leave school. To stay eligible, programs that use the longer time frame must show that their students' annual loan payment is no more than 20 percent of discretionary income or no more than 8 percent of average annual earnings.
Overall Results
Under the gainful employment proposal, the department estimates that about 5 percent of programs would be deemed ineligible and 8 percent would be restricted. 17 Another 48 percent would be eligible with a debt warning, and 39 percent would be fully eligible. 18 Among for-profit institutions, the department expects about 1,658 programs to be declared ineligible, but it did not say how many forprofit programs it considered overall. 19 It provided no details on which institutions or program types are likely to fall into this category. It is impossible to independently verify the department's estimates because student income data
Ineligible Programs
The 504 programs with high cost-to-income ratios and low repayment rates are offered at 222 different colleges or universities. Of those, 102 colleges had more than one ineligible program. But 196 of the institutions with an ineligible program had at least one other program that would retain its eligibility. This means that even if that program lost student aid eligibility, the school could continue offering other
Figure 1. Eligibility Status Under Gainful Employment

All Programs
Bachelor's Degree Programs
W .
Associate Degree Programs
- Ineligible Restricted
in culinary arts have an average repayment rate of 27 percent and have costs more than $29,000 above the borrowing limits. The 12 ineligible programs in baking and pastry arts also fare poorly with an average repayment rate of 25 percent and costs more than $22,000 above the limits. Others have already raised concerns about student debt at culinary institutions. In March, the New York Times ran a front-page article on student debt at forprofit colleges, featuring a picture of students in chefs' uniforms. Inside, it discussed the story of Andrew Newburg, who paid $41 ,000 for a program at Le Cordon Bleu with the promise of a $38,000 line cook job, only to find out classmates were taking $8-anhour dishwashing jobs. 22 Thirteen programs at Le Cordon Bleu show up on the list of ineligible schools, and 18 are on the list of restricted schools.
Debt warning
Eligible
Restricted Programs
According to the analysis, 1,899 programs, or 15 percent, would be restricted under the proposed gainful employment standard. These offerings all had repayment rates that were too low or cost-to-income ratios that were too high, but not both. The programs are offered by 807 different institutions. Cosmetology programs were the most common type of offering to
programs, so, it would not be put out of business entirely. These 504 programs represent 87 different instructional codes. The instructional type with the largest number of ineligible programs is medical/clinical assistant, which represented 74 of the 504 violations. Other common types were programs for culinary arts/ chef training (34), e-commerce (31), and accounting technology/technician and bookkeeping (26). Though medical/clinical assistant offerings were among the most common program types to violate the borrowing standards, the average amount by which they exceeded these thresholds was much lower than that for other program types- particularly those in the food services. On average, medical/clinical assistant exceeded the borrowing threshold for 12 percent of average annual income by just over $7,900. Similarly, other health-related programs like health information and medical records, medical insurance coding, and medical office assistant all had several programs in violation, but these exceeded the 12 percent threshold by an average of between $7,000 and $9,000. Since many of these programs are offered at the associate or bachelor's degree levels, that works out to only a few thousand dollars over each year. Other program types are nowhere near meeting the gainful employment standard. The ineligible programs
Table 2. Most Common Types of Ineligible Programs

MedicaVCiinical Assistant Culinary Arts/Chef Training E-Commerce/Eiectronic Commerce Accounting Technology/Technician and Bookkeeping Graphic Design Health Information/Medical Records Technology/Technician Interior Design Administrative Assistant and Secretarial Science, General Baking and Pastry Arts/Baker/Pastry Chef Design and Visual Communications, General Medical Insurance Coding Specialist/Coder Fashion Merchandising
74 34 31 26
21 20 13 12 11 11 11
end up in this category, with 210 programs restrict ed. Other program types that show up in large numbers include medical/clinical assist ant (142 instances), animation, interactive technology, video graphics, and special effects (83), and electrical, electronic and communications engineering technology (70). Forty-five culinary arts programs are categorized as restricted, while 15 baker/pastry chef programs fell into this category. Many of these restricted programs could be in further trouble if their graduates' earnings end up being lower than the estimates. Over 800 of the restricted programs had a repayment rate below 35 percent, and 163 of these had a repayment rate below 20 percent. If these programs end up violating the debtto-income ratio they will become ineligible.
offered by for-profit colleges in these two degree types. This was done by using completion data from IPEDS, which each year reports the type of program and degree level for every credential conferred by a college or university. A program's total cost was estimated using the figures for tuition, fees, books, and supplies for the total number of years it would take to complete a program. This means summing the cost over four years for bachelor's degrees and over two years for associate degrees.24 This methodology has a few additional limitations. Unlike the programs in which the institutions report specific costs, exact tuition charges are not available for these bachelor's degrees. Instead, the analysis assumes that the tuition is the same for each offering at a school. Recent research indicates price variability is less pronounced at four-year institutions than at two-year colleges. According to a research paper published in May 201 0 by a fellow at the Association for Institutional Research and the National Center for Education Statistics, only about 13.3 percent of for-profit four-year institutions vary their tuition by program, and 6.7 percent vary their fees by program.25 Second, it is possible that a student may take longer to complete a degree. In that case, the cost would be even higher than the estimate.
Bachelor's and Associate Degree Programs

One particular concern raised by critics of the gainful employment standard is that it would "preclude for-profit colleges from offering bachelor's degree programs," and eliminate many associat e degree programs, all due to their high cost-2 3 To test t hese assertions, the analysis separated out all programs
Bachelor's Degree Results
Table 3. Most Common Types of Restricted Programs

Cosmetology/Cosmetologist, General MedicaVCiinical Assistant Animation, Interactive Technology, Video Graphics and Special Effects Electrical, Electronic and Communications Engineering Technology/Technician CAD/CADD Drafting and/or Design Technology/Technician Corrections and Criminal Justice, Other Legal Assistant/Paralegal Administrative Assistant and Secretarial Science, General Graphic Design Interior Design Culinary Arts/Chef Training 142 83
The bachelor's degree subset includes 2,351 programs offered at 431 institutions. Out of all the bachelor's degree programs considered, 62 percent would be either eligible or eligible with a debt warning under the proposed gainful employment standard. An additional 29 percent would be restricted, and 8 percent-or 193 programs-would be ineligible. (See Figure 1.)
70
Ineligible Programs
68 66
55 53
The 193 programs that would be ineligible are offered at 78 colleges and universities. This includes programs at branches of the Art Institutes, the International Academy of Design and Technology, ITT Technical Institute, and Westwood College. Of the ineligible programs, 31 are in e-commerce-the most of any program type. Other program types with large numbers of ineligible programs include interior design (19) and graphic design (16). On average, all of t hese
1Q EDUCATION SECTOR REPORTS: Are You Gainfully Employed?
Table 4. Most CommonTypes of Ineligible Programs, Bachelor's Degrees

Instructional category E-Commerce/Eiectronic Commerce Interior Design Graphic Design Fashion Merchandising Animation, Interactive Technology, Video Graphics and Special Effects Web Page, Digital/Multimedia and Information Resources Design Accounting Technology/Technician and Bookkeeping Computer Graphics Design and Visual Communications, General Fashion/Apparel Design Cinematography and FilmNideo Production
..
.
31
Table 5. Most Common Types of Restricted Programs, Bachelor's Degrees

Instructional category Animation, Interactive Technology, Video Graphics and Special Effects Electrical, Electronic and Communications Engineering Technology/Technician Corrections and Criminal Justice, Other Interior Design Legal Assistant/Paralegal Accounting
79
19
16
9
70
45 36 32
31
8 8 8
7
Web Page, Digital/Multimedia and Information Resources Design Graphic Design Psychology, General Computer and Information Systems Securit y
24
23
21
7
7
21
programs are wel l below t he minimum repayment rate of 35 percent and are more than $20,000 away from meeting the debt -t o-income st andard. These results indicate that programs connected to greater work-force needs are less likely to be ineligible. Only a handful of programs in accounting and one program each in business management , legal assistant/paralegal, and nursing would be ineligible. By contrast, most ineligible programs are in "dream job" areas: t hey provide training in cutting-edge fields like online businesses and graphic design, or in luxury occupations like int erior design or fashion merchandising. These areas are associated wit h relatively high borrowing levels, but do not offer large numbers of jobs.
paralegal, accounting, web page, digit al/multimedia and inf ormat ion resources design, and graphic design also appeared numerous times.
Associate Degree Results

The associate degree subset includes 4,171 different programs offered by 721 institutions. 26 Of t hese programs, 6 percent, or 267 programs, would be ineligible under the gainful employment st andard. Anot her 75 percent of programs would be fully eligible or eligible with a debt warning, while the remaining 19 percent would be rest ricted. (See Figure 1.)
Ineligible Programs
The 267 ineligible programs are offered by 142 different colleges or universities. This includes programs offered by well-known college chains like the Art Institutes, Everest (college, university, and inst it ut e), ITT Technical Institute, and Kaplan (college and university). Fifty-seven different t ypes of programs fall into the ineligible category. Medical/clinical assistant programs are the most common type of offering to be ineligible, with 67 programs f alling int o this category. Programs in culinary arts/chef training (22) and health inf ormat ion/medical records technology (21} also
Restricted Programs
About 29 percent of bachelor's degree programs would be rest ricted-meaning they would not be able to offer federal financial aid to new students and would have t o demonstrate a continued need for t heir program from the local business community. The most common types of programs in this category are in animation, interactive technology, video graphics and special effects (79 programs}, followed by electrical, electronic and communications engineering technology (70}, correct ions and criminal justice (45}, and interior design (36}. Programs in legal assistant/
11

Responsive Documents - CREW: Department of Education: Regarding For-Profit Education: 8/17/2011 - 11-00026 Ginns Responsive 8-12-11 - PART 1

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To: CC: Date: 4/12/2010 5:33 :50 PM

James Bob Finley, Steve

The Honorable Anthony Wilder Miller April 12, 2010 Page2

The Current GE Proposal Would Dramatically Limit Students' College Opportunities

Kantrowitz further found that:

The Honorable Anthony Wilder Miller April 12,2010 Page 3

Students Will Be Protected by Transparent Cost and Debt Information.

The Honorable Anthony Wilder Miller April12, 2010 Page4

Kantrowitz, pp. 20-21 .

The Honorable Anthony Wilder Miller April 12, 2010 Page 5

The Honorable Anthony Wilder Miller April 12, 2010 Page6

Andrew S. Rosen Chairman and CEO, Kaplan, Inc.

Daniel Hamburger President and CEO, DeVry Inc.

North America United States Industrials Business Services & Education

Paul Ginocchio, CFA

(+1) 415617-4207 paul.ginocchioCdb.com

Robert MacArthur <nnacarthur@altresearch com> Robert MacArthur 7/20/2010 9:45:08 PM

North America United States Industrials Business Services & Education

DB Education Services Gainful Employment Update

Business Services & Education DB Education Services

Gainful employment calculations at 12% of income over 10 years

-3% -14% -1 0% -29%

-10% -109% -41% -66%

-4% -16% -19% -35%

-14% -120% -79% -80%

Deutsche Bank Securities Inc.

Business Services & Education DB Education Services

Major assumptions in our Gainful Employment calculations

Business Services & Education DB Education Services

Deutsche Bank Securities Inc.

Business Services & Education DB Education Services

DB ests. DoE DoE DB ests. calc 7% calc sum

33,500 2,345 2,960 28,195

34,000 2,380 3,700 27,920

19,980 1,399 2,664 15,917

DB est. Mort. Calc.

50,000 $ 500 $ 43,448 2,345 2,960 48,753 $ 46%

50,000 $ 500 $ 43,448 2,380 3,700 49,528 $ 46%

25,000 250 21,724 1,399 2,664 25,787 29%

o/o of Revs 19% 4% 38% 39%

( JN<> f)tif:eCVI tf ~SCCi~res can~rn$2$K .lf gr~virl<::m

Soutee Ct:>mpany date ntJ Oeutsr:he S.nr estm,.tes

Deutsche Bank Securities Inc.

Business Services & Education DB Education Services

Figure 3: Gainful Employment Calculations- DeVry

Source/Calc Co. comments

DV 30% 61,700 $ 10-K BA 52% 2,572 $ 77% 0.75

50,131 $ 5,013 6,420 38,698 50,071 501

mort calc from above from above

43,510 $ 5,013 6,420 54,943 $ 10%

%of Revs 12% 14% 40% 12% 15% 7% 100% EPS

Cc!'~?Pinr datil fKI Oe<tlxl>o 8ank eSttn><les

Deutsche Bank Securities Inc.

Business Services & Education DB Education Services

Figure 4: Gainful Employment Calculations -ITT Education

Source/Calc Co. comments

ESI 20.25% 69, 600 1o-K BA 15% 2.550 80% 0.75

ESI 20.25% 34,800 1o-K Assoc. 85% 2.550 80% 0.25

Company data DoE DoE DB ests.

56.550 2.828 6,630 47,093 50.000

30.4 50 1.523 3.570 25,358 29.000

est. See Calc A

292 29.181 25.358 1,523 3,570 30.450