Washington Post reports steep decline in revenue, as Kaplan no longer is cash cow

http://professional.wsj.com/article/SB10001424053111903454504576489961854419124.html?lpe=WSJ_PRO&mg=com-wsj

This is what I predicted last fall:


By Jim Castagnera
Part 1 of 2

In September 2004, as the Bush reelection campaign shifted into high gear, reports in the press announced the Administration’s intentions to relax certain rules affecting for-profit colleges.

Six years, a recession, and the historic replacement of a WASP Republican by a black Democrat in the White House are producing a sea change in federal policy. This past summer, two tidal forces surged from Washington to whipsaw the for-profit side of the higher education industry.

The first is a new set of proposed regulations from the Department of Education (ED), aimed at punishing for-profit education providers whose former students fall short of requirements that will be associated with "gainful employment."

In a July 23 press release announcing the new regs, ED Secretary Arne Duncan said, "While career colleges play a vital role in training our workforce to be globally competitive, some of them are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use. These schools—and their investors—benefit from billions of dollars in subsidies from taxpayers, and in return, taxpayers have a right to know that these programs are providing solid preparation for a job."

The press release also notes, "To qualify for federal aid, the law requires that career colleges and training programs prepare students for gainful employment in recognized occupations." Under the proposed rules, "The Department would define … a twopart test: (1) measuring the relationship between the debt students incur and their incomes after program completion; and (2) measuring the rate at which all enrollees, regardless of completions, repay their loans on time."

Students at for-profit schools are heavy borrowers
The picture of the early test results painted by ED isn’t pretty. "The median federal loan debt carried by students earning associate degrees at for-profit institutions in 2007-08 was $14,000—almost double the median debt for their peers at non-profit institutions." By way of contrast, "while 88 percent of recent borrowers from nonprofit institutions and 80 percent of borrowers from public institutions were able to pay down the balance of their student loans in recent years, only 55 percent of borrowers attending forprofit institutions were able to pay off more than accrued interest."

Federal student loans may permissibly provide as much as 90 percent of a for-profit school’s gross revenues. As a result, staff writer James Goodman of rocnow.com observes, "Although fewer than 10 percent of the estimated 19 million students enrolled in institutions of higher learning take courses from for-profit colleges, these schools account for 44 percent of all defaults on federal loans."

So Arne Duncan says, somewhat understatedly, "While proprietary schools have profited and prospered thanks to federal dollars, some of their students have not. This is a disservice to students and taxpayers…."

If ED’s proposed rules become effective in their proposed state, a school may have to warn admissions prospects and enrolled students that "they may have difficulty repaying loans for attending that program…." Certain debt and repayment delinquency thresholds will trigger ineligibility for financial aid for the school’s students.

Student loans, stage right: mystery shoppers, stage left
While, indeed, these proposed regs may prove onerous to some for-profit players, standing alone they might not reflect anything more than a prudent policy correction on the part of the DoE. More unusual—and, therefore, maybe more of a signal of which direction the obama administration is steering the ship of state—is the recent exercise undertaken by the Government Accountability office. The GAo engaged in what entrepreneurs, such as myself, with experience in the retail world, call "shopping." In the convenience store industry, where my experience lies, my partners and I regularly employed professional shoppers, who made purchases at selected store locations, then reported back to our security director if the clerks failed to properly record the sales.

In the GAo’s case, "Undercover tests at 15 for-profit colleges found that 4 colleges encouraged fraudulent [admissions] practices and that all 15 made deceptive or otherwise questionable statements to GAo’s undercover applicants." The August 4 issue of GAO Highlights reported, "Four undercover applicants were encouraged by college personnel to falsify their financial aid forms to qualify for federal aid—for example, one admissions representative told an applicant to fraudulently remove $250,000 in savings."

On that same day in August 2010, Gregory Kurtz, managing director of the GAo’s office of Forensic Audits and Special Investigations, testified about these findings before the Senate Committee on Health, Education, Labor and Pensions.

One result of the publicity was a dramatic decline in the stock values of publicly traded for-profit education companies. one wellknown firm to take a hit was the Washington Post Company. Its iconic newspaper was made legendary by Woodward and Bernstein during the Watergate scandal, but its cash cow in these days of dying daily newspapers is Kaplan, its higher education subsidiary.

According to Mark Basch at Jacksonville.com, in the first half of this calendar year, "Kaplan accounted for $1.46 billion of Washington Post’s $2.34 billion in revenue. "Kaplan had an operating profit of $166.9 million, while the company as a whole had operating income of $266.2 million."

Coming clean on August 17, the Post published a story by Nick Anderson in which it confessed, "Late Friday, the Education Department released data on student loan repayment rates that showed 28 percent of Kaplan University’s former students are repaying the principal on their federal loans. That was lower than the 36 percent repayment rate posted by the for-profit sector overall…."

Referencing the proposed ED regulations, the story continued, "The Post Company said that ‘a significant number of Kaplan schools’ could be at risk of new limits on financial aid.’"

Continued in Part 2 ...

Part 2 of 2

Now, enter the lawyers
What motivated the Washington Post Company’s confessions?

One reason might be a flurry of security class-action suits filed against other for-profit corporations in mid-August. Suits were filed in federal district courts against Education Management Corporation on August 11; American Public Education on August 12; Lincoln Educational Services on August 13; Apollo Group (University of Phoenix) on August 16, and Corinthian Colleges on September 1.

Kevin LaCroix of OakBridge Insurance Services in Beachwood, Ohio is author of the blog "The D&o Diary" [www.dandodiary. com]. LaCroix says the security class actions business "is big business." An avalanche of class actions occurs "where in one sector everybody has the same problem." He also notes that "the same law firms are driving all these litigations."

Indeed, the complaints in four of the five actions—against Education Management Corp, American Public Ed, Lincoln, and Apollo—are all signed by Attorney Kim Miller of Kahn Swick & Foti of New York City and Attorney Lewis Kahn of that firm’s Madisonville, Louisiana office. Each of the complaints filed in federal courts in Pittsburgh, West Virginia, New Jersey, and Phoenix, respectively are also signed by local counsel. The Corinthian suit was filed by the firm of Pomerantz Haudek Grossman & Gross in the federal court for central California.

The lead firm’s homepage asserts, "Kahn Swick & Foti represents victims of corporate wrongdoing. Consistent with our goal to lend a helping hand is our mission to only accept payment at the end of a case, only if we win. And win we do. We have recovered millions of dollars for victims of corporate greed."

As LaCroix notes, the allegations in the complaints are all much the same. The plaintiffs assert that each of the defendants made "a series of false and misleading statements" in registration and proxy statements, other SEC filings, press releases, and the like. The statements induced investors to buy their stock, which subsequently declined in value.

While emphasizing that he has "no idea of the merits" of the claims, LaCroix observes it’s "not a pretty picture."

LaCroix identifies a sixth suit, "a separate class action lawsuit against Alta College, Inc. (parent of Westwood College)… on August 11, 2010 in Colorado alleging violations of the Colorado Consumer Protection Act." observing that "it seems safe to predict that other publicly-traded for-profit education companies could also be hit with such a suit," LaCroix singles out Apollo Group for special attention.

LaCroix recounts a series of events involving a previous Apollo class action suit that is still being worked within the federal courts. It has gained a certain "notoriety because it is one of the few securities cases that has actually gone to trial. The trial resulted in a plaintiffs’ verdict, although the presiding judge later set the verdict aside in a response to a post-trial motion. More recently, the Ninth Circuit (Court of Appeals) reversed the trial court’s ruling and remanded the case to the district court for further proceedings, a development that has sparked significant interest and discussion."

When I interviewed him recently, LaCroix added that Apollo’s "management disclosure practice has drawn a lot of attention." In fact, my own interest, as reflected in a previous issue of Today’s Campus magazine, has long been drawn to the case of Hendow v. University of Phoenix. Hendow and another former Phoenix employee claimed that the company illegally rewarded admissions officers on the basis of the number of students each enrolled.

The Hendow case was initially dismissed by the federal trial court, only to be reinstated by the Ninth Circuit, which said, "This case involves allegations under the False Claims Act that the University of Phoenix… knowingly made false promises ... in order to become eligible to receive Title IV funds." [U.S. ex rel Hendow v. University of Phoenix, 461 F3d 1166 (9th Cir. 2006).]

After the Ninth Circuit reinstated the case, the trial was set for March of this year. Before the trial date, Apollo Group settled with the federal government for $67.5 million, while also paying the opposing lawyers $11 million in attorney fees.

The publicity is widely noticed
How widely noticed? Comedy Central’s Daily Show has a blog, where one blogger ranted as follows on August 6th. (http://forums. thedailyshow.com) "It is crazy how the matchbook schools now market themselves as ‘universities.’ Many are basically predators on Title IV and GI Bill funds—basically taking taxpayer money and delivering content and certificates of dubious value…. The problem ones seduce low-income and freshly discharged military with unsupportable fantasies just to get their one precious opportunity to use public funding to better themselves. Instead they get crap."

The come-uppance may take place in a courtroom with big checks attached. or it may occur in the blogosphere and the television networks. Nonetheless there are negative outcomes for for-profit schools in particular—and U.S. higher education, in general.