Responsive Document - CREW: Department of Education: Regarding For-Profit Education: 8/16/2011 - OUS 11-00026 - 2

From: Kvaal, James
Sent: Tuesday, August 03, 2010 5:12PM

To:
Subject:
Chesley, Susan; Kolotos, John; Bergeron, David
RE: Anticipating Data Issue
Attachments: 0900b8c081 f76aeo .pdf
Susan,
Thanks for identifying these.
Attached is a Deutsche Bank analysis that estimates the tuition cuts t hat ITI would need to make to come under the
thresholds. It does not seem to assume that there is any lower bound to tuition.
To get below the debt-to-income test of8% of amlllal income, we believe that ITT would
have to cut the tuition of its bachelor's program by approximately 40% and associates by
approximately 25% (see Figure 1 below).
From: Chesley, Susan
Sent: Tuesday, August 03, 2010 10:58 AM
To: Kolotos, John; Bergeron, David; Kvaal, James
Subject: Anticipating Data I ssue
All,
33
Thank you,
Susan
34
North America United States
Industrials Business Services & Educat ion
25 July 2010
ITT Education Services
Reuters: ESI.N Bloomberg: ESI UN Exchange: NYS Ticker: ESI
Downgrade to Hold, lowering
EPS for Gainful Employment
Paul Ginocchio, CFA
Research Analyst
(+ 1) 415 617-4207
paul.ginocchio@db.com
Adrienne Colby
Associate Analyst
( ) 212 25()-0948
adrienne.colby@db.com
ESI will face many restricted programs, creating the need for changes
We believe t he proposed Gainful Employment (GE) language in Friday's NPRM will
rest rict a significant proportion of ESI's programs. We also bel ieve ESI will have to
increase its admission criteria over t ime to increase its repayment rates. The
rest rictions, plus t he need to raise admission criteria, will make it difficult for ESI to
grow. We have cut our FY1 OE and FY1 1 E EPS by 8% and 29%, respectively, due
to our assumed business model changes. We have lowered our price target f rom
$1 1 0 to $85. HOLD.
ESI's programs will struggle to pass repayment or debt-to-income thresholds
ESI's relat ively high draft '07 3-yr CDR at 24.1 o/o likely means many programs will
struggle t o make t he 45% student loan pri ncipal repayment threshold. Also, due to
ESI's t uition prices and starting salaries, at $30K (Associate's) and $40K
(bachelor's), t heir programs will also not meet t he 8% debt-t o-i ncome, or 20% of
disposal income, t hresholds. To make t hese repayment t hresholds, ESI BA's need
to graduate with $34K debt or less, while t heir AA's need to graduate wit h $20K or
less. Our best estimate is t hat ESI's grads have over $40K and over $25 of debt,
respectively, at graduat ion, well above eligible levels.
ESI's business model seems the most impacted by the proposed language
We t hink top pick APOL should see mini mal impact from t he proposed Gainful
Employment regulat ion, and APOL already has a strategy in place t o weed out
uncommitted students, which raises repayment rates. ESI just stated last week
(but before GE was proposed) t hat it would not change its admission criteria. We
now t hink ESI needs to in order t o increase f uture repayment rates, t hus hurting
enrol lment. Tuit ion may also need to decl ine over t ime to meet thresholds.
Price target reduced to account for potential business model changes
Our price target decli nes f rom $11 0 to $85 to account for potential f uture business
model changes. On our lowered ' 12E EPS, ITT would t rade at a sli ght premium to
t he market, which we believe is reasonable. Our price target is largely derived
f rom our DCF analysis 0/VACC 11 o/o; LTGR3.5o/o - see page 6 for detail ). Key
downsi de risks incl ude greater t han expected adjustments to ESI's business
model or negat ive legislative developments. Key upside potential is from: 1) GE
watered down, 2) legislative challenges t o GE, or 3) less of a negat ive impact to
ESI t han expected.
Year End Dec 31 2009A 2010E 2011E
10EPS 1.59 2.46A 2.99
20EPS 1.85 2.78A 3.13
30EPS 2.00 2.82 2.40
40EPS 2.56 3.19 2.56
FYEPS (USD) 7.96 11.23 11 .10
OLD FY EPS (USD)
% Change
P/E (X) 12.9 7.6 7.7
Swtce 0e(lt$Che Bank est mates. company
Deutsche Bank Securities Inc.
Deutsche Bank
Recommendation Change
Hold
Price at 23 Jul 2010 (USD) 85.44
Price target 85.00
119.20-78.59
Buy toHold w
110.00 to 85.00 w -22.7%
7/07 1/08 7/08 1/09 7/09 1/10
--ITT Education Servic
S&P 500 INDEX (Rebased)
Performance(%) 1m 3m
Absolute -5.3 -23.6
:::L:=::: l
40% .
20%

12m
-16.2
Dec08 Jun09 Dec09 Jllltl
Real izedVol --lmpliedi.IJI(ATM)
ESIN 51.6%
STRA.OO ; 4<l .9%
WMSN ...................................... 39.1%
BKC.N 37.0%
PNRA.OQ 31.7%
*W ei ght ed-avg. of index components
Data as of 22Jul 10
All prices are t hose current at t he end of t he previous t rading session unless otherwise indicated. Prices are sourced from local
exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche
Bank does and seeks to do business with companies covered in its research reports. Thus, invest ors should be aware that t he f irm
may have a confl ict of interest that could affect the objectivity of t his report. Invest ors should consider t his report as only a single
factor in making t heir invest ment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1.
MICA(P) 007/05/2010
25 July 2010 Business Services & Educati on ITT Education Services
Model updated:26 July 2010
Running the numbers
North America
United States
Business Services & Education
Reuters: ESI.N
Hold
Price (23 Jul 1 0)
Target price
52-week Range
Market Cap (m)
Company Profile
Bloomberg: ESI UN
USD 85.44
USD85.00
USD 78.59 119.20
USDm 2,918
EURm2,276
ITI Educational Servi ces, Inc. is a provider of career-oriented
postsecondary degree programs in the United States. The
company offers diploma, associate, bachelor, and master
degree programs to approximately 54,000 students at over
100 ITT Technical Institutes in 35 states.
Price Performance
140
120
DO
80
60
40
- =f!A-
--
--
J tJ 07 Apr 08 Dec08 S<!> 09 Jun 10
--In Education Services --S&P 500 INOEX(Rebased)
Margin Trends
44
40
36
32
28

07 08 09 10E 11E 12E
--e--EBITOAMargi n -e-EBITMargi n
Growth & Profitability
40 -- --- ---
20
0
20
-40
07 08 09
-- r -- :
100
. - 50
0
10E 11E 12E
S31esgrowth( LHS) - ROE( RHS)
Solvency
07 08 09 10E 11: 12E
Net debt/equily( LHS) interestcover(RHS)
Paul Ginocchio, CFA
+1 415 617-4207
Page 2
Fiscal year end 31-Dec
Financi al Summary
DBEPS(USD)
Reported EPS (USD)
DPS(USD)
BVPS(USD)
Valuation Metrics
Price/Sales (x)
P/E(DB)(x)
PIE (Reported) (x)
P/BV(x)
FCF yield (%)
Dividend yield (%)
EV/Sales
EV/EBITDA
EV/EBIT
Income Statement (USDm)
Sales
EBITDA
EBIT
Pre-tax
Net Income
Cash Flow (USDm)
Cash flow from operati ons
NetCapex
Free cash flow
Equity raisedl(bought back)
Dividends paid
Net inc/( dec) in borrowings
Other investing/financing cash flo;vs
Net cash now
Change in working capital
Balance Sheet (USDm)
Cash and cash equivalents
Property, plant & equipment
Goodwill
Other assets
Total assets
Debt
Other liabilities
Total liabilities
Total shareholders equity
Net debt
Key Company Metrics
Sales growth (%)
DB EPS growth(%)
Payout ratio (%)
EBITDA Margin (%)
EBIT Margin (%)
ROE (%)
Net debt/eqUity(%)
Net interest cover (x)
DuPont Analysis
EBIT margin (%)
x Asset turnover (x)
x Financial cost rabo (x)
x Tax and other effects (x)
= ROA (post tax) (%)
x Financial leverage (x)
=ROE(%)
annual growth ("A,)
x NT Nshare (avg) (x)
= Reported EPS
annual growth ("A,)
Source: Company data, Deutsche Bank estimates
2007
3.71
3.71
0.00
1.73
4.8
27.4
27.4
49.4
3.6
0.0
4.6
15.1
16.5
870
265
242
244
152
178
-28
150
-265
0
0
-40
-155
24
7
153
0
380
541
150
320
470
71
143
nm
na
0.0
30.5
27.8
214.8
202.3
nm
27.8
1.6
1.0
0.6
28.0
7.7
214.8
na
1.7
3.71
na
2008
5.17
5.17
0.00
4.79
3.0
14.9
14.9
19.8
4.5
0.0
2.8
8.0
8.5
1,015
350
328
330
203
173
-36
137
-88
0
0
169
219
-93
237
167
0
221
624
150
286
436
188
-87
16.8
39.5
0.0
34.5
32.3
157.1
-46. 1
nm
32.3
1.7
1.0
0.6
34.9
4.5
157.1
-26.9
3.3
5.17
39.5
2009
7.96
7.96
0.00
4. 13
3.0
12.9
12.9
23.3
7.0
0.0
2.9
7.3
7.7
1,319
517
492
494
302
301
-28
273
-348
0
0
12
-S4
114
131
195
0
291
617
150
310
460
157
19
29.9
53.9
0.0
39.2
37.3
175.4
12.3
nm
37.3
2.1
1,0
0.6
48.7
3.6
175.4
11.6
4.5
7.96
53.9
Deutsche Bank l/l
2010E
11 .23
11.23
0.00
6.05
1.8
7.6
7.6
14. 1
16.8
0.0
1.7
4.1
4.3
1,607
656
628
628
384
524
-34
490
-361
0
0
-10
118
20
247
198
0
272
718
150
361
511
207
-97
21.8
41.2
0.0
40.8
39. 1
211.3
-47.0
nm
39. 1
2.4
1.0
0.6
57.5
3.7
211.3
20.5
5.3
11.23
41.2
2011E
11. 10
11.10
0.00
8.69
1.7
7.7
7.7
9.8
12.2
0.0
1.5
4.0
4.2
1,560
598
566
568
346
364
-40
324
-320
0
0
24
28
-105
275
206
0
261
742
150
321
471
271
-125
-3.0
-1.2
0.0
38.3
36.3
145.0
46.2
nm
36.3
2. 1
1.0
0.6
47.5
3. 1
145.0
-31.4
7.7
11.10
-1.2
2012E
7.86
7.86
0.00
7.49
1.9
10.9
10.9
11.4
7.8
0.0
1.8
5.7
6.2
1,267
402
370
372
227
232
-40
192
-320
0
0
24
-104
-95
171
213
0
244
629
150
263
413
216
-21
-18.8
-29.2
0.0
31.7
29.2
93.1
9.9
nm
29.2
1.8
1.0
0.6
33.1
2 .8
93.1
-35.8
8.4
7.86
-29.2
Deutsche Bank Securit ies Inc.
25 July 2010 Business Services & Education ITT Education Services
Deutsche Bank l/l
We have cut FY11E and
FY12E EPS by 8% and 29%,
respectively
Reducing 2010 and 2011 estimates due to assumed business
model changes
The proposed Gainful Employment language, we bel ieve, will impact ITT Technical Institutes'
business model the most of any of the publicly-traded For Profits.
Changes to our forward estimates
Our FY1 1 E revs/EPS goes from $1 ,640m/$12.01 to $1 ,560m/$11.1 0 and FY12E drops from
$1 ,542m/$11.13 to $1 ,267m/$7 .86.
We bel ieve that ITT will likely have to lower tuition costs and significantly increase
admissions standards to reduce drops and increase graduation rates, thus increasing
repayment rates. By lifting repayment rates, this should create more eligible programs for ITT
and reduce restrictions, thus enabling ITT to grow enrollment at some point in the future.
We have made two primary adjustments to our model:
1. We have reduced our enrollment growth assumptions to -8% in FY1 1 E (with again the
bigger hit in 2H1 1, and to -20% in FY12E. Apollo Group (Buy; $49.27) implemented a
University Orientation program and found that this program weeds out 20% of mai nly
associate students, the uncommitted, but increases persistence rates by 500bp to over
1 OOObp. We have made the general assumption that ITT will also have to similarly reduce
enrollment to raise persistence, and thus repayment rates.
2. We have reduced revenue per student, on average, to -6% in FY1 1 E (with most of the
decline taking play in the back half of the year, and to -8% in FY12E. Both of these
assumptions will potentially reduce debt at graduation and improve both repayment
rates and debt-to-income ratios.
We have also reduced costs in FY1 1 E and FY12E, and we have assumed a 67% incremental
EBIT margin on negative revenue growth in FY12E.
We believe most of ITT programs will be restricted, i.e. no
growth
Restricted Programs will creat e a need to make adjustments to the business model
If most of ITT's programs, as we bel ieve, are below a 45% repayment rate, and their
students cannot meet the two currently proposed debt-to-income ratios (see below), then a
significant portion of ITT's programs will be restricted. This will limit ITT's ability to grow
enrollment and create the need to make adjustment s to their business model.
We think the adjustments will be:
1) Increase admission criteria (lowering enroll ment) to increase repayments rates, and
2) Lower tuition costs to hopefull y reduce debt at graduation.
Since institutions cannot keep students from taking out more student loans than absolutely
necessary, reducing tuition does not necessary mean students will graduate with Jess debt.
Page 3
Deutsche Bank l/l
Page4
Repayment Rates
We think the Draft 2007 3-year CORs are a decent proxy for looki ng at repayment rates. Since
the 3-yr year of the 2007 CDR is unmanaged, we think it decently captures the fall off of
forbearances and deferments. Whi le not a direct indicator of repayment rates, we think that
the formula looks something like this
Repayment Rate = 1 - (1.X x Draft 2007 3-year CDR)
There is a multiplier on the draft 2007 3-year CORs for two reasons: 1) CORs are going up
due to t he economic environment, and 2) CORs will be measured for all loans going into
repayment for the last four fiscal years (so it captures a 4-yr window, one longer than the 3-yr
COR).
We have included the draft 2007 3-year CDRs for all the publicly traded For Profit education
companies at the end of this note. See Figure 3 on page 7.
Debt to Income Ratios
Based on our gainful employment calculations, we think it will be very hard for ITT to get
below either an 8% of annual income test or below a 20% of discretionary income test for
most of their programs.
To get below the debt-to-income test of 8% of annual income, we believe that ITT would
We feel fairly comfortable about these calculations for the foll owi ng reasons: 1) we know the
cash pay of student s as it was disclosed for 2009 in the 1 O-K at 5%, and 2) on ITT's 20 call
last week, they disclosed their BA salaries at $40,000 and AA salaries at approximately
$30,000. We have made assumptions about transfer credits, but assume they are fai rly low
due to the demographic ITT serves. We have assumed the annual cost of tuition is right in
the 1 O-K at $17,400 and that it t akes, on average, 2-yrs for a AA and 4-yrs for a BA, excluding
the impact of transfer credits. We also believe our Pell Grant assumptions are correct as this
dat a is directly from the Department of Education (DoE).
Deutsche Bank l/l
I :
Step 1- calculation Source/Calc ESI ESI
Exposure to HS Grads Co. comments 20-25% 20-25%
Tuition & Fees $ 69,600 $ 34,800
source 10-K 10-K
Program BA Assoc.
%of Total Enrol lment Company data 15% 85%
Avg. Pell Grant ' 08-'09 (DoE) DoE 2,550 2,550
Percent of Students getting Pell DoE 80% 80%
Assumed years of credits transferred DB ests. 0.75 0.25
Total Tuition & Fees calc $56,550 $ 30,450
Cash/out of pocket payments 5% 2,828 1,523
Pel l Grants calc 6,630 3,570
Avg. Debt from School (D) sum 47,093 25,358
Average Starting Salary est, See Calc A $40,000 $ 30,000
Implied monthly payments to cover debt (D) (8%, 10yrs, 6.8%) $ 542
Implied starting salary by debt (D) $ 81,291
Monthly payment at 8% of salary 8% $ 267 $ 200
Max Debt Load, over 10 years, 6.8% int.rate mort calc $ 23,172 $ 47,093 $ 17,379
Cash/out of pocket payments from above 2,828 2,828 1,523
add Avg. Pell Grants from above 6,630 6,630 ~ 3,570
Total Tuition & Fees $ 32,630 $ 56,550 $ 22,472
Implied PriCB Cut@ Xo/o of salaw over 10yrs -42% -26%
Step 2- Revenue Reduct1on
Estimate of impact of current Gainful Employment
Bachelors
Associates
Total revenue impact
% of Revs Price Cut Rev impact
15%
85%
100%
-42%
-26%
-6.3%
-22.3%
-28.6%
Step 3- Impact to EPS and PE EPS PE
Current Calendar 2010E Consensus EPS
EPS impact from revenue decrease with no cost offset
Estimated impact f rom Gainful Employment
Souf'Cr3 Depan.ment of Educaton, Comp<iny dat3. dnd Deutsch6 B a n ~ : estimares
$
$
11.19
(7.24)
3.95
7.6x
21.6x
-65% 183%
$ 292
$ 43,772
$ 25,358
1,523
3,570
$ 30,450
To keep below t he 20% of discretionary income test, we believe ITI's AA's would need to
graduate with less t han $19,900 of debt while t he BA's would need to graduate with less
t han $34,400. Table E on page 121 of t he DoE's Gainful Employment NPRM has t he
calculations and max debt load calculat ions for various salary levels.
Graduate debt at University of Phoenix versus liT Technical Institute
Since we do not know t he graduate debt at ITI, we looked at the disclosure Apollo Group
provided on its website regarding graduate debt. For University of Phoenix (UPX) st udents
who graduated in t he 2007/2008 school year, associate's graduated with an average of
$14,200 of debt while bachelor's graduated with an average of $25,220 in debt .
Page 5
Deutsche Bank l/l
Page 6
We make the fol lowing adjustments to estimate ITT's graduate debt :
We thi nk t hat, on average, ITT's programs are about $6,300 more expensive per
year t han UPX.
We assume UPX st udents have a lot more transfer credits t han ITT st udents.
While t here is some offset f or ITT's higher usage of Pell Grants, but we t hink it only
amounts to a difference of about $600 a year.
We have assumed tuition increases of 5% annually in 2008/9 and 2009/10.
Based on these adj ustments, we t hink ITT's Associate' s could be graduat ing with, on
average, $27,000 of debt, whil e Bachelor's could be graduating with, on average, $45,000 of
debt. Both of these est imates are wel l above the $19,900 and $34,400 t hresholds,
respectively (see Figure 2 below).
Figure 2: Our estimate of ESI' s 20% of discretionary income test
Type of Program
Average starting salanes
Current Federal Poverty Guidelines
150o/o of the Federal Poverty Gu1deline
Discretionary Income
20% of discretionary income threshold
Available Monthly Payment (using 10-yr mortgage, 6.8% int. exp)
Max Debt Load
DB Estimated Average Debt Load of Graduates
DB Estimated needed reducation in debt l oad
SourCfJ US Federat Gov'l .)00 Deursche Bank estrmares
Valuation and risks
Valuation
Bachelor's
$ 40,000
$10,830
150% $16.245
$ 23,755
20% $ 4,751
396
$ 34,404
$ 45,000
-24%1
Associate's
$ 30,000
$10,830
$16,245
$ 13,755
$ 2,751
229
$ 19, 921
$ 27,000
-26%1
Our price target for ITT is derived pri mari ly from our DCF analysis. As we believe that ITT will
have t o change its business model, if the Gai nful Employment language goes t hrough as it,
we thi nk a DCF is a better way to capture f uture value.
On our new, reduced 2012E EPS, ESI t rades on a PE of 1 0.8x. We t hink t he S&P500 is on
approx. 10.1x for FY12E, so ITT is tradi ng at a slight premium. Beyond 2012, we thi nk ITT wil l
potential ly have adj usted its business model enough to grow, t he legislative/regulatory risk
wi ll be greatly reduced, t hus we t hink t his sl ight premium is reasonable.
Our DCF analysis suggests an $87 f air value. We use explicit f orecasts for 9 years and a mid-
cycle EBIT margi n in the terminal value t hereafter. Our assumptions f or include a WACC of
11%, based on a 4% risk-free rate, 7.0% equity risk premium (down from our previous 8.0%
due to t he reduced regulatory risk t hat should be now present post the enactment of Gainful
Employment), beta of 1.0, no debt in t he capital st ructure, and a long-term growt h rate of
3.5%. The 3.5% assumpt ion corresponds to the long-term real growth rate of t he US
economy.
Ri sks
The for-profit education sector f aces many risks related to t he highly regulated nat ure of
postsecondary education in t he US and due to t he dependence of inst itutions and student s
on Federal f inancial support. Other industry risks include f urther decreases in private loan
Deutsche Bank l/l
availabi lity for student borrowers, industry overbui lding of campuses, and a rebound in job
growth and lower unemployment, which would hurt enrollment growth due to the industry's
counter-cyclicality.
ITI-specific downside risks include: 1) bigger business model changes than assumed due to
the proposed Gainful Employment regulation, 2) negative legislative developments led by
Senators Harkin or Durbin, 3) more economic sensitivity than peers due to an 85% exposure
to associate degrees, a shorter duration program, 4) increased bad debt write-offs and risks
related to internal student funding, 5) a shift to online enrollment from physical campus
enrollment (where ITI has a predominance of its exposure), 6) aggressive expansion of
campus locations and degree offerings f rom competitors into ITI's markets, and 7) negative
developments in ITI's recently filed lawsuit.
ITI-specific upside risks include: 1) less negative impact than estimat ed from the proposed
Gainful Employment legislation, 2) Gainful Employment bei ng watered down aft er the public
comment period or legislatively chall enged by the House of Representatives, 3) higher
elasticity of demand than expected due to our expected tuition price cuts in the future, and 4)
higher share repurchases than expected.
Figure 3: Draft 3-year cohort default rates by company
OV 2007 2006 2005 coco 2007 2006 2005 ESI 2007 2006 2005
all schools all schools ITT Technical Institute
3-yr 15.8% 15.0% 12.3% 3-yr 30.2% 27.7% 23.7% 3-yr 24.1% 20.5% 21.1%
2-yr 7.8% 7.3% 5.9% 2-yr 15.3% 13.0% 10.5% 2-yr 11.6% 9.6% 9.3%
Increase 10Wo 105% 108% Increase 98% 113% 126% Increase 108% 114% 128%
Apollo Everest Number of OPE IDs 29 30 29
3-yr 21.1% 22.8% 17.6% 3-yr 31.1% 28.5% 241% Number w13-yr >40% 0 0 0
2-yr 7.3% 7.5% 4.9% 2-yr 15.7% 13.3% 10.4% Number w13-yr >30% 1 0 0
Increase 1000/i, 202% 264% Increase 99% 113% 132% Number wl3-yr >25% 11 3 3
Devry University Number of OPE IDs 35 35 35 APOL 2007 2006 2005
3-yr 17.1% 17.1% 13.3% Number wl3-yr >40% 1 1 0 u Phoenix
2-yr 9.0% 9.0% 0.066 Number wl3-yr >30% 21 14 4 3-yr 15.9% 10.3% 11.4%
/naease 90% 90% 102% Number wl3-yr >25% 28 27 17 2-yr 9.3% 7.2% 7.3%
Increase 71% 43% 56%
Chamberlain WyoTech 2007 2006 2005
3-yr 4.1% 5.0% 3.2% 3-yr 28.6% 28.2% 26.0% Western lnt'l
2-yr 2.9% 1.8% 0.5% 2-yr 15.3% 13.5% 14.2% 3-yr 26.5% 36.9% 28.7%
Increase 41% 178% 540% Increase 87% 109% 83% 2-yr 18.5% 27.4% 11.4%
Increase 43% 35% 152%
Keller Number of OPE IDs 3 3 3 A PEl 2007 2006 2005
3-yr 4.7% 2.9% 2.9% Number wl3-yr >40% 0 0 0 3-yr 3.3%
2-yr 2.7% 1.4% 1.7% Number wl3-yr >30% 1 1 1 2-yr 0.0%
Ina-ease 74% 107% 71% Number wl3-yr >25% 1 1 1 Increase nm
Ross Heald 2007 2006 2005
3-yr 0.5% 0.3% 0.3% 3-yr 20.8% 19.6% 19.0%
2-yr 0.2% 0.2% 0. 1% 2-yr 10.7% 9.4% 9.2%
Increase 151% 51% 252% Increase 94% 109% 106%
Western Number of OPE IDs 9 9 9 BPI 2007 2006 2005
3-yr 24.4% 23.8% 26.3% Number wl3-yr >40% 0 0 0 Ashford Unoversi ty
2-yr 10.2% 9.6% 10.3% Number wl3-yr >30% 0 0 0 3-yr 17.4% 6.1% 8.8%
/naease 139% 148% 155% Number wl3-yr >25% 0 2-yr 13.3% 4.1% 4.1%
Increase 31% 49% 115%
CPLA 2007 2006 2005 STRA 2007 2006 2005
Capella Universi ty Strayer University U of the Rockies
3-yr 5.5% 3.7% 4.4% 3-yr 13.0% 10.5% 9.3% 3-yr 0.0% 0.0% 5.5%
2-yr 2.5% 1.5% 2.3% 2-yr 6.0% 3.8% 3.9% 2-yr 0.0% 0.0% 0.0%
Increase 120% 147% 91% Increase 117% 176% 138% Increase
UTI 2007 2006 2005 LOPE 2007 2006 2005 WPO 2007 2006 2005
Universal Tech Insti tute Grand Canyon U Kaplan
3-yr 13.8% 16.1% 13.8% 3-yr 2.9% 2.7% 3.0% 3-yr 25.7% 19.9% 16.2%
2-yr 6.6% 7.2% 5.5% 2-yr 1.4% 1.6% 1.8% 2-yr 15.0% 11.4% 8.4%
Increase 109% 123% 153% Increase 107% 69% 67% Increase 71% 75% 93%
CECO 2007 2006 2005 UNC 2007 2006 2005 EDMC 2007 2006 2005
3-yr 19.6% 19.0% 21.0% 3-yr 26.2% 24.9% 21.6% 3-yr 14.4% 11.1% 11.4%
2-yr 8.5% 8.2% 10.7% 2-yr 13.8% 12.3% 8.8% 2-yr 7.9% 5.2% 4.8%
Source US Dept of Educat10naoo Deutsche Bant ca/culat;ons
Deutsche Bank Securities Inc. Page 7
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Figure 4: ITI Educational Services quarterly revenue driver (US$ in millions)
Total Revenue
Growth
New Student Enrollments in Qtr
Growth
Year ago comp
2-year comp
St udent Enroll ment at QE
Growth
Tuiti on Growth (YoY)
Rev per Student
YoY Change i n Persi st ence (bp)
Persistence
Continuing Enrollment
$
$
Actual
2008
1.015.3
16.8%
65.313
19.6%
61.983
16.9%
3.7%
18,162
(82)
74.8%
167.213
Srce Deutsche & n ~ : estimates 4rd company dati
Actual Actual
2009 1Q
s 1.319.194 384.0
29.9% 33.3%
85,928 23.064
31.6% 21.8%
37%
45%
80,766 84,555
30.3% 28.9%
5.0% 2.3%
s 19,066 s 4,754 s
95 82
75.7% 76.1%
209.555 61,491
Year ended Dec 31,
Esti mated Est
2Q 3Q 4Q 2010
401.8 403.4 417.9 s 1.607.1
26.7% 18.8% 11.6% 21.8%
21.673 29.125 19.563 93.425
10.1% 5% 0% 8.7%
33% 27% 31%
56% 47% 60'.4
84,695 90.228 88,379 88,379
21.2% 13.9% 9.4% 9.4%
-1.7% -2 0% -2 0% -0.9%
4,753 s 4,763 s 4.632 s 18,901
(196) (150) (100) (96)
74.5% 72.1% 76.3% 74.8%
63.022 61,104 68,816 254.433
1Q
411.7
7.2%
22.603
-2%
22%
SS%
89,006
5.3%
-2%
$ 4,859 s
(100)
75.1%
66.403
Year ended Oec 31,
Estimat ed Est
2Q 3Q 4Q 2011 1Q
414.5 368.8 384.5 s 1.559.5 345.6
3.2% -8.6% -12.8% -3.0% -16.1%
20.589 26.212 16,629 86.033 18.082
-5% -10% - 15% -7.9% -20%
10'.4 5% 0'.4 2%
44.4 32% 31.4 20%
86.039 87,425 82,432 82,432 79.193
1.6% -3.1% -6.7% -6.7% -11.CJ%
-2% -10% -10% -6.0% -10%
4,657 s 4,286 $ 4.169 s 17,771 $ 4.193 s
(100) (100) (100) (97) (100)
73.5% 71.1% 75.3% 73.8% 74.1%
85,450 61.213 65.804 258.869 61,111
Year ended Oec 31,
Estimat ed
2Q 3Q 4Q
332.0 301.0 288.4 s
-19.9% -18.4% -20.9%
16.471 20.970 13.303
-20'h -20% -20%
-5% Ill% - 15A.
5% 5% 15%
73,913 72.817 67,383
-14. 1% -16.7% -18.3%
-10% -5% .0%
4.192 $ 4,072 $ 3.960 s
(100) (100) (100)
72.5% 70.1% 74.3%
57,442 51.847 54,080
Est
2012
1,266.9
-18.8%
88.826
-20.0%
67,383
-18.3%
-7.6%
16.417
(100)
72.8%
224.479
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Figure 5: ITI Educational Services quarterly P&L (US$ in millions, except per share data)
Revenue
Bad Debt
cos ex bad debt
Cost of educational services
Gross profit
Student svcs and adm in. expenses
EBITDA
Depreciation and amortization
EBIT
Interest Income
Interest Expense
EBT
Provision (benefit) for lncom e taxes
One-time cost
Net income
Shares outstanding, fully diluted
EPS, excluding nonrecurring items
% of Revenues
Bad debt
Cost of Educational Services ex bad deb
Gross margin
Student Services & Admi n
EBITDA
EBIT
Incremental EBIT Margm
YoY Change in EBIT Margin
Tax rate (as a% of pretax income)
% Growth (Y/Y)
Revenues
Bad debt
COS ex bad debt
Gross profit
Advertising Spend (from cont. call)
Student srvcs and adm in. expenses
EBITDA
EBIT
EBT
Net income
EPS, as reported
Srce Deutsche estimates 4rd company dati
Actual
2008
$ 1,015.3
43.3
340.5
383.8
$ 631.6
303.7
350.1
22.2
$ 327.9
6.5
(4.6)
329.8
126.8
-
$ 203.0
39.2
$ 5.17
4.3%
37.8%
62.2%
29.9%
34.5%
32.3%
58.9%
4.5%
38.4%
16.8%
132.7%
0.1%
23.6%
6%
12.9%
32.0%
35.5%
34.9%
33.9%
39.5%
Year ended December 31 ,
Actual Actual
1Q 2Q 3Q 4Q 2009
s 288.0 s 317 1 s 339.6 s 374.4 $ 1,319.2 $
14.2 18.6 23.2 26.0 82.0
86.9 92.2 93.5 95.3 367.9
101. 1 110.8 116 7 121 2 449.8
s 186.9 $ 206.3 s 222.9 s 253.2 s 869.4 $
86.8 90.4 100.2 100.3 377.7
105.9 122.1 129.0 159.6 516.6
5.8 62 63 6.7 24.9
$ 100.1 $ 115.9 $ 122.7 $ 152.9 $ 491 .7 $
1.2 0.9 07 0.5 3.3
(0.2) (0.2) (0.2) (0.1) (07)
101.2 116.6 123.3 153.2 494.2
39.3 45.5 47.9 59.6 192.2
s 61.9 $ 71. 1 s 75.4 s 93.6 s 302.0 $
39. 1 38 4 37.8 36.5 37.9
$ 1.59 $ 1.85 $ 2.00 $ 2.56 $ 7.96 $
4.9% 5.9% 6.8% 6.9% 6.2%
35.1% 34.9% 34.4% 32.4% 34.1%
64.9% 65. 1% 65.6% 67.6% 65.9%
30. 1% 28.5% 29.5% 26.8% 28.6%
36.8% 38.5% 38.0% 42.6% 39.2%
34.8% 36.6% 36. 1% 40.8% 37.3%
59. 1% 56.0% 49.2% 53.7% 53.9%
5.5% 5.6% 4.4% 4.3% 5.0%
38.8% 39.0% 38.9% 38.9% 38.9%
22.6% 28.7% 33.6% 33.8% 29.9%
104.9% 92.3% 80.6% 87.8% 89.4%
2.1% 7.8% 13.8% 8.6% 8.0%
30.9% 36. 4% 40.0% 42.0% 37.7%
3% 1% 2% 12% 5%
17.1% 20.7% 27.6% 31. 7% 24.4%
42.8% 48.7% 50.3% 47.8% 47.6%
45.8% 51.9% 52.0% 49.7% 50.0%
46.2% 52.5% 51.6% 49.0% 49.9%
45.3% 50.8% 50.2% 48.6% 48.8%
46.9% 53.8% 55.9% 59.0% 53.9%
Actual Estimated
1Q 2Q 3Q 4Q
384.0 s 401 .8 $ 403.4 $ 417.9
22. 8 23.0 21.8 20.9
111.6 110.7 109.4 109.5
134.4 133.8 131.2 130.4
249.6 $ 268.1 $ 272.1 $ 287.5
107.0 111.0 116.2 115.3
149.4 163. 9 162.8 179.7
6.8 6.7 6.9 75
142.6 $ 157.1 $ 155.9 $ 172.2
0.7 0.5 0.5 0.6
(0.4) (0.5) (0.5) (0.5)
142.9 157.2 155.9 172.2
55.5 61.1 60.8 67.2
87.5 $ 96.0 $ 95. 1 $ 105. 1
35.5 34 5 33.7 32.9
2.46 $ 2.78 $ 2.82 $ 3.19
5.9% 5.7% 5. 4% 5.0%
35.0% 33.3% 32.5% 31.2%
65.0% 66.7% 67.5% 68.8%
27.9% 27.6% 28.8% 27.6%
38.9% 40.8% 40.4% 43.0%
37. 1% 39. 1% 38.7% 41.2%
44.3% 48.6% 52. 1% 44.3%
2.4% 2.5% 2.5% 0.4%
38.8% 38.9% 39.0% 39.0%
33.3% 26.7% 18.8% 11.6%
60.2% 23.7% <1.0% -19.5%
28.5% 17.0% 15.0%
33.5% 29.9% 22.1% 13.6%
6% 20% 20% 20%
16.0% 15.0%
41.0% 34.2% 26.2% 12.6%
42.4% 35.5% 27.0% 12.6%
41.2% 34.8% 26.5% 12.4%
41.2% 35. 1% 26.2% 12.2%
55.4% 50.3% 41.5% 24.7%
Est Est
2010 2011
s 1,607. 1 $ 1,559.5
88.5 74.3
441.3 439.2
529.8 513.5
s 1,077.3 $ 1,046.0
449.4 480.4
655.8 598.0
27.9 32.5
$ 627.8 $ 565. 6
2.3 4.2
(2.0) (2.1)
628.2 567.7
244.5 221.4
$ 383.7 $ 346.3
34.2 31.2
$ 11.23 $ 11.10
5.5% 4.8%
33.0% 32.9%
67.0% 67. 1%
28.0% 30.8%
40.8% 38.3%
39. 1% 36.3%
47.3% 130.9%
1.8% -2.8%
38.9% 39.0%
21.8% -3.0%
7.9% -16.0%
20.0% -0.5%
23.9% -2.9%
17% 16%
19.0% 6.9%
26.9% -8.8%
27.7% -9.9%
27.1% -9.6%
27.0% -9.7%
41.2% -1.2%
Est
2012
s 1,266.9
50.7
366. 1
416.8
s 850.1
480.4
402.2
32.5
$ 369.7
3.9
(2.1)
371.6
144.9
s 226.7
28.8
$ 7.86
4.0%
32.9%
67.1%
37.9%
31.7%
29.2%
66.9%
-7. 1%
39.0%
-18.8%
-31.8%
-16.6%
- 18.7%
10%
0.0%
-32.8%
-34.6%
-34.5%
-34.5%
-29.2%
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Figure 6: ITI Educational Services quarterly cash flow statement (US$ in millions)
Net Income
D&A
Provision for doubtful accounts
Deferred taxes
Tax benefit from stock options exercises
Stock-based compensation expense
Working Capital movement
Restricted cash
Accounts receivable
Prepaids & other assets
Direct markebng costs
Accounts payable & accrued liabilities
I nco me taxes & others
Deferred revenue
Cash from Operations
Facility expenditure & land purchases
Capex, net
Acquisitions
Proceeds from sales & maturities of inves
Purchase of investments
Issuance of note receivable
Cash flow from Investing
Proceeds from revol ving credit
Excess tax benefit from stock options exer
Proceeds from stock option exercise
Repurchase of common shares
Cash flow from Financing
Effects of exchange rate changes
Change In cash
Cash at Start of Period
Cash at End of Period
Total Cash, restricted cash & MS on BS
Total Debt
Assumptions & Analysi s
AR-DSO (LTM Sales)
YoY Change i n Days
Annualized provision for Bad DebVLTM Sa
Stock based compensation growth, YoY
Stock-based compensation growth, OoO
Share-based com pen satio n I Revs
OCF I Revenue
Capex/Reven u e
Capex/D&A
Working capital
NWC I l TM Sales
FCF
FCF I Net in come
FCFI Share
Source DeutscM Bank estimatus andcomp8(ty d a l ~
$
$
$
$
$
$
$
Actual
2008
203
22
43
(8)
(1)
7
(4)
(58)
,
(2)
10
12
(51)
173
(18)
(18)
-
1,086
(920)
129
1
3
(88)
(83)
219
7
226
375
150
10.7
4.4
4.3%
42%
42%
0.7%
17.0%
3.5%
160%
(209)
-21%
137
68%
3.50
s
$
$
$
$
$
$
s
10
62 $
6
14
(1)
(4)
4 ~
10
(36)
1
(2)
9
26
(29)
61 $
(1)
(5)
49
(56)
(13) $
4
6
(65)
(55) $
(7) $
226
220
366
150
16.3
10.5
5.3%
99%
-40%
1.5%
21 .3%
2.0%
98%
(190)
-18%
$
$
56 $
90%
1.42
Actual
20
71 s
6
19
(3)
(0)
3
(2)
(36)
( 1 ~
0
(3)
(25)
(8)
21 $
(1)
(7)
(21)
37
(35)
(14)
(41) $
0
0
(60)
(60) $
(79) $
220
140
285
150
20.1
9.3
6.5%
65%
-27%
1.0%
6.8%
2.6%
133%
(138)
-12%
$
$
13 s
19%
0.34
30
75 $
6
23
1
(1)
3
(6)
(47)
(0)
(1)
5
(2)
19
75 $
(1)
(4)
-
57
(57)
(0)
(4) $
1
3
(84)
(80) $
(9) $
140 $
131 $
281
25.2
13.3
7.6%
85%
-5%
0.9%
22. 1%
1.3%
73%
(131)
-11%
70 $
93%
1.86
40
94 s
7
26
1
(0)
3
3
(18)
0
0
(6)
6
28
144 $
(2)
(8)
-
100
(97)
1
(7) $
-
0
0
(139)
(139) $
(2) $
131
129
274
150
20.8
111
5.1%
88%
-0%
0.8%
38.3%
2.6%
146%
(188)
-13%
$
$
134 s
143%
3.66
Actual
2009
302
25
82
(2)
(5)
13
6
(137)
1
(3)
5
4
10
301
(4)
(24)
(21)
242
(245)
(51)
5
9
(348)
(334)
0
(85)
226
129
274
150
20.8
10.1
6.2%
84%
84%
1.0%
22.8%
2.1%
113%
(168)
-13%
273
90%
7.19
$
$
$
$
$
$
$
$
Year ended December 31,
Actual Esti mated
10
87 s
7
23
(3)
(1)
5
(3)
(26)
3'
0
7
41
20
159 $
(1)
(5)
85
(107)
(29) $
1
1
(96)
(94) $
37
129
166
327
150
21.0
4.7
6.4%
15%
-63%
1.3%
41.4%
1.6%
91%
(222)
-16%
$
$
$
153 s
175%
4.31
20
96 s
7
23
(6)
(1)
5'
5
(33)
0
0
8
(21r
5
87 $
(2)
(7)
115
(116)
(9) $
1
2
(105)
(103) $
(25) $
166
141
280
150
22.3
2.3
6.1%
42%
-9%
1.1%
21.7%
2.2%
134%
(182)
-12%
$
$
78 s
81%
2.26
30
95 $
7
22
(3)
(1)
4
0
6
(3)
0
3
8
(3)
133 $
(1)
(8)
(9) $
1
3
(80)
(76) $
48
141
188
328
150
16.0
-9.2
5.6%
20%
-20%
0.9%
32.9%
2.2%
130%
(210)
-13%
124
130%
3.68
$
$
$
40
105 s
8
21
3
(1)
3
0
(5)
(1)
0
{9)
4
15
145 $
(2)
(8)
-
(10) $
-
1
3
(80)
(76) $
59
188
247
386
150
12.0
-8,8
5.2%
20%
-6%
0.8%
34.6%
2.4%
133%
I (239;
-15%
135
128%
4.09
$
$
$
s
Est
2010
384
28
88
(9)
(4)
16
2
(58)
(2)
0
9
32
37
524
(6)
(29)
-
200
(223)
(57)
4
9
(361)
(348)
0
118
129
247
386
150
12.0
-8.8
5.5%
24%
24%
1.0%
32.6%
2.1%
122%
(239)
-15%
490
128%
14.34
$
$
$
$
$
$
$
s
Est
2011
346
32
74
2
(4)
18
0
(67)
3
0
(12)
(2)
(27)
364
(8)
(32)
-
(40)
4
20
(320)
(296)
-
28
247
275
415
150
11.2
-0.8
4.8%
10%
10%
1.2%
23.3%
2.6%
123%
(211)
-14%
324
94%
10.39
$
$
$
$
$
$
$
$
Est
2012
227
32
51
3
(4)
18
0
(41)
4
0
(17)
(2)
(38)
232
(8)
(32)
-
(40)
4
20
(320)
(296)
-
(104)
275
171
311
150
11.0
-0.3
4.0%
0%
0%
1.4%
18.3%
3.2%
123%
(170)
-13%
192
85%
6.67
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Appendix 1
Important Disclosures
Additional information available upon request
Disclosure checklist
Company Ticker Recent price* Disclosure
ITI Education Services ESI.N 85.44 (USD) 23 Jul 1 0 8
Apollo Group APOL.OO 49.27 (USD) 23 Jul 10 2
Corinthian Col leges Inc COCO.OO 10.20 (USD) 23 Jul 10 2,8
DeVry DV.N 59.29 (USD) 23 Jul 10 NA
* Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
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Historical recommendations and target price: ITT Education Services (ESI.N)
(as of 7/23/2010)
....
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Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 00 Apr 00 Jul 00 Oct 00 Jan '0 Apr '0
Date
Deutsche Bank l/l
Previous Recommendations
Strong Buy
Buy
Market Perform
Underperform
Not Rated
Suspended Ratmg
Current Recommendations
Buy
Hold
Sell
Not Rated
Suspended Rating
New Recommendation Structure
as of September 9, 2002
1. 4/20/2009: Buy, Target Price Change USD125.00 2. 7/22/2010: Buy, Target Price Change USD11 0.00
Historical recommendations and target price: Apollo Group {APOL.OQ)
{as of 7/23/2010)
USD'OO.OO
USD90.00
USD80.00
USD70.00
- ....
Cl.. USD60.00
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USD20.00
USD'O.OO
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Jul
07
1. 4/20/2009:
Page 12
Oct
07
Jan
08
Apr
08
Jul
08
Buy, Target Price Change US080.00
Oct
08
Jan Apr
09 00
Date
Jul
00
Oct
09
2. 7/1/2010:
Jan Apr
'[) '[)
Strong Buy
Buy
Market Perform
Underperform
Not Rated
Suspended Rating
Buy
Hold
Sell
Not Rated
Suspended Rating
Buy, Target Price Change USD75.00
Historical recommendations and target price: Corinthian Colleges Inc (COCO.OQ)
(as of 7/23/2010)
USD25.00
USD20.00

>
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::)
USD1J.OO
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USD5.00
USD-
Jul07 OctO? Jan08 Apr08 Jul08 Oct08 Jan09 Apr09 Jul09 Oct09 Jan1J Apr1J
Date
Deutsche Bank l/l
Strong Buy
Buy
Market Perform
Underperform
Not Rated
Suspended Ratmg
Buy
Hold
Sell
Not Rated
Suspended Rating
1. 1 0/26/2009: Buy, Target Price Change USD27.00 2. 5/5/2010: Buy. Target Price Change USD24.00
Historical recommendations and target price: DeVry (DV.N)
{as of 7/23/2010)
USD80.00
0...
c

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0
Q)
(/)
USD?O.OO
USD60.00
USD40.00
USD30.00
USD20.00
USD1J.OO
USD-
Strong Buy
Buy
Market Perform
Underperform
Not Rated
Suspended Rating
Buy
Hold
Sell
Not Rated
Suspended Rating
Jul07 OctO? Jan08 Apr08 Jul 08 Oct08 Jan09 Apr09 Jul09 0:::109 Jan1J Apr1J
Date
1. 4/20/2009:
2. 8/14/2009:
3. 1 0/28/2009:
Hold, Target Price Change USDSO.OO
Hold, Target Price Change USD53.00
Hold. Target Price Change USD56.00
4. 1/27/2010:
5. 4/23/201 0:
Page 13
Deutsche Bank l/l
Equ1t y ratmg key Equ1ty ratmg d1spers1on and bank1ng relat1onsh1ps
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Sel l: Expected total return (includi ng dividends) of -
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Page 14
5oo
400
300
200
100
0 -1---L--
Buy
1%27%
Hold Sell
0 Companies Covered II Cos. w/ Banking Relationship
North American Universe
Deutsche Bank l/l
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From:
Sent:
To:
Kevin Modany at HQ [KModany@itt-tech.edu)
Saturday, July 31, 201 o 1 :34 PM
Kvaal, James
Subject: FW: Business, Education & Professional Services : Little news from GE panel; Senate
hearing next week- United States - 8pp
Attachments: mlbull.gif; spacer.gif
James,
I'm not sure if you can comment or not but I thought I would ask; You'll note in the analyst report below that
Sara reported that during the panel discussion at New America Foundation you said that the ED calculated the impact of
the gainful employment repayment metric by using the data available in the NSLDS. Per our exhaustive review of the
data in NSLDS, we here at m Educational Services (along with several other peer intuitions that we've been working
with on this) do not believe that the data required to calculate the repayment rate (as defined by the GE proposed
regulation) is available in NSLDS. As such we believe it is impossible for any proprietary institution to recalculate their
repayment rate (for any period) as we simply do not believe that we have access to the requisite data. If we are
somehow missing something with regard to what is available in NSLDS (or any other source) we would greatly appreciate
some direction from the ED on that front.
I feel confident in saying that many of us in the proprietary sector have been working non-stop since the release of the
proposal to try and determine the impact on our employees, students and employer partners however I am unaware of a
single proprietary institution that has been able to do so. We have been unable to calculate the repayment rate, the debt
to discretionary income ratio or the debt to salary ratio as we have been unable to gather the necessary data to calculate
any of it (some of the data, we believe, could not be legally provided to us at any time, now or in the future).
Any insight or clarification that you can provide on any of this (while maintaining adherence to any limitation on
communications from the ED during the official comment period) would be truly appreciated. If it would make more
sense to discuss this over the phone I will be in the office all next week and would make myself available in accordance
with your schedule.
I look forward to your thoughts, comments and/or suggestions.
Regards,
Kevin
From: BofAML-Sara Gubins [feedback@mlresearch.ml.com]
Sent: Friday, July 30, 2010 3:52 PM
To: Kevin Modany at HQ
Subject: Business, Education & Professional Services : Little news from GE panel; Senate hearing next week- United
States- 8pp
Link to full report including important disclosures*
http://research 1.ml.com/C!?q=ulgg2chHPQTltljEpgrEYA &r=modake
Industry Overview
Bank of America.
Merrill Lynch
Panel discussion on GE at New America Foundation
Today's New America Foundation panel discussion focused largely on the Department of Education's gainful employment
proposal (GE), with James Kvaal (Bob Shireman's replacement at the Dept. of Education) as the featured speaker. Kvaal
was limited by the DOE being in a comment period on proposed regulation. He largely described the proposal and his
comments were fairly balanced. He reiterated DOE estimates that only 5% of programs would be ineligible & 8% would be
restricted, but that over half would have to make more disclosures to students. We have heard some industry concerns
that it could be worse than this. When asked about data sources, he said the DOE used NSLDS (national student loan
database) for debt repayment. Income data was only based on longitudinal data from the state of Missouri. One key
concern for schools has been not having the data to fully analyze the proposal. There is a chance the DOE will release
more detailed data to the public, but they haven't yet confirmed this.
Panel included range of views
The other two panelists were Katherine Mangu-Ward from Reason Magazine & Barmak Nassirian from the American
Assn. of Collegiate Registrars & Admissions Officers. Not surprisingly, Nassirian (a long-time critic of the industry) was
highly critical & suggested the GE proposal didn't go far enough. One of Mangu-Ward's key points was that traditional
schools should be included in this proposal. However, most traditional school programs are not subject to GE under the
law.
Senate hearing on for-profit education recruiting on 8/ 4
As has been widely anticipated, the Senate HELP (Health, Education, Labor and Pensions) committee will hold a second
in a series of hearings on for-profit education on 8/4 at 1 Oam ET entitled For-Profit Schools: The Student Recruitment
Experience. We expect another negative hearing. According to the Chronicle of Higher Ed. , it will include a video &
testimony from an undercover GAO investigation into for-profit college recruiting practices as they posed as students. The
rest of the witnesses will be posted on Monday. We think the hearings largely provide support for the DOE's current
regulatory process. One proposal is to eliminate the safe harbors related to incentive compensation. However, there is a
risk that the hearings could lead to more legislation around the sector over time.
Positives in regulation; ed stocks require patience
We continue to believe the picture emerging from the GE proposal is better than the original. However, we think education
stocks will require patience given continued concerns about the impact of GE & the potential for further DC scrutiny. For
the most part, we prefer what we view as high-quality, less-countercyclical names such as Strayer, Grand
Canyon, DeVry, & Capella given the continued broader regulatory overhang. In terms of greatest potential upside, we
view deep-value names Apollo and Career Education as particularly attractive. They have more overhangs but a
particularly attractive risk/reward profile in our view.
To repl y to Sara Gubins directly, click here or call +1 646 855 1961
Read the research report, available through the link above, for complete information including important disclosures and analyst certification(s). The
research report and the link to such report is for the use of Merrill Lynch and Bane of America Securities customers only and all copying,
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Publication: 672679-10960623.pdf
Recipient: Kevin Modany
2
From: Kvaal, James
Sent:
To:
Saturday, July 31, 2010 2:08PM
Bergeron, David
Subject: Fw: Business, Education & Professional Services : Little news from GE panel; Senate hearing
next week - United States - 8pp
Sent using BlackBerry
From: Kevin Modany at HQ <KModany@itt-tech.edu>
To: Kvaal, James
Sent: Sat Jul 31 12:34:05 2010
Subject: FW: Business, Education & Professional Services : Little news from GE panel; Senate hearing next week-
United States- 8pp
James,
with your schedule.
Regards,
Kevin
3
States- 8pp
Link t o full re port including important disclosures*
http://research 1.m l.com/ C/?q=ulgg2chHPQTltljEpgrEYA &r =modake
Panel discussi on on GE at New America Foundation
Indust ry Overview
BankofAmerica.
Merrill Lynch
that it could be worse than this. V\lhen asked about data sources, he said the DOE used NSLDS (national student Joan
law.
Senat e hearing on for-profit education recruiting on 8/ 4
Positives in regulation; ed stocks requi re patience
view deep-value names Apoll o and Career Educati on as particularly attractive. They have more overhangs but a
To reply to Sara Gubins directly, click here or call +1 646 855 1961
* Read the research report, available through the link above, for complete information including important disclosures and analyst certification(s}. The
4
To receive BofA Merrill Lynch Research emails in plain text format, click here
The Americas: +1 888 734 1391 or +1 646 556 2910
Japan: +813 6225 7677 or +813 6225 6264
5
From: Kvaal, James
Sent:
To:
Monday, August 02, 2010 7:27 PM
'KModany@itt-tech.edu'
Subject: Re: Business, Education & Professional Services : Little news from GE panel; Senate hearing
next week- United States- 8pp
Kevin, we are looking into what data we can share. I suggest that you or someone on your team send these questions to
john.kolotos@ed.gov. Sorry to pass the buck but we are referring people to John to ensure consistency and compliance
with administrative laws.
To: Kvaal, James
Sent: Sat Jul 31 12:34:05 2010
United States- 8pp
James,
with your schedule.
Regards,
Kevin
6
States- 8pp
Link t o full re port including important disclosures*
http://research 1.m l.com/ C/?q=ulgg2chHPQTltljEpgrEYA &r =modake
Panel discussi on on GE at New America Foundation
Indust ry Overview
BankofAmerica.
Merrill Lynch
that it could be worse than this. V\lhen asked about data sources, he said the DOE used NSLDS (national student Joan
law.
Senat e hearing on for-profit education recruiting on 8/ 4
Positives in regulation; ed stocks requi re patience
view deep-value names Apoll o and Career Educati on as particularly attractive. They have more overhangs but a
7
The Americas: +1 888 734 1391 or +1 646 556 2910
Japan: +813 6225 7677 or +813 6225 6264
8
From:
Sent:
To: Kvaal, James
Subject: Re: Business, Education & Professional Services : Little news from GE panel; Senate hearing
next week- United States- 8pp
Thanks. This is helpful. We'll definitely check with John.
From: Kvaal, James <James.Kvaal@ed.gov>
Sent : Mon Aug 02 19:27:02 2010
Subject: Re: Business, Education & Professional Services : Little news from GE panel; Senate hearing next week- United
States- 8pp
Kevin, we are looking into what data we can share. I suggest that you or someone on your team send these questions to
john.kolotos@ed.gov. Sorry to pass the buck but we are referring people to John to ensure consistency and compliance
with administrative laws.
To: Kvaal, James
Sent : Sat Jul 31 12:34:05 2010
United States- 8pp
James,
regulation) is available in NSLDS. As such we bel ieve it is impossible for any proprietary institution to recalculate their
with your schedule.
9
Regards,
Kevin
Sent: Friday, July 30, 2010 3:52PM
States- 8pp
http://research1.ml.com/C/?q=ulgg2chHPQTltljEpgrEYA &r=modake
Panel discussion on GE at New America Foundation
Industry Overview
Bank of America ...
Merrill Lynch
that it could be worse than this. When asked about data sources. he said the DOE used NSLDS (national student loan
law.
Senate hearing on for-profit education recruiting on 8/4
Positives in regulation; ed stocks require patience
view deep-value names Apollo and Career Education as particularly attractive. They have more overhangs but a
10
The Americas: +1 888 734 1391 or +1 646 556 2910
Japan: +813 6225 7677 or +813 6225 6264
11
From:
Sent:
To:
Tuesday, August 03, 201 o 1 :11 PM
Kvaal, James
Subject: FW: Business, Education & Professional Services : Little news from GE panel; Senate
hearing next week- United States - 8pp
No luck through John. Seems like we are correct in that this data is not available.
Any other suggestions on how a school could go about knowing what is expected of us and where
we stand with the proposed metric?
I appreciate your patience with us and any feedback you can provide.
-----Original Message-----
From: KolotosJ John [mailto:John.Kolotos@ed.gov]
Sent: TuesdayJ August 03J 2010 8:03 AM
To: Greg Wallis at HQ
Subject: RE: BusinessJ Education & Professional Services
hearing next week - United States - 8pp
Little news from GE panel; Senate
the nprm provides that the DeptJ not the schoolJ would calculate the repayment rate. i
understand your positionJ and would suggest that you submit a comment to the nprm expressing
your concerns about calculating this rate. i don't know how a school could obtain the data
needed for the numerator under current procedures. john
From: Greg Wallis at HQ [GWallis@itt-tech.edu]
Sent: TuesdayJ August 03J 2010 7:35 AM
To: KolotosJ John
Subject: FW: BusinessJ Education & Professional Services
JohnJ
I was directed your way to follow up on sourcing the data necessary to be able to calculateJ
in particularJ the numerator for our Repayment RateJ as defined in the NPRM. We can build
the denominator from the LRDR reports we receive each yearJ but lack the repayment data to be
able to determine those students who have made a payment of principal in the last 12 months
of the measurement periodJ along with those students on either a mi litary or in-school
deferment.
Would you be able to provide us guidance on the specifics of what to request from NSLDS to be
able to do so. If you would prefer to have a call on this topicJ we'd be happy to arrange
our schedul es to do so.
Thanks for your consideration.
Gregory C. Wa llis
VPJ Finance
ITT Educational ServicesJ Inc.
317-706-9217
gwallis@ittesi.com<mailto:gwallis@ittesi.com>
12
From: Kevin Modany at HQ
Sent: MondayJ August 02J 2010 10:18 PM
To: Greg Wallis at HQ
Subject: Fw: Business) Education & Professional Services
GregJ
Let's reach out to John and see if he can help us get access to our repayment data.
Let me know what we find out. See me with any questions.
Kevin
From: KvaalJ James <James.Kvaal@ed.gov>
Sent: Mon Aug 02 19:27:02 2010
Subject: Re: Business) Education & Professional Services
KevinJ we are looking into what data we can share. I suggest that you or someone on your team
send these questions to john.kolotos@ed.gov. Sorry to pass the buck but we are referring
people to John to ensure consistency and compliance with administrative laws.
To: KvaalJ James
Sent: Sat Jul 31 12:34:05 2010
Subject: FW: Business) Education & Professional Services
hearing next week - United States - 8pp JamesJ
I'm not sure if you can comment or not but I thought I would ask; You'll note in the analyst
report below that Sara reported that during the panel discussion at New America Foundation
you said that the ED calculated the impact of the gainful employment repayment metric by
using the data available in the NSLDS. Per our exhaustive review of the data in NSLDSJ we
here at ITT Educational Services (along with several other peer intuitions that we've been
working with on this) do not believe that the data required to calculate the repayment rate
(as defined by the GE proposed regulation) is available in NSLDS. As such we believe it is
impossible for any proprietary institution to recalculate their repayment rate (for any
period) as we simply do not believe that we have access to the requisite data. If we are
somehow missing something with regard to what is available in NSLDS (or any other source) we
would greatly appreciate some direction from the ED on that front.
I feel confident in saying that many of us in the proprietary sector have been working non-
stop since the release of the proposal to try and determine the impact on our employees)
students and employer partners however I am unaware of a single proprietary institution that
has been able to do so. We have been unable to calculate the repayment rateJ the debt to
discretionary income ratio or the debt to salary ratio as we have been unable to gather the
necessary data to calculate any of it (some of the dataJ we believe) could not be legally
provided to us at any timeJ now or in the future).
Any insight or clarification that you can provide on any of this (while maintaining adherence
to any limitation on communications from the ED during the official comment period) would be
13
truly appreciated. If it would make more sense to discuss this over the phone I will be in
the office all next week and would make myself available in accordance with your schedule.
Regards,
Kevin
From: BofAML-Sara Gubins [feedback@mlresearch.ml.com)
Subject: Business, Education & Professional Services Little news from GE panel; Senate
[cid:image001.png@01CB32DE.68ABSAE0)
Business, Education & Professional Services
Industry Overview
Little news from GE panel; Senate hearing next week
[cid:6d6c62756c6c@ml]
http://researchl.ml.com/C/?q=uigq2chHPQTltljEpgrEYA __ &r=modake
14
Panel discussion on GE at New America Foundation Today's New America Foundation panel
discussion focused largely on the Department of Education's gainful employment proposal (GE),
with James Kvaal (Bob Shireman's replacement at the Dept. of Education) as the featured
speaker. Kvaal was limited by the DOE being in a comment period on proposed regulation. He
largely described the proposal and his comments were fairly balanced. He reiterated DOE
estimates that only 5% of programs would be ineligible & 8% would be restricted, but that
over half would have to make more disclosures to students. We have heard some industry
concerns that it could be worse than this. When asked about data sources, he said the DOE
used NSLDS (national student loan database) for debt repayment. Income data was only based on
longitudinal data from the state of Missouri. One key concern for schools has been not having
the data to fully analyze the proposal. There is a chance the DOE will release more detailed
data to the public, but they haven't yet confirmed this.
The other two panelists were Katherine Mangu-Ward from Reason Magazine & Barmak Nassirian
from the American Assn. of Collegiate Registrars & Admissions Officers. Not surprisingly,
Nassirian (a long-time critic of the industry) was highly critical & suggested the GE
proposal didn't go far enough. One of Mangu-Ward's key points was that traditional schools
should be included in this proposal. However, most traditional school programs are not
subject to GE under the law.
Senate hearing on for -profit education recruiting on 8/4 As has been widely anticipated, the
Senate HELP (Health, Education, Labor and Pensions) committee will hold a second in a series
of hearings on for-profit education on 8/4 at 10am ET entitled For-Profit Schools: The
Student Recruitment Experience. We expect another negative hearing. According to the
Chronicle of Higher Ed . , it will include a video & testimony from an undercover GAO
investigation into for -profit college recruiting practices as they posed as students. The
rest of the witnesses will be posted on Monday. We think the hearings largely provide support
for the DOE's current regulatory process. One proposal is to eliminate the safe harbors
related to incentive compensation. However, there is a risk that the hearings could lead to
more legislation around the sector over time.
Positives in regulation; ed stocks require patience We continue to believe the picture
emerging from the GE proposal is better than the original. However, we think education stocks
will require patience given continued concerns about the impact of GE & the potential for
further DC scrutiny. For the most part, we prefer what we view as high-quality, less-
countercyclical names such as Strayer, Grand Canyon, DeVry, & Capella given the continued
broader regulatory overhang. In terms of greatest potential upside, we view deep-value names
Apollo and Career Education as particularly attractive. They have more overhangs but a
To reply to Sara Gubins directly, click here<mailto:sara.gubins@baml.com> or call +1 646 855
1961
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15
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16
From:
Sent:
To:
Subject:
Martha gmail.com]
Monday, August 02, 201 o 10:32 PM
Kvaal, James
Apollo Group Draws Call-Buying Activity - TheStreet
http://www.thestreet.com/_yahoo/story/10823410/1/apollo-group-draws-call-buying-
activity.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA
Sent from my iPhone
17
From:
Sent:
To:
Subject:
Martha gmail.com]
Kvaal, James
Summary of CORINTHIAN COLLEGES INC- Yahoo! Finance
http://biz.yahoo.com/e/100802/coco8-k.html
Sent from my iPhone
18
From:
Sent:
To:
Subject:
Attachments:
Weiss, Joanne
Friday, July 30, 2010 11:00 AM
Kvaal, James
FW: GE
f_EDU07291 O.pdf
From: Andy Kaplan fmailto:andy@guadpartners.coml
Sent: Friday, July 30, 2010 10:48 AM
To: Weiss, Joanne
Subject: Re: GE
I understand that .... at the same time I'm concerned about the bias implied by James Kvaal speaking today in a discussion
entitled, "Reining in For-Profit Education." (See below and attached.) It just doesn't seem to be the level playing field
we'd all want when trying to figure out a fair approach that serves students.
(From Jeff Silber at BMO):
Flash: Stocks Could See Some Pressure from New America Foundation Event
On Friday, the New America Foundation is hosting an event entitled "Reining in For-Profit Higher
Education" at which the featured speaker is James Kvaal, who recently replaced Robert Shireman as
deputy undersecretary for the US Department of Education. We believe this is Kvaal 's first public
event relating to the for-profit sector since the gainful employment NPRM was officially released on
Monday.
On 7/29/10 4:30 PM, "Weiss, Joanne" <Joanne. Weiss@ed.gov> wrote:
Not during this period, Andy. It's imperative that we keep a level playing field while we're in the midst of the regulatory
process.
Joanne
From: Andy Kaplan [mailto:andy@guadpartners.com]
Sent: Thursday, July 29, 2010 4:27 PM
To: Weiss, Joanne
Cc: Kvaal, James; Kanter, Martha
Subject: Re: GE
I understand .... can we get together to discuss the role of for-profits in postsecondary education more generally and
without discussion of the pending regulations?
On 7/28/10 5:45PM, "Weiss, Joanne" <Joanne.Weiss@ed.gov> wrote:
19
Andy,
I appreciate your interest in helping us get this "right." However, we are not permitted to have individual conversations
about a regulation that's out for public comment. The only way that we can "hear" your comments is for you to submit
them through regulations.gov (at
http://www.regulations.gov/search/Regs/home.html#documentDetaii?R=0900006480b20b5f). I assure you that we
read everything that comes in there- and the more specific and concrete you can be about how you would recommend
that we change the rules (including your redlined suggestions, together with rationales), the better.
Joanne
From: Andy Kaplan [mailto:andy@guadpartners.com]
Sent: Wednesday, July 28, 2010 5:41PM
To: Weiss, Joanne
Subject: GE
Joanne-
Hope you are well. Congratulations on your new role!
I wanted to follow up with you on the conversations we had about the new proposed regulations on for-profits post
secondary schools, particularly the new proposal for gainful employment.
As you know, we run high quality schools with good outcomes ... and I know that the Department is trying to come up
with rules that provide better disclosure and consumer protection ... but the newest proposal may have a lot of
unintended consequences.
Can Line and I come down to see you to discuss? We would very much like to be constructive on the issue.
Thanks!
Best,
-Andy
20
W BMO ~ Capital Markets
Thursday, July 29, 2010
Education
Stocks Could See Some Pressure from New America Foundation Event
Flash:
On friday, the New America Foundation is hosting an event entitled "Reining in for-Proft
Higher Education" at which the featured speaker is James Kvaal , who recently replaced Robtrt
Shireman as deputy Lmdersecretary for the US Department of Education. We believe this is
Kvaal's first public event relating to the for-profit sector since the gainful employment NPRM
was officially released on Monday.
Our View:
* Jn addition to Mr. Kvaal, panelists include Bannak Nassirian, associate executi ve directo
of the American Association of Collegiate Registrars and Admissions Officers, with the
panel moderated by the New America foLmdation's Stephen Burd - two individuals whose
public comments and writi11gs have shown them to not necessarily be advocates for the
sector. TI1e other panelist, Reason magazine' s Katherine Mangu-Ward, recently wrote a
critical piece on Apollo Group's (APOL -- MARKET PERFORM) University of Phoenix,
but has also questioned why the gainful employment rules are not appli ed to some not-for-
profit programs as well.
* Given the title of the event and the panelists, we would not expect this event to be a
lovefest for the sector.
* We hope this wiJJ also be an opportunity for Mr. Kvaal to address some oftl1e issues tl1at
emanated following the NPRM release, such as the Jack of data and some of the
uncertainties surrounding de fin it ions.
* The event will be held at II :00 a.m. (ET) at New American's Waslill1gton DC office, but
wiJI be webcast for those that cannot attend.
* The URL is at http://www.newamerica.net/events/2010/for_profit_higher_education.
!sector: Education
Rating: Outperform
1
Analyst: Jeffrey M. Silber 212-885-4063
I email: jeff.silber@bmo. com
Associate: Paul Condra 212-885-4176
JEmail : paul.condra@bmo.com
Refer to pages 2 to 4 for Important Disclosures, including Analyst's Certification. For Important
Disclosures on the stocks discussed in this report, please go to http://research-
us.bmocm.com/Company_Disclosure_Public.asp
Flash BMO Capital Markets
APOLLO GROUP INC (APOL)
80
60
40
20
140
120
100
80
60
1980
5 [ '
1980
Quarterly Price (US$)
80
60
40
20
APOL Relative to S&P 500
APOL Relative to Diversified Consumer Services
1985 1990 1995 2000
D EPS (4 Qtr Traili ng) - (US$)
~ M ~ J :
1990 1995 2000 2005 2010
'
1985
Flash Page 2
100
90
80
70
60
50
40
300
_:: [
Target Price(US$)
Share Price(US$)
APOL Relative to S&P 500
APOL Relative to Diversified Consumer Services
APOL Relative to S&P 500 YIY (%)
100
90
80
70
60
50
40
300
APOL Relative to Diversified Consumer Services YIY (%)
500
~ : :: :=:1_500 I I I
2008 2009 2010
APOL - Rating as of 17 -Aug-07 = OP
Date
8-Jan-10
Rating Change Share Price
OP to Mkt $63.94
last Datly Data Point: July 28, 2010
Analyst's Certifi cation
I, Jeffrey M. Silber, hereby certifY that tbe views expressed in this repo.rt accurately reflect 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 prepnred this report are compensated based upon (among other factors) the overall profitability of BMO Capital
Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is
based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations,
accuracy of earnings estimates, and service to clients.
Com1>any Specific Disclosure for APOL
9- BMO Capital Markets makes a market in this security.
Methodology and Risks to Our Price Target
Methodology: Average of forward looking PIE. forward looking EV/EBITDA and Discounted Cash Flow
Risks: Worse than expected enrollment trends in postsecondary education, state and federal regulatory issues,
Distribution ofRatin!!:s (June 30, 2010)
Rating BMOCMUS BMOCM US BMOCM US BMOCM BMOCM
Category BMO Rating Un iverse* IB Clients*"' 113 Clients*** Universe**** IB Clients*****
Buy Outperform 37.1% 13.7% 43.6% 40.9% 51.0%
Hold Market Perfonn 59.3% 10.4% 52.7% 54.8% 45.4%
Sell Underperform 3.6% 11.8% 3.6% 4.3% 3.6%
"
Reflects ratmg dtstnbutlOn of all compantes covered by BMO Capt tal Markets Corp. eqUi ty research analysts.
Starrnine
Universe
54.4%
40.2%
5.4%
Reflects rating distribution of all companies from which BMO Capital Markets Corp. has received compensntion for
lnvestment Banking services as percentage within ratings category.
***
****
*****
Reflects rating distribution of all companies from which BMO Capital Markets Corp. bas received compensation for
Investment Banking services as percentage of Investment Banking clients.
Reflects rating distribution of all companies covered by BMO Capital Markets equity research analysts.
Retlects rating distribution of all companies from which BMO Capital Markets has received compensation for Investment
Banking services as percentage of lnvestrnent Banking clients.
Ratings and Sector Key
We use the follov;ing ratings system definitions:
OP =Outperform- Forecast to outperform the market;
Mkt = Market Perform- Forecast to perform roughly in line with the market;
Und = Underperforrn- Forecast to underperform the market;
(S) =speculative investment;
NR = No rating at this time;
R =Restricted - Dissemination of research is currently restricted.
Market performance is measured by a benchmark index such as the S&PITSX Composite Lndex, S&P 500, Nasdaq Composite, as
appropriate for each company. BMO Capital Markets eight Top I 5 li sts guide investors to our best ideas according to different
objectives (Canadian large, small, growth, value, income, quantitative; and US large, US small) have replaced the Top Pick
rating.
Other Important Disclosures
For Other Important Disclosures on the stocks discussed in this report, please go to http://researchglobal. bmocapitalmarkets.co m/
Company_Disclosure_Public.asp or write to Editorial Department, BMO Capital Markets, 3 Times Square, New York, NY
10036 or Editorial Department, BMO Capital Markets, I First Canadian Place, Toronto, Ontario, M5X 11-13.
Prior BMO Capital Markets Ratings Systems
http://researchglobal. bmocap italmarkets.com/documents/2009/prior _rating_ systems. pdf
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Flash Page 3
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From:
Sent:
To:
Subject:
Attachments:
Kvaal, James
Wednesday, July 28,2010 9:11PM
Bergeron, David
FW: DB Education: ITT- Downgrade to Hold, lowering EPS for Gainful Employment
0900b8c081 f76aeO.pdf
Some interesti ng stuff below and attached
From: Kantrowitz, Mark [mailto:Mark.Kantrowitz@Monster.com]
Sent: Monday, July 26, 2010 5:06PM
To: Kvaal, James; Madzelan, Dan
Cc: Kantrowitz, Mark
Subject: FW: DB Education: m- Downgrade to Hold, lowering EPS for Gainful Employment
The proposed rules are already having an impact. This Deutsche Bank analyst report precipitated a drop in the stock
prices at most of the for-profit colleges today. Paul Ginocchio has previously published research showing a strong
correlation between compliance with the various federal regulations (e.g., 90/10, cohort default rates and now gainful
employment} and price-to-earnings ratios at these colleges. This makes the colleges feel it in their pocketbook, giving
them a strong financial incentive to comply with the rules.
Limiting enrollment at these colleges will be a very effective tool for ensuring compliance, especially since your use of a
three-year moving average effectively means an enrollment drop the first year a college is in the restricted zone. (Most
of the programs experience double-digit enrollment growth, so the most recent enrollment figures are higher than the
three-year average.} Investors are attracted to the publicly traded for-profit colleges because of their high profit margins
and their enrollment growth.
I noticed on page 124 of the NPRM that you' ve got institutional loan repayment rates: "While repayment rates by program are
not avai lable, the Department has developed queri es of the National St udent Loan Data System (NSLDS) to detem1i ne repayment rates by
instituti on." The table on page 21 of the NPRM was based on this data, implying that you have these f igures for all
colleges. It might be worthwhile to release this institution-level data, similar to the previous release of Trial 3-Year
Cohort Default Rates, as it will help inform the discussions ofthe proposed rules and influence institutional behavior.
I've been getting a lot of email from colleges that are trying to figure out how to calculate their current loan repayment
rate and analysts that are trying to estimate the loan repayment rates for the publicly traded for-profit colleges. Key
problems that prevent colleges from calculating their current loan repayment rates include consolidation loans (they
cannot evaluate the status of consolidation loans that paid off the student's Stafford loans} and deferments (they cannot
distinguish the different types of deferments) and ICR/IBR (they have difficulty identifying whether the borrower has
made payments to principal). You will probably receive a lot of FOIA requests for this information.
In the meantime I've been suggesting that a college with a 25%+ cohort default rate (2-year) or 30%+ cohort default rate
(3-year} will probably not be able to satisfy the 35% loan repayment rate threshold when one adds in 12% to 13%
delinquencies, 25% deferments and forbearances, 7% to 8% IBR/ICR negative amortization. It would be interesting to
see exactly how the loan repayment rates correlate with cohort default rates. To the extent that the loan repayment
rate measures repayment behavior while the debt to income ratios measure ability to repay, the loan repayment rate
carries more information than the debt to income ratios. For example, almost all of the colleges that satisfy the 45% loan
repayment rate threshold also satisfy the 8%/20% debt to income ratios. I wouldn't be surprised if you started with the
cohort default rate thresholds and translated them to the equivalent loan repayment rates, yielding something pretty
close to the 35% loan repayment rate.
Mark Kantrowitz
Publisher of FinAid.org and Fastweb.com
From: Paul Ginocchio [mailto:paul.ginocchio@db.com]
Sent: Monday, July 26, 2010 3:30 PM
To: undisclosed-recipients
Subject: DB Education: m- Downgrade to Hold, lowering EPS for Gainful Employment
We published tlus note this morning.
ITT Education Services : Downgrade to Hold, loweri ng EPS for Gainful Employment
ITT Education Services {Ticker: ESI.N, Closing Price: 85.44 USD, Target Price: 85.00 USD, Recommendation: Hold}
We believe the proposed Gainful Employment (GE) language in Friday's NPRM will restrict a significant proportion of
ESI's programs. We also believe ESI will have to increase its admission criteria over time to increase its repayment rates.
The restrictions, plus the need to raise admission criteria, will make it difficult for ESI to grow. We have cut our FY1 OE and
FY11 E EPS by 8% and 29%, respectively, due to our assumed business model changes. We have lowered our price
target from $110 to $85. HOLD.
ESt's programs will struggle to pass repayment or debt-to-income thresholds
ESI's relatively high draft '07 3-yr CDR at 24.1% likely means many programs will struggle to make the 45% student loan
principal repayment threshold. Also, due to ESI's tuition prices and starting salaries, at $30K (Associate's) and $40K
(bachelor's), their programs will also not meet the 8% debt-to-income, or 20% of disposal income, thresholds. To make
these repayment thresholds, ESI SA's need to graduate with $34K debt or less, while their AA's need to graduate with
$20K or less. Our best estimate is that ESI's grads have over $40K and over $25 of debt, respectively, at graduation, well
above eligible levels.
ESt's business model seems the most impacted by the proposed language
We think top pick APOL should see minimal impact from the proposed Gainful Employment regulation, and APOL already
has a strategy in place to weed out uncommitted students, which raises repayment rates. ESI just stated last week (but
before GE was proposed) that it would not change its admission criteria. We now think ESI needs to in order to increase
future repayment rates, thus hurting enrollment. Tuition may also need to decline over time to meet thresholds.
The following link will be available for 90 days. For more information, please click on the link for the full PDF. If you have
any trouble viewing the link, copy and paste the link in a browser. http://pull.db-gmresearch.com/p/144-
27E6/64122679/0900b8c081f76aeO.pdf
After 90 days you can access the report on our web site: http://gm.db.com
Regards,
Paul Ginocchio
Office:+1-415-617-4207
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(See attached file: 0900b8c081P6ae0.pdj)
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Subject:
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Interesting reading
Kvaal, James
Wednesday, July 28,2010 9:15PM
Shireman, Robert
FW: DB Education: ITT- Downgrade to Hold, lowering EPS for Gainful Employment
0900b8c081 f76aeO.pdf
To: Kvaal, James; Madzelan, Dan
Subject: FW: DB Education: m- Downgrade to Hold, lowering EPS for Gainful Employment
The proposed rules are already having an impact. This Deutsche Bank analyst report precipitated a drop in the stock
prices at most of the for-profit colleges today. Paul Ginocchio has previously published research showing a strong
correlation between compliance with the various federal regulations (e.g., 90/10, cohort default rates and now gainful
employment} and price-to-earnings ratios at these colleges. This makes the colleges feel it in their pocketbook, giving
them a strong financial incentive to comply with the rules.
Limiting enrollment at these colleges will be a very effective tool for ensuring compliance, especially since your use of a
three-year moving average effectively means an enrollment drop the first year a college is in the restricted zone. (Most
of the programs experience double-digit enrollment growth, so the most recent enrollment figures are higher than the
three-year average.} Investors are attracted to the publicly traded for-profit colleges because of their high profit margins
and their enrollment growth.
I noticed on page 124 of the NPRM that you' ve got institutional loan repayment rates: "While repayment rates by program are
not avai lable, the Department has developed queri es of the National St udent Loan Data System (NSLDS) to detem1i ne repayment rates by
instituti on." The table on page 21 of the NPRM was based on this data, implying that you have these f igures for all
colleges. It might be worthwhile to release this institution-level data, similar to the previous release of Trial 3-Year
Cohort Default Rates, as it will help inform the discussions ofthe proposed rules and influence institutional behavior.
I've been getting a lot of email from colleges that are trying to figure out how to calculate their current loan repayment
rate and analysts that are trying to estimate the loan repayment rates for the publicly traded for-profit colleges. Key
problems that prevent colleges from calculating their current loan repayment rates include consolidation loans (they
cannot evaluate the status of consolidation loans that paid off the student's Stafford loans} and deferments (they cannot
distinguish the different types of deferments) and ICR/IBR (they have difficulty identifying whether the borrower has
made payments to principal). You will probably receive a lot of FOIA requests for this information.
In the meantime I've been suggesting that a college with a 25%+ cohort default rate (2-year) or 30%+ cohort default rate
(3-year} will probably not be able to satisfy the 35% loan repayment rate threshold when one adds in 12% to 13%
delinquencies, 25% deferments and forbearances, 7% to 8% IBR/ICR negative amortization. It would be interesting to
see exactly how the loan repayment rates correlate with cohort default rates. To the extent that the loan repayment
rate measures repayment behavior while the debt to income ratios measure ability to repay, the loan repayment rate
carries more information than the debt to income ratios. For example, almost all of the colleges that satisfy the 45% loan
repayment rate threshold also satisfy the 8%/20% debt to income ratios. I wouldn't be surprised if you started with the
cohort default rate thresholds and translated them to the equivalent loan repayment rates, yielding something pretty
close to the 35% loan repayment rate.
Mark Kantrowitz
Publisher of FinAid.org and Fastweb.com
4
Sent: Monday, July 26, 2010 3:30 PM
Subject: DB Education: m- Downgrade to Hold, lowering EPS for Gainful Employment
We published tlus note this morning.
ITT Education Services : Downgrade to Hold, loweri ng EPS for Gainful Employment
ITT Education Services {Ticker: ESI.N, Closing Price: 85.44 USD, Target Price: 85.00 USD, Recommendation: Hold}
We believe the proposed Gainful Employment (GE) language in Friday's NPRM will restrict a significant proportion of
ESI's programs. We also believe ESI will have to increase its admission criteria over time to increase its repayment rates.
The restrictions, plus the need to raise admission criteria, will make it difficult for ESI to grow. We have cut our FY1 OE and
FY11 E EPS by 8% and 29%, respectively, due to our assumed business model changes. We have lowered our price
target from $110 to $85. HOLD.
ESt's programs will struggle to pass repayment or debt-to-income thresholds
ESI's relatively high draft '07 3-yr CDR at 24.1% likely means many programs will struggle to make the 45% student loan
principal repayment threshold. Also, due to ESI's tuition prices and starting salaries, at $30K (Associate's) and $40K
(bachelor's), their programs will also not meet the 8% debt-to-income, or 20% of disposal income, thresholds. To make
these repayment thresholds, ESI SA's need to graduate with $34K debt or less, while their AA's need to graduate with
$20K or less. Our best estimate is that ESI's grads have over $40K and over $25 of debt, respectively, at graduation, well
above eligible levels.
ESt's business model seems the most impacted by the proposed language
We think top pick APOL should see minimal impact from the proposed Gainful Employment regulation, and APOL already
has a strategy in place to weed out uncommitted students, which raises repayment rates. ESI just stated last week (but
before GE was proposed) that it would not change its admission criteria. We now think ESI needs to in order to increase
future repayment rates, thus hurting enrollment. Tuition may also need to decline over time to meet thresholds.
27E6/64122679/0900b8c081f76aeO.pdf
Regards,
Paul Ginocchio
Office:+1-415-617-4207
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(See attached file: 0900b8c081P6ae0.pdj)
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6
25 July 2010
Reuters: ESI.N Bloomberg: ESI UN Exchange: NYS Ticker: ESI
Downgrade to Hold, lowering
EPS for Gainful Employment
Paul Ginocchio, CFA
Research Analyst
(+ 1) 415 617-4207
Adrienne Colby
Associate Analyst
( ) 212 25()-0948
We believe t he proposed Gainful Employment (GE) language in Friday's NPRM will
rest rict a significant proportion of ESI's programs. We also bel ieve ESI will have to
increase its admission criteria over t ime to increase its repayment rates. The
rest rictions, plus t he need to raise admission criteria, will make it difficult for ESI to
grow. We have cut our FY1 OE and FY1 1 E EPS by 8% and 29%, respectively, due
to our assumed business model changes. We have lowered our price target f rom
$1 1 0 to $85. HOLD.
ESI's programs will struggle to pass repayment or debt-to-income thresholds
ESI's relat ively high draft '07 3-yr CDR at 24.1 o/o likely means many programs will
struggle t o make t he 45% student loan pri ncipal repayment threshold. Also, due to
ESI's t uition prices and starting salaries, at $30K (Associate's) and $40K
(bachelor's), t heir programs will also not meet t he 8% debt-t o-i ncome, or 20% of
disposal income, t hresholds. To make t hese repayment t hresholds, ESI BA's need
to graduate with $34K debt or less, while t heir AA's need to graduate wit h $20K or
less. Our best estimate is t hat ESI's grads have over $40K and over $25 of debt,
respectively, at graduat ion, well above eligible levels.
ESI's business model seems the most impacted by the proposed language
We t hink top pick APOL should see mini mal impact from t he proposed Gainful
Employment regulat ion, and APOL already has a strategy in place t o weed out
uncommitted students, which raises repayment rates. ESI just stated last week
(but before GE was proposed) t hat it would not change its admission criteria. We
now t hink ESI needs to in order t o increase f uture repayment rates, t hus hurting
enrol lment. Tuit ion may also need to decl ine over t ime to meet thresholds.
Our price target decli nes f rom $11 0 to $85 to account for potential f uture business
model changes. On our lowered ' 12E EPS, ITT would t rade at a sli ght premium to
t he market, which we believe is reasonable. Our price target is largely derived
f rom our DCF analysis 0/VACC 11 o/o; LTGR3.5o/o - see page 6 for detail ). Key
downsi de risks incl ude greater t han expected adjustments to ESI's business
model or negat ive legislative developments. Key upside potential is from: 1) GE
watered down, 2) legislative challenges t o GE, or 3) less of a negat ive impact to
ESI t han expected.
Year End Dec 31 2009A 2010E 2011E
10EPS 1.59 2.46A 2.99
20EPS 1.85 2.78A 3.13
30EPS 2.00 2.82 2.40
40EPS 2.56 3.19 2.56
FYEPS (USD) 7.96 11.23 11 .10
OLD FY EPS (USD)
% Change
P/E (X) 12.9 7.6 7.7
Swtce 0e(lt$Che Bank est mates. company
Deutsche Bank
Recommendation Change
Hold
Price at 23 Jul 2010 (USD) 85.44
Price target 85.00
119.20-78.59
Buy toHold w
110.00 to 85.00 w -22.7%
7/07 1/08 7/08 1/09 7/09 1/10
--ITT Education Servic
S&P 500 INDEX (Rebased)
Performance(%) 1m 3m
Absolute -5.3 -23.6
:::L:=::: l
40% .
20%

12m
-16.2
Dec08 Jun09 Dec09 Jllltl
Real izedVol --lmpliedi.IJI(ATM)
ESIN 51.6%
STRA.OO ; 4<l .9%
WMSN ...................................... 39.1%
BKC.N 37.0%
PNRA.OQ 31.7%
*W ei ght ed-avg. of index components
Data as of 22Jul 10
MICA(P) 007/05/2010
Model updated:26 July 2010
Running the numbers
North America
United States
Reuters: ESI.N
Hold
Price (23 Jul 1 0)
Target price
52-week Range
Market Cap (m)
Company Profile
Bloomberg: ESI UN
USD 85.44
USD85.00
USD 78.59 119.20
USDm 2,918
EURm2,276
ITI Educational Servi ces, Inc. is a provider of career-oriented
postsecondary degree programs in the United States. The
company offers diploma, associate, bachelor, and master
degree programs to approximately 54,000 students at over
100 ITT Technical Institutes in 35 states.
Price Performance
140
120
DO
80
60
40
- =f!A-
--
--
J tJ 07 Apr 08 Dec08 S<!> 09 Jun 10
--In Education Services --S&P 500 INOEX(Rebased)
Margin Trends
44
40
36
32
28

07 08 09 10E 11E 12E
--e--EBITOAMargi n -e-EBITMargi n
Growth & Profitability
40 -- --- ---
20
0
20
-40
07 08 09
-- r -- :
100
. - 50
0
10E 11E 12E
S31esgrowth( LHS) - ROE( RHS)
Solvency
07 08 09 10E 11: 12E
Net debt/equily( LHS) interestcover(RHS)
Paul Ginocchio, CFA
+1 415 617-4207
Page 2
Fiscal year end 31-Dec
Financi al Summary
DBEPS(USD)
Reported EPS (USD)
DPS(USD)
BVPS(USD)
Valuation Metrics
Price/Sales (x)
P/E(DB)(x)
PIE (Reported) (x)
P/BV(x)
FCF yield (%)
Dividend yield (%)
EV/Sales
EV/EBITDA
EV/EBIT
Income Statement (USDm)
Sales
EBITDA
EBIT
Pre-tax
Net Income
Cash Flow (USDm)
Cash flow from operati ons
NetCapex
Free cash flow
Equity raisedl(bought back)
Dividends paid
Net inc/( dec) in borrowings
Other investing/financing cash flo;vs
Net cash now
Change in working capital
Balance Sheet (USDm)
Cash and cash equivalents
Property, plant & equipment
Goodwill
Other assets
Total assets
Debt
Other liabilities
Total liabilities
Total shareholders equity
Net debt
Key Company Metrics
Sales growth (%)
DB EPS growth(%)
Payout ratio (%)
EBITDA Margin (%)
EBIT Margin (%)
ROE (%)
Net debt/eqUity(%)
Net interest cover (x)
DuPont Analysis
EBIT margin (%)
x Asset turnover (x)
x Financial cost rabo (x)
x Tax and other effects (x)
= ROA (post tax) (%)
x Financial leverage (x)
=ROE(%)
annual growth ("A,)
x NT Nshare (avg) (x)
= Reported EPS
annual growth ("A,)
Source: Company data, Deutsche Bank estimates
2007
3.71
3.71
0.00
1.73
4.8
27.4
27.4
49.4
3.6
0.0
4.6
15.1
16.5
870
265
242
244
152
178
-28
150
-265
0
0
-40
-155
24
7
153
0
380
541
150
320
470
71
143
nm
na
0.0
30.5
27.8
214.8
202.3
nm
27.8
1.6
1.0
0.6
28.0
7.7
214.8
na
1.7
3.71
na
2008
5.17
5.17
0.00
4.79
3.0
14.9
14.9
19.8
4.5
0.0
2.8
8.0
8.5
1,015
350
328
330
203
173
-36
137
-88
0
0
169
219
-93
237
167
0
221
624
150
286
436
188
-87
16.8
39.5
0.0
34.5
32.3
157.1
-46. 1
nm
32.3
1.7
1.0
0.6
34.9
4.5
157.1
-26.9
3.3
5.17
39.5
2009
7.96
7.96
0.00
4. 13
3.0
12.9
12.9
23.3
7.0
0.0
2.9
7.3
7.7
1,319
517
492
494
302
301
-28
273
-348
0
0
12
-S4
114
131
195
0
291
617
150
310
460
157
19
29.9
53.9
0.0
39.2
37.3
175.4
12.3
nm
37.3
2.1
1,0
0.6
48.7
3.6
175.4
11.6
4.5
7.96
53.9
Deutsche Bank l/l
2010E
11 .23
11.23
0.00
6.05
1.8
7.6
7.6
14. 1
16.8
0.0
1.7
4.1
4.3
1,607
656
628
628
384
524
-34
490
-361
0
0
-10
118
20
247
198
0
272
718
150
361
511
207
-97
21.8
41.2
0.0
40.8
39. 1
211.3
-47.0
nm
39. 1
2.4
1.0
0.6
57.5
3.7
211.3
20.5
5.3
11.23
41.2
2011E
11. 10
11.10
0.00
8.69
1.7
7.7
7.7
9.8
12.2
0.0
1.5
4.0
4.2
1,560
598
566
568
346
364
-40
324
-320
0
0
24
28
-105
275
206
0
261
742
150
321
471
271
-125
-3.0
-1.2
0.0
38.3
36.3
145.0
46.2
nm
36.3
2. 1
1.0
0.6
47.5
3. 1
145.0
-31.4
7.7
11.10
-1.2
2012E
7.86
7.86
0.00
7.49
1.9
10.9
10.9
11.4
7.8
0.0
1.8
5.7
6.2
1,267
402
370
372
227
232
-40
192
-320
0
0
24
-104
-95
171
213
0
244
629
150
263
413
216
-21
-18.8
-29.2
0.0
31.7
29.2
93.1
9.9
nm
29.2
1.8
1.0
0.6
33.1
2 .8
93.1
-35.8
8.4
7.86
-29.2
Deutsche Bank Securit ies Inc.
Deutsche Bank l/l
We have cut FY11E and
FY12E EPS by 8% and 29%,
respectively
Reducing 2010 and 2011 estimates due to assumed business
model changes
The proposed Gainful Employment language, we bel ieve, will impact ITT Technical Institutes'
business model the most of any of the publicly-traded For Profits.
Changes to our forward estimates
Our FY1 1 E revs/EPS goes from $1 ,640m/$12.01 to $1 ,560m/$11.1 0 and FY12E drops from
$1 ,542m/$11.13 to $1 ,267m/$7 .86.
We bel ieve that ITT will likely have to lower tuition costs and significantly increase
admissions standards to reduce drops and increase graduation rates, thus increasing
repayment rates. By lifting repayment rates, this should create more eligible programs for ITT
and reduce restrictions, thus enabling ITT to grow enrollment at some point in the future.
We have made two primary adjustments to our model:
1. We have reduced our enrollment growth assumptions to -8% in FY1 1 E (with again the
bigger hit in 2H1 1, and to -20% in FY12E. Apollo Group (Buy; $49.27) implemented a
University Orientation program and found that this program weeds out 20% of mai nly
associate students, the uncommitted, but increases persistence rates by 500bp to over
1 OOObp. We have made the general assumption that ITT will also have to similarly reduce
enrollment to raise persistence, and thus repayment rates.
2. We have reduced revenue per student, on average, to -6% in FY1 1 E (with most of the
decline taking play in the back half of the year, and to -8% in FY12E. Both of these
assumptions will potentially reduce debt at graduation and improve both repayment
rates and debt-to-income ratios.
We have also reduced costs in FY1 1 E and FY12E, and we have assumed a 67% incremental
EBIT margin on negative revenue growth in FY12E.
We believe most of ITT programs will be restricted, i.e. no
growth
Restricted Programs will creat e a need to make adjustments to the business model
If most of ITT's programs, as we bel ieve, are below a 45% repayment rate, and their
students cannot meet the two currently proposed debt-to-income ratios (see below), then a
significant portion of ITT's programs will be restricted. This will limit ITT's ability to grow
enrollment and create the need to make adjustment s to their business model.
We think the adjustments will be:
1) Increase admission criteria (lowering enroll ment) to increase repayments rates, and
2) Lower tuition costs to hopefull y reduce debt at graduation.
Since institutions cannot keep students from taking out more student loans than absolutely
necessary, reducing tuition does not necessary mean students will graduate with Jess debt.
Page 3
Deutsche Bank l/l
Page4
Repayment Rates
We think the Draft 2007 3-year CORs are a decent proxy for looki ng at repayment rates. Since
the 3-yr year of the 2007 CDR is unmanaged, we think it decently captures the fall off of
forbearances and deferments. Whi le not a direct indicator of repayment rates, we think that
the formula looks something like this
Repayment Rate = 1 - (1.X x Draft 2007 3-year CDR)
There is a multiplier on the draft 2007 3-year CORs for two reasons: 1) CORs are going up
due to t he economic environment, and 2) CORs will be measured for all loans going into
repayment for the last four fiscal years (so it captures a 4-yr window, one longer than the 3-yr
COR).
We have included the draft 2007 3-year CDRs for all the publicly traded For Profit education
companies at the end of this note. See Figure 3 on page 7.
Debt to Income Ratios
Based on our gainful employment calculations, we think it will be very hard for ITT to get
below either an 8% of annual income test or below a 20% of discretionary income test for
most of their programs.
To get below the debt-to-income test of 8% of annual income, we believe that ITT would
We feel fairly comfortable about these calculations for the foll owi ng reasons: 1) we know the
cash pay of student s as it was disclosed for 2009 in the 1 O-K at 5%, and 2) on ITT's 20 call
last week, they disclosed their BA salaries at $40,000 and AA salaries at approximately
$30,000. We have made assumptions about transfer credits, but assume they are fai rly low
due to the demographic ITT serves. We have assumed the annual cost of tuition is right in
the 1 O-K at $17,400 and that it t akes, on average, 2-yrs for a AA and 4-yrs for a BA, excluding
the impact of transfer credits. We also believe our Pell Grant assumptions are correct as this
dat a is directly from the Department of Education (DoE).
Deutsche Bank l/l
I :
Step 1- calculation Source/Calc ESI ESI
Tuition & Fees $ 69,600 $ 34,800
source 10-K 10-K
Program BA Assoc.
%of Total Enrol lment Company data 15% 85%
Avg. Pell Grant ' 08-'09 (DoE) DoE 2,550 2,550
Assumed years of credits transferred DB ests. 0.75 0.25
Total Tuition & Fees calc $56,550 $ 30,450
Pel l Grants calc 6,630 3,570
Average Starting Salary est, See Calc A $40,000 $ 30,000
Implied monthly payments to cover debt (D) (8%, 10yrs, 6.8%) $ 542
Implied starting salary by debt (D) $ 81,291
Max Debt Load, over 10 years, 6.8% int.rate mort calc $ 23,172 $ 47,093 $ 17,379
Cash/out of pocket payments from above 2,828 2,828 1,523
add Avg. Pell Grants from above 6,630 6,630 ~ 3,570
Implied PriCB Cut@ Xo/o of salaw over 10yrs -42% -26%
Bachelors
Associates
% of Revs Price Cut Rev impact
15%
85%
100%
-42%
-26%
-6.3%
-22.3%
-28.6%
Current Calendar 2010E Consensus EPS
Souf'Cr3 Depan.ment of Educaton, Comp<iny dat3. dnd Deutsch6 B a n ~ : estimares
$
$
11.19
(7.24)
3.95
7.6x
21.6x
-65% 183%
$ 292
$ 43,772
$ 25,358
1,523
3,570
$ 30,450
To keep below t he 20% of discretionary income test, we believe ITI's AA's would need to
graduate with less t han $19,900 of debt while t he BA's would need to graduate with less
t han $34,400. Table E on page 121 of t he DoE's Gainful Employment NPRM has t he
calculations and max debt load calculat ions for various salary levels.
Graduate debt at University of Phoenix versus liT Technical Institute
Since we do not know t he graduate debt at ITI, we looked at the disclosure Apollo Group
provided on its website regarding graduate debt. For University of Phoenix (UPX) st udents
who graduated in t he 2007/2008 school year, associate's graduated with an average of
$14,200 of debt while bachelor's graduated with an average of $25,220 in debt .
Page 5
Deutsche Bank l/l
Page 6
We make the fol lowing adjustments to estimate ITT's graduate debt :
We thi nk t hat, on average, ITT's programs are about $6,300 more expensive per
year t han UPX.
We assume UPX st udents have a lot more transfer credits t han ITT st udents.
While t here is some offset f or ITT's higher usage of Pell Grants, but we t hink it only
amounts to a difference of about $600 a year.
We have assumed tuition increases of 5% annually in 2008/9 and 2009/10.
Based on these adj ustments, we t hink ITT's Associate' s could be graduat ing with, on
average, $27,000 of debt, whil e Bachelor's could be graduating with, on average, $45,000 of
debt. Both of these est imates are wel l above the $19,900 and $34,400 t hresholds,
respectively (see Figure 2 below).
Figure 2: Our estimate of ESI' s 20% of discretionary income test
Type of Program
Average starting salanes
Current Federal Poverty Guidelines
150o/o of the Federal Poverty Gu1deline
Discretionary Income
20% of discretionary income threshold
Available Monthly Payment (using 10-yr mortgage, 6.8% int. exp)
Max Debt Load
DB Estimated Average Debt Load of Graduates
DB Estimated needed reducation in debt l oad
SourCfJ US Federat Gov'l .)00 Deursche Bank estrmares
Valuation and risks
Valuation
Bachelor's
$ 40,000
$10,830
150% $16.245
$ 23,755
20% $ 4,751
396
$ 34,404
$ 45,000
-24%1
Associate's
$ 30,000
$10,830
$16,245
$ 13,755
$ 2,751
229
$ 19, 921
$ 27,000
-26%1
Our price target for ITT is derived pri mari ly from our DCF analysis. As we believe that ITT will
have t o change its business model, if the Gai nful Employment language goes t hrough as it,
we thi nk a DCF is a better way to capture f uture value.
On our new, reduced 2012E EPS, ESI t rades on a PE of 1 0.8x. We t hink t he S&P500 is on
approx. 10.1x for FY12E, so ITT is tradi ng at a slight premium. Beyond 2012, we thi nk ITT wil l
potential ly have adj usted its business model enough to grow, t he legislative/regulatory risk
wi ll be greatly reduced, t hus we t hink t his sl ight premium is reasonable.
Our DCF analysis suggests an $87 f air value. We use explicit f orecasts for 9 years and a mid-
cycle EBIT margi n in the terminal value t hereafter. Our assumptions f or include a WACC of
11%, based on a 4% risk-free rate, 7.0% equity risk premium (down from our previous 8.0%
due to t he reduced regulatory risk t hat should be now present post the enactment of Gainful
Employment), beta of 1.0, no debt in t he capital st ructure, and a long-term growt h rate of
3.5%. The 3.5% assumpt ion corresponds to the long-term real growth rate of t he US
economy.
Ri sks
The for-profit education sector f aces many risks related to t he highly regulated nat ure of
postsecondary education in t he US and due to t he dependence of inst itutions and student s
on Federal f inancial support. Other industry risks include f urther decreases in private loan
Deutsche Bank l/l
availabi lity for student borrowers, industry overbui lding of campuses, and a rebound in job
growth and lower unemployment, which would hurt enrollment growth due to the industry's
counter-cyclicality.
ITI-specific downside risks include: 1) bigger business model changes than assumed due to
the proposed Gainful Employment regulation, 2) negative legislative developments led by
Senators Harkin or Durbin, 3) more economic sensitivity than peers due to an 85% exposure
to associate degrees, a shorter duration program, 4) increased bad debt write-offs and risks
related to internal student funding, 5) a shift to online enrollment from physical campus
enrollment (where ITI has a predominance of its exposure), 6) aggressive expansion of
campus locations and degree offerings f rom competitors into ITI's markets, and 7) negative
developments in ITI's recently filed lawsuit.
ITI-specific upside risks include: 1) less negative impact than estimat ed from the proposed
Gainful Employment legislation, 2) Gainful Employment bei ng watered down aft er the public
comment period or legislatively chall enged by the House of Representatives, 3) higher
elasticity of demand than expected due to our expected tuition price cuts in the future, and 4)
higher share repurchases than expected.
OV 2007 2006 2005 coco 2007 2006 2005 ESI 2007 2006 2005
3-yr 15.8% 15.0% 12.3% 3-yr 30.2% 27.7% 23.7% 3-yr 24.1% 20.5% 21.1%
2-yr 7.8% 7.3% 5.9% 2-yr 15.3% 13.0% 10.5% 2-yr 11.6% 9.6% 9.3%
Increase 10Wo 105% 108% Increase 98% 113% 126% Increase 108% 114% 128%
3-yr 21.1% 22.8% 17.6% 3-yr 31.1% 28.5% 241% Number w13-yr >40% 0 0 0
2-yr 7.3% 7.5% 4.9% 2-yr 15.7% 13.3% 10.4% Number w13-yr >30% 1 0 0
Increase 1000/i, 202% 264% Increase 99% 113% 132% Number wl3-yr >25% 11 3 3
Devry University Number of OPE IDs 35 35 35 APOL 2007 2006 2005
3-yr 17.1% 17.1% 13.3% Number wl3-yr >40% 1 1 0 u Phoenix
2-yr 9.0% 9.0% 0.066 Number wl3-yr >30% 21 14 4 3-yr 15.9% 10.3% 11.4%
/naease 90% 90% 102% Number wl3-yr >25% 28 27 17 2-yr 9.3% 7.2% 7.3%
2-yr 2.9% 1.8% 0.5% 2-yr 15.3% 13.5% 14.2% 3-yr 26.5% 36.9% 28.7%
Increase 43% 35% 152%
3-yr 4.7% 2.9% 2.9% Number wl3-yr >40% 0 0 0 3-yr 3.3%
2-yr 2.7% 1.4% 1.7% Number wl3-yr >30% 1 1 1 2-yr 0.0%
Ina-ease 74% 107% 71% Number wl3-yr >25% 1 1 1 Increase nm
Ross Heald 2007 2006 2005
3-yr 0.5% 0.3% 0.3% 3-yr 20.8% 19.6% 19.0%
2-yr 0.2% 0.2% 0. 1% 2-yr 10.7% 9.4% 9.2%
3-yr 24.4% 23.8% 26.3% Number wl3-yr >40% 0 0 0 Ashford Unoversi ty
2-yr 10.2% 9.6% 10.3% Number wl3-yr >30% 0 0 0 3-yr 17.4% 6.1% 8.8%
/naease 139% 148% 155% Number wl3-yr >25% 0 2-yr 13.3% 4.1% 4.1%
Increase 31% 49% 115%
CPLA 2007 2006 2005 STRA 2007 2006 2005
3-yr 5.5% 3.7% 4.4% 3-yr 13.0% 10.5% 9.3% 3-yr 0.0% 0.0% 5.5%
2-yr 2.5% 1.5% 2.3% 2-yr 6.0% 3.8% 3.9% 2-yr 0.0% 0.0% 0.0%
UTI 2007 2006 2005 LOPE 2007 2006 2005 WPO 2007 2006 2005
Universal Tech Insti tute Grand Canyon U Kaplan
3-yr 13.8% 16.1% 13.8% 3-yr 2.9% 2.7% 3.0% 3-yr 25.7% 19.9% 16.2%
2-yr 6.6% 7.2% 5.5% 2-yr 1.4% 1.6% 1.8% 2-yr 15.0% 11.4% 8.4%
CECO 2007 2006 2005 UNC 2007 2006 2005 EDMC 2007 2006 2005
3-yr 19.6% 19.0% 21.0% 3-yr 26.2% 24.9% 21.6% 3-yr 14.4% 11.1% 11.4%
2-yr 8.5% 8.2% 10.7% 2-yr 13.8% 12.3% 8.8% 2-yr 7.9% 5.2% 4.8%
Source US Dept of Educat10naoo Deutsche Bant ca/culat;ons
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Figure 4: ITI Educational Services quarterly revenue driver (US$ in millions)
Total Revenue
Growth
New Student Enrollments in Qtr
Growth
Year ago comp
2-year comp
St udent Enroll ment at QE
Growth
Tuiti on Growth (YoY)
Rev per Student
YoY Change i n Persi st ence (bp)
Persistence
Continuing Enrollment
$
$
Actual
2008
1.015.3
16.8%
65.313
19.6%
61.983
16.9%
3.7%
18,162
(82)
74.8%
167.213
Srce Deutsche & n ~ : estimates 4rd company dati
Actual Actual
2009 1Q
s 1.319.194 384.0
29.9% 33.3%
85,928 23.064
31.6% 21.8%
37%
45%
80,766 84,555
30.3% 28.9%
5.0% 2.3%
s 19,066 s 4,754 s
95 82
75.7% 76.1%
209.555 61,491
Year ended Dec 31,
Esti mated Est
2Q 3Q 4Q 2010
401.8 403.4 417.9 s 1.607.1
26.7% 18.8% 11.6% 21.8%
21.673 29.125 19.563 93.425
10.1% 5% 0% 8.7%
33% 27% 31%
56% 47% 60'.4
84,695 90.228 88,379 88,379
21.2% 13.9% 9.4% 9.4%
-1.7% -2 0% -2 0% -0.9%
4,753 s 4,763 s 4.632 s 18,901
(196) (150) (100) (96)
74.5% 72.1% 76.3% 74.8%
63.022 61,104 68,816 254.433
1Q
411.7
7.2%
22.603
-2%
22%
SS%
89,006
5.3%
-2%
$ 4,859 s
(100)
75.1%
66.403
Year ended Oec 31,
Estimat ed Est
2Q 3Q 4Q 2011 1Q
414.5 368.8 384.5 s 1.559.5 345.6
3.2% -8.6% -12.8% -3.0% -16.1%
20.589 26.212 16,629 86.033 18.082
-5% -10% - 15% -7.9% -20%
10'.4 5% 0'.4 2%
44.4 32% 31.4 20%
86.039 87,425 82,432 82,432 79.193
1.6% -3.1% -6.7% -6.7% -11.CJ%
-2% -10% -10% -6.0% -10%
4,657 s 4,286 $ 4.169 s 17,771 $ 4.193 s
(100) (100) (100) (97) (100)
73.5% 71.1% 75.3% 73.8% 74.1%
85,450 61.213 65.804 258.869 61,111
Year ended Oec 31,
Estimat ed
2Q 3Q 4Q
332.0 301.0 288.4 s
-19.9% -18.4% -20.9%
16.471 20.970 13.303
-20'h -20% -20%
-5% Ill% - 15A.
5% 5% 15%
73,913 72.817 67,383
-14. 1% -16.7% -18.3%
-10% -5% .0%
4.192 $ 4,072 $ 3.960 s
(100) (100) (100)
72.5% 70.1% 74.3%
57,442 51.847 54,080
Est
2012
1,266.9
-18.8%
88.826
-20.0%
67,383
-18.3%
-7.6%
16.417
(100)
72.8%
224.479
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Figure 5: ITI Educational Services quarterly P&L (US$ in millions, except per share data)
Revenue
Bad Debt
cos ex bad debt
Cost of educational services
Gross profit
Student svcs and adm in. expenses
EBITDA
Depreciation and amortization
EBIT
Interest Income
Interest Expense
EBT
Provision (benefit) for lncom e taxes
One-time cost
Net income
Shares outstanding, fully diluted
EPS, excluding nonrecurring items
% of Revenues
Bad debt
Cost of Educational Services ex bad deb
Gross margin
Student Services & Admi n
EBITDA
EBIT
Incremental EBIT Margm
YoY Change in EBIT Margin
Tax rate (as a% of pretax income)
% Growth (Y/Y)
Revenues
Bad debt
COS ex bad debt
Gross profit
Advertising Spend (from cont. call)
Student srvcs and adm in. expenses
EBITDA
EBIT
EBT
Net income
EPS, as reported
Srce Deutsche estimates 4rd company dati
Actual
2008
$ 1,015.3
43.3
340.5
383.8
$ 631.6
303.7
350.1
22.2
$ 327.9
6.5
(4.6)
329.8
126.8
-
$ 203.0
39.2
$ 5.17
4.3%
37.8%
62.2%
29.9%
34.5%
32.3%
58.9%
4.5%
38.4%
16.8%
132.7%
0.1%
23.6%
6%
12.9%
32.0%
35.5%
34.9%
33.9%
39.5%
Actual Actual
1Q 2Q 3Q 4Q 2009
s 288.0 s 317 1 s 339.6 s 374.4 $ 1,319.2 $
14.2 18.6 23.2 26.0 82.0
86.9 92.2 93.5 95.3 367.9
101. 1 110.8 116 7 121 2 449.8
s 186.9 $ 206.3 s 222.9 s 253.2 s 869.4 $
86.8 90.4 100.2 100.3 377.7
105.9 122.1 129.0 159.6 516.6
5.8 62 63 6.7 24.9
$ 100.1 $ 115.9 $ 122.7 $ 152.9 $ 491 .7 $
1.2 0.9 07 0.5 3.3
(0.2) (0.2) (0.2) (0.1) (07)
101.2 116.6 123.3 153.2 494.2
39.3 45.5 47.9 59.6 192.2
s 61.9 $ 71. 1 s 75.4 s 93.6 s 302.0 $
39. 1 38 4 37.8 36.5 37.9
$ 1.59 $ 1.85 $ 2.00 $ 2.56 $ 7.96 $
4.9% 5.9% 6.8% 6.9% 6.2%
35.1% 34.9% 34.4% 32.4% 34.1%
64.9% 65. 1% 65.6% 67.6% 65.9%
30. 1% 28.5% 29.5% 26.8% 28.6%
36.8% 38.5% 38.0% 42.6% 39.2%
34.8% 36.6% 36. 1% 40.8% 37.3%
59. 1% 56.0% 49.2% 53.7% 53.9%
5.5% 5.6% 4.4% 4.3% 5.0%
38.8% 39.0% 38.9% 38.9% 38.9%
22.6% 28.7% 33.6% 33.8% 29.9%
104.9% 92.3% 80.6% 87.8% 89.4%
2.1% 7.8% 13.8% 8.6% 8.0%
30.9% 36. 4% 40.0% 42.0% 37.7%
3% 1% 2% 12% 5%
17.1% 20.7% 27.6% 31. 7% 24.4%
42.8% 48.7% 50.3% 47.8% 47.6%
45.8% 51.9% 52.0% 49.7% 50.0%
46.2% 52.5% 51.6% 49.0% 49.9%
45.3% 50.8% 50.2% 48.6% 48.8%
46.9% 53.8% 55.9% 59.0% 53.9%
Actual Estimated
1Q 2Q 3Q 4Q
384.0 s 401 .8 $ 403.4 $ 417.9
22. 8 23.0 21.8 20.9
111.6 110.7 109.4 109.5
134.4 133.8 131.2 130.4
249.6 $ 268.1 $ 272.1 $ 287.5
107.0 111.0 116.2 115.3
149.4 163. 9 162.8 179.7
6.8 6.7 6.9 75
142.6 $ 157.1 $ 155.9 $ 172.2
0.7 0.5 0.5 0.6
(0.4) (0.5) (0.5) (0.5)
142.9 157.2 155.9 172.2
55.5 61.1 60.8 67.2
87.5 $ 96.0 $ 95. 1 $ 105. 1
35.5 34 5 33.7 32.9
2.46 $ 2.78 $ 2.82 $ 3.19
5.9% 5.7% 5. 4% 5.0%
35.0% 33.3% 32.5% 31.2%
65.0% 66.7% 67.5% 68.8%
27.9% 27.6% 28.8% 27.6%
38.9% 40.8% 40.4% 43.0%
37. 1% 39. 1% 38.7% 41.2%
44.3% 48.6% 52. 1% 44.3%
2.4% 2.5% 2.5% 0.4%
38.8% 38.9% 39.0% 39.0%
33.3% 26.7% 18.8% 11.6%
60.2% 23.7% <1.0% -19.5%
28.5% 17.0% 15.0%
33.5% 29.9% 22.1% 13.6%
6% 20% 20% 20%
16.0% 15.0%
41.0% 34.2% 26.2% 12.6%
42.4% 35.5% 27.0% 12.6%
41.2% 34.8% 26.5% 12.4%
41.2% 35. 1% 26.2% 12.2%
55.4% 50.3% 41.5% 24.7%
Est Est
2010 2011
s 1,607. 1 $ 1,559.5
88.5 74.3
441.3 439.2
529.8 513.5
s 1,077.3 $ 1,046.0
449.4 480.4
655.8 598.0
27.9 32.5
$ 627.8 $ 565. 6
2.3 4.2
(2.0) (2.1)
628.2 567.7
244.5 221.4
$ 383.7 $ 346.3
34.2 31.2
$ 11.23 $ 11.10
5.5% 4.8%
33.0% 32.9%
67.0% 67. 1%
28.0% 30.8%
40.8% 38.3%
39. 1% 36.3%
47.3% 130.9%
1.8% -2.8%
38.9% 39.0%
21.8% -3.0%
7.9% -16.0%
20.0% -0.5%
23.9% -2.9%
17% 16%
19.0% 6.9%
26.9% -8.8%
27.7% -9.9%
27.1% -9.6%
27.0% -9.7%
41.2% -1.2%
Est
2012
s 1,266.9
50.7
366. 1
416.8
s 850.1
480.4
402.2
32.5
$ 369.7
3.9
(2.1)
371.6
144.9
s 226.7
28.8
$ 7.86
4.0%
32.9%
67.1%
37.9%
31.7%
29.2%
66.9%
-7. 1%
39.0%
-18.8%
-31.8%
-16.6%
- 18.7%
10%
0.0%
-32.8%
-34.6%
-34.5%
-34.5%
-29.2%
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Figure 6: ITI Educational Services quarterly cash flow statement (US$ in millions)
Net Income
D&A
Deferred taxes
Tax benefit from stock options exercises
Stock-based compensation expense
Working Capital movement
Restricted cash
Accounts receivable
Prepaids & other assets
Direct markebng costs
Accounts payable & accrued liabilities
I nco me taxes & others
Deferred revenue
Cash from Operations
Facility expenditure & land purchases
Capex, net
Acquisitions
Proceeds from sales & maturities of inves
Purchase of investments
Issuance of note receivable
Cash flow from Investing
Proceeds from revol ving credit
Excess tax benefit from stock options exer
Proceeds from stock option exercise
Repurchase of common shares
Cash flow from Financing
Effects of exchange rate changes
Change In cash
Cash at Start of Period
Cash at End of Period
Total Cash, restricted cash & MS on BS
Total Debt
Assumptions & Analysi s
AR-DSO (LTM Sales)
YoY Change i n Days
Annualized provision for Bad DebVLTM Sa
Stock based compensation growth, YoY
Stock-based compensation growth, OoO
Share-based com pen satio n I Revs
OCF I Revenue
Capex/Reven u e
Capex/D&A
Working capital
NWC I l TM Sales
FCF
FCF I Net in come
FCFI Share
Source DeutscM Bank estimatus andcomp8(ty d a l ~
$
$
$
$
$
$
$
Actual
2008
203
22
43
(8)
(1)
7
(4)
(58)
,
(2)
10
12
(51)
173
(18)
(18)
-
1,086
(920)
129
1
3
(88)
(83)
219
7
226
375
150
10.7
4.4
4.3%
42%
42%
0.7%
17.0%
3.5%
160%
(209)
-21%
137
68%
3.50
s
$
$
$
$
$
$
s
10
62 $
6
14
(1)
(4)
4 ~
10
(36)
1
(2)
9
26
(29)
61 $
(1)
(5)
49
(56)
(13) $
4
6
(65)
(55) $
(7) $
226
220
366
150
16.3
10.5
5.3%
99%
-40%
1.5%
21 .3%
2.0%
98%
(190)
-18%
$
$
56 $
90%
1.42
Actual
20
71 s
6
19
(3)
(0)
3
(2)
(36)
( 1 ~
0
(3)
(25)
(8)
21 $
(1)
(7)
(21)
37
(35)
(14)
(41) $
0
0
(60)
(60) $
(79) $
220
140
285
150
20.1
9.3
6.5%
65%
-27%
1.0%
6.8%
2.6%
133%
(138)
-12%
$
$
13 s
19%
0.34
30
75 $
6
23
1
(1)
3
(6)
(47)
(0)
(1)
5
(2)
19
75 $
(1)
(4)
-
57
(57)
(0)
(4) $
1
3
(84)
(80) $
(9) $
140 $
131 $
281
25.2
13.3
7.6%
85%
-5%
0.9%
22. 1%
1.3%
73%
(131)
-11%
70 $
93%
1.86
40
94 s
7
26
1
(0)
3
3
(18)
0
0
(6)
6
28
144 $
(2)
(8)
-
100
(97)
1
(7) $
-
0
0
(139)
(139) $
(2) $
131
129
274
150
20.8
111
5.1%
88%
-0%
0.8%
38.3%
2.6%
146%
(188)
-13%
$
$
134 s
143%
3.66
Actual
2009
302
25
82
(2)
(5)
13
6
(137)
1
(3)
5
4
10
301
(4)
(24)
(21)
242
(245)
(51)
5
9
(348)
(334)
0
(85)
226
129
274
150
20.8
10.1
6.2%
84%
84%
1.0%
22.8%
2.1%
113%
(168)
-13%
273
90%
7.19
$
$
$
$
$
$
$
$
Year ended December 31,
Actual Esti mated
10
87 s
7
23
(3)
(1)
5
(3)
(26)
3'
0
7
41
20
159 $
(1)
(5)
85
(107)
(29) $
1
1
(96)
(94) $
37
129
166
327
150
21.0
4.7
6.4%
15%
-63%
1.3%
41.4%
1.6%
91%
(222)
-16%
$
$
$
153 s
175%
4.31
20
96 s
7
23
(6)
(1)
5'
5
(33)
0
0
8
(21r
5
87 $
(2)
(7)
115
(116)
(9) $
1
2
(105)
(103) $
(25) $
166
141
280
150
22.3
2.3
6.1%
42%
-9%
1.1%
21.7%
2.2%
134%
(182)
-12%
$
$
78 s
81%
2.26
30
95 $
7
22
(3)
(1)
4
0
6
(3)
0
3
8
(3)
133 $
(1)
(8)
(9) $
1
3
(80)
(76) $
48
141
188
328
150
16.0
-9.2
5.6%
20%
-20%
0.9%
32.9%
2.2%
130%
(210)
-13%
124
130%
3.68
$
$
$
40
105 s
8
21
3
(1)
3
0
(5)
(1)
0
{9)
4
15
145 $
(2)
(8)
-
(10) $
-
1
3
(80)
(76) $
59
188
247
386
150
12.0
-8,8
5.2%
20%
-6%
0.8%
34.6%
2.4%
133%
I (239;
-15%
135
128%
4.09
$
$
$
s
Est
2010
384
28
88
(9)
(4)
16
2
(58)
(2)
0
9
32
37
524
(6)
(29)
-
200
(223)
(57)
4
9
(361)
(348)
0
118
129
247
386
150
12.0
-8.8
5.5%
24%
24%
1.0%
32.6%
2.1%
122%
(239)
-15%
490
128%
14.34
$
$
$
$
$
$
$
s
Est
2011
346
32
74
2
(4)
18
0
(67)
3
0
(12)
(2)
(27)
364
(8)
(32)
-
(40)
4
20
(320)
(296)
-
28
247
275
415
150
11.2
-0.8
4.8%
10%
10%
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Appendix 1
ITI Education Services ESI.N 85.44 (USD) 23 Jul 1 0 8
Apollo Group APOL.OO 49.27 (USD) 23 Jul 10 2
Corinthian Col leges Inc COCO.OO 10.20 (USD) 23 Jul 10 2,8
DeVry DV.N 59.29 (USD) 23 Jul 10 NA
* Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Disclosures marked with an asterisk may also be requi red by at least one jurisdict ion in addition to t he United Stat es. See
8. Deutsche Bank and/or its affi li ate(s) expects to receive, or intends to seek, compensation for investment banki ng services
Please also refer to disclosures in the" Important Disclosures Required by US Regulators" and t he Explanatory Not es.
website at http:Uqm.db.com/qer/disclosure/Disclosure.eqsr?ricCode=ESI.N.
The views expressed in t his report accurately refl ect t he personal views of t he undersigned lead analyst (s) about t he subject
issuer and t he securities of t he issuer. In addition, t he undersigned lead analyst(s) has not and wi ll not receive any
compensation f or providi ng a specific recommendat ion or view in this report. Paul Ginocchio
(as of 7/23/2010)
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Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 00 Apr 00 Jul 00 Oct 00 Jan '0 Apr '0
Date
Deutsche Bank l/l
Strong Buy
Buy
Market Perform
Underperform
Not Rated
Suspended Ratmg
Buy
Hold
Sell
Not Rated
Suspended Rating
1. 4/20/2009: Buy, Target Price Change USD125.00 2. 7/22/2010: Buy, Target Price Change USD11 0.00
Historical recommendations and target price: Apollo Group {APOL.OQ)
{as of 7/23/2010)
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Jan
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Buy, Target Price Change US080.00
Oct
08
Jan Apr
09 00
Date
Jul
00
Oct
09
2. 7/1/2010:
Jan Apr
'[) '[)
Strong Buy
Buy
Market Perform
Underperform
Not Rated
Suspended Rating
Buy
Hold
Sell
Not Rated
Suspended Rating
Buy, Target Price Change USD75.00
(as of 7/23/2010)
USD25.00
USD20.00

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USD-
Jul07 OctO? Jan08 Apr08 Jul08 Oct08 Jan09 Apr09 Jul09 Oct09 Jan1J Apr1J
Date
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Strong Buy
Buy
Market Perform
Underperform
Not Rated
Suspended Ratmg
Buy
Hold
Sell
Not Rated
Suspended Rating
1. 1 0/26/2009: Buy, Target Price Change USD27.00 2. 5/5/2010: Buy. Target Price Change USD24.00
Historical recommendations and target price: DeVry (DV.N)
{as of 7/23/2010)
USD80.00
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Suspended Rating
Buy
Hold
Sell
Not Rated
Suspended Rating
Jul07 OctO? Jan08 Apr08 Jul 08 Oct08 Jan09 Apr09 Jul09 0:::109 Jan1J Apr1J
Date
1. 4/20/2009:
2. 8/14/2009:
3. 1 0/28/2009:
Hold, Target Price Change USDSO.OO
Hold, Target Price Change USD53.00
4. 1/27/2010:
5. 4/23/201 0:
Page 13
Deutsche Bank l/l
Equ1t y ratmg key Equ1ty ratmg d1spers1on and bank1ng relat1onsh1ps
holder return (TSR = percentage change in share pri ce
f rom current price to proj ected target pri ce plus pro-
ject ed dividend yield), we recommend t hat investors
buy the stock.
holder ret urn, we recommend t hat investors sel l t he
stock
Notes:
1 . Newly issued research recommendat ions and target
prices always supersede previously publi shed research.
2. Ratings def initions prior to 27 January, 2007 were:
1 0% or more over a 12-month period
Hold: Expected total return (i ncl uding divi dends)
Sel l: Expected total return (includi ng dividends) of -
Page 14
5oo
400
300
200
100
0 -1---L--
Buy
1%27%
Hold Sell
0 Companies Covered II Cos. w/ Banking Relationship
Deutsche Bank l/l
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review t his information bef ore investi ng.
http://qm.db.com.
Corporations Act.
f luct uations and other factors. Transactions in foreign stocks can lead to additional losses stemming f rom f oreign exchange
f luctuations.
appraisal or evaluat ion activity requiring a license in the Russian Federation.
60 Wall Street
New York, NY 10005
Tel: (212) 250 2500
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Tel : (215) 854 1546
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price of any stock.
From:
Sent:
To:
Subject:
Attachments:
Kvaal, James
Friday, July 23, 201010:20 AM
Robert Shireman
RE: Fw: Gainful Employment Press Coverage
image001 .png; image002.gif; image003.png; image004.png; imageOOS.png; image006.png
From: Robert Shireman [mailto: gmail.com]
Sent: Friday, July 23, 2010 9:13AM
To: Kvaal, James
Subject: Re: Fw: Gainful Employment Press Coverage
This is quite good, and the InsideHjgherEd story is good too. Congrats. ("Wacky" isn't a terribly effective
argument, especially when no one else echos it).
On Fri, Jul 23, 2010 at 6:56AM, Kvaal , James <James.Kvaal@ed.gov> wrote:
Our 11:59 embargo held as anticipated (never lost one yet) and coverage is mostly good.
The NYT article has the worst zinger from a friendly: Barmak saying "You're kidding me, 45 percent and you're
golden?"
Congressional criticism is limited to the AP story, which paints this issue as one of "partisan divide" It quotes
Lamar saying, "a surprisingly wacky proposal from one of the president's best cabinet members" and Harking
saying the regulations are "plain common sense."
Beyond those two, the rest of the coverage is fairly favorable.
Headlines below, full articles after that:
WSJ: U.S. to Scrutinize For-Profit Career Colleges (Good)
Bloomberg: Obama Cracks Down on For-Profit Colleges, Links Loans to Income (Good)
AP: Proposed federal rules target for-profit colleges (Evenly mixed review)
NYT: U.S. Releases Rules on For-Profit Colleges (The least flattering quote: Barmak saying " You're
kidding me, 45 percent and you're golden?")
Chronicle of Higher Ed: Education Department Takes Aim at For-Profits With Student-Debt Rule (Good)
Washington Post: Administration proposal aims to tighten oversight of for-profit colleges (Good)
Reuters: U.S. rule would force education companies to show work (Good)
Not online as of midnight: USA Today, Inside Higher Ed
WSJ: Department of Education to Scrutinize For-Profit Career
Colleges
The U.S. Department of Education on Friday will propose a measure t o penalize for-profit career colleges for
graduating sh1dents with high debt-to-income ratios.
The proposal, which will undergo a 45-day comment period that is expected to include opposition from industry
lobbyists, is an effort to ensure schools are training students for gainful employment in a recognized occupation. It
comes at a time when for-profits are under new scrutiny as they capture a growing share of federal sh1dent-aid
dollars.
"Some proprietary schools have profited and prospered but their students haven't," Secretary of Education Arne
Duncan said. "While career colleges play a vital role in training our work force to be globally competitive, some of
them are saddling students with debt they cannot afford in exchange for degrees and certificates they cannot use."
Under the proposal, training programs would be judged on whether former students are repaying the principal on
federal loans, and the relationship between total student loan debt and average earnings upon graduation. The
recommendation set s up three tiers of eligibility, with those in the middle tier facing enrollment restrictions and
debt-to-income disclosure requirements, and the weakest tier losing access t o federal student aid for new sh1dents.
According to the Education Department, if career colleges made no changes, 5% of all programs woald no longer be
eligible for federal aid and 55% would be required to warn students about high debt-to-income ratios. Many publicly
traded schools derive close to 90% of their revenue from federal aid.
The recommendation, known as a Notice of Proposed Rulemaking, has been a long time coming, with federal
officials and industry representatives meeting for a year to discuss new higher-education regulations. The
government put fmth its first proposal in late January and the stocks of for-profit colleges have soared and swooned
since, propelled by rumors of how programs cottld gain exemption from the regulation.
The Education Department said that this version is "thoughtful," with income calculations based on actual graduate
earnings rather than Bureau of Labor Statistics figures. To give time for program improvement, the agency proposed
that the 2012-2013 academic year be the earliest that programs could be found ineligible for federal aid.
The Education Department had released 13 other proposals in June but said it needed more time for this one.
2
"Some key issues around gainful employment are complicated and we want to get it right," Mr. Duncan said at the
time.
The earlier recommendations included proposals on incentive compensation for student recruiters, a clearer
definition of a credit hour and a new metrics by which students must show academic progress in order to continue
receiving federal aid.
The colleges' programs include training for students to work in the culinary arts, as medical assistants, and in
criminal justice.
Write to Melissa Korn at me1issa.korn@dowjones.com
Bloomberg
Obama Cracks Down on For-Profit Colleges, Links
Loans to Income
BY John Lauerman - Jul 23, 2010
rhe Obama administration released a proposal that would tighten for-profit colleges' access to federal
student aid, threatening growth in the industry that received $26.5 billion in U.S. funds last year.
The proposed rules released today by the U.S. Department of Education would link U.S. student aid
eligibility at Apollo Group Inc., ITT Educational Services Inc., Career Education Corp. and other education
companies to former students' salaries and debt repayment rates. The rules may cut off access to federal
student grants and loans at about 5 percent of all for- profit education programs, Secretary Arne Duncan
said in a telephone call with reporters yesterday.
Students earning two-year associates' degrees at for-profit colleges had an average student-loan debt of
$14,000 in 2007- 2008, about twice that of students at nonprofit colleges, the department said in a
statement. While most education companies provide valuable training and skills, high-cost education
programs that lead to low-wage jobs are harming students, leaving them with hard-to-pay debts, Duncan
said.
"We want to hit the ones at the bottom, those that simply aren't working for students," Duncan said in the
press briefing. "The 5 percent would frankly be the bottom of the barrel. "
Tuition Impact
If the rules were in effect today, programs enrolling about 8 percent of the students at for-profit colleges
nationwide would lose eligibility, the Education Department said. There were about 1.8 million students
enrolled in education companies' programs in 2008, according to a June 24 report from Iowa Democratic
Senator Tom Harkin, chairman of the Senate Health, Education, Labor and Pensions Committee.
The rules may hurt Carmel, Indiana-based ITT Educational, Hoffman Estates, Illinois-based Career
Education and Santa Ana, California-based Corinthian Colleges Inc., because they may not meet the
repayment standard and they offer high-priced programs, said Trace Urdan, an analyst with Signal Hill
Capital Group in San Francisco. Expensive courses of study that lead to relatively low-paying careers, such
as those in criminal justice, may begin to disappear, he said yesterday in a telephone interview.
"You will see some programs being terminated," Urdan said. "No one's going to be kicked out into the
street, but programs that are no longer profitable at contemplated prices will be ended."
3
Stocks Decline
Under the proposed rules, the Education Department would monitor loan repayments and starting
salaries among graduates of for-profit colleges. To remain fully eligible for student loans, education
companies would have to show the agency that at least 45 percent of their former students are paying off
their student loans, or that graduates pay less than 8 percent of their total income or less than a fifth of
their "discretionary income" on student loan payments.
When a program's repayment levels and debt-to-income ratios both miss those targets, its access to
federal student aid may be restricted, the statement said. That may mean that the program would have to
limit enrollment growth or warn applicants that the program's graduates have high debt levels. About 55
percent of for-profit college programs would have to issue such warnings if the proposed regulations were
now in effect, the statement said.
Lose Eligibility
Companies would lose their eligibility for aid if less than 35 percent of former students are repaying and
their educational debt is at least 12 percent of their annual total income or 30 percent of discretionary
income, the statement said. No more than 5 percent of programs nationally will lose U.S. aid access under
the regulations during their first year, the department said.
Average annual tuition at for-profit colleges was $14,000 in 2009, compared with $2,500 at community
colleges, Harkin's report said.
Education companies have been hurt as investors have waited for the Education Department to write its
regulations. The Standard & Poor's 1500 Education Services Sub-Industry Index, which tracks nine
education companies, fel113 percent over the past 12 months as of yesterday's close. Apollo, the Phoenix-
based operator of the University of Phoenix and the biggest U.S. education company, fell 32 percent over
the past 12 months in Nasdaq Stock Market composite trading.
Industry Reaction
Congressional staffers who were briefed on the proposed rules said they expected the education industry
to fight them. The Career College Association, a Washington-based industry group, didn't respond to
telephone calls and e-mails requesting comment. Apollo company officials declined to comment because
they hadn't seen the new regulations.
"Apollo cautions against policy with the potential for unintended consequences that could restrict
educational access, limit students' choices or unfairly disadvantage hundreds of thousands of historically
underserved students," Manny llivera, a spokesman, said in an e-mail.
Robert Jaffe, a spokesman for Corinthian, Lauren Littlefield, a spokesman for ITT Educational and Jeff
Leshay, a spokesman for Career Education, didn't immediately return telephone calls seeking comment.
While the proposed rules are a step in the right direction that may eliminate many abuses of the student
financial aid system, the government may have set the standard for loan repayment too low, said Barmak
Nassirian, associate executive director of the American Association of Collegiate Registrars & Admissions
Officers in Washington.
'Rampant Waste'
"I defy anyone to say that an institution with a 45 percent loan-repayment rate represents the gold
standard," he said in a telephone interview. "This says something about how rampant waste and fraud and
4
abuse are in this sector."
While the expectations for repayment appear low, the rules appear to have some "real teeth" in them, said
Pauline Abernathy, who oversees policy and advocacy for the Institute for College Access and Success in
Washington. Her group will urge the administration to strengthen the regulations in the 45- day comment
period that starts today.
"This regulation is plain common sense," Harkin said in a statement. "If a school can't show that its
students are repaying their college debt and not defaulting, this is a sure sign that the school is failing to
prepare its students for gainful employment, as the law requires."
An earlier draft of the proposal said that starting salaries would be estimated using data from the U.S.
Bureau of Labor Statistics. The proposed rules instead can for the salary data to come directly from
graduating students' Internal Revenue Service filings, the Education Department said.
'Actual Wages'
"Therein lies the problem for the sector given that actual wages are generally lower than the Bureau of
Labor Statistics data," said Jarrell Price, an analyst with Height Analytics in Washington who follows the
for-profit education sector. "There's a lot of uncertainty about the income levels of graduates of 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. About 96 percent of students who graduated from for- profit colleges in 2008
had taken out student loans, and 24 percent of that graduating class had more than $40,000 in U.S.
student loan debt, according to the June report from Harkin.
Taxpayers' Right
"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,"
Duncan said in the statement. "The rules we've proposed today will help ensure that career college and
training programs use federal student aid to prepare students for success. "
The government has been determining for-profit programs' eligibility for student grants and loans in part
by monitoring default rates. Those rates underestimate the proportion of students who don't pay back
loans on time, because many receive postponements known as forbearances or deferments. The new rules
link a program's eligibility for federal aid to the percentage of former students who are repaying principal
on their loans three years after leaving school, the department said.
To contact the reporter on this story: John Lauerman in Boston at jlauerman@bloomberg.net.
Proposed federal rules target for-profit colleges
By ERIC GORSKI (AP)- 38 minutes ago
The Education Department will propose much-anticipated regulations Friday that would cut off federal aid to for-profit
college programs if too many of their students default on loans or don't earn enough after graduation to repay them.
"Some proprietary schools have profited and prospered but their students haven't, and this is a disservice to students
and to taxpayers," Education Secretary Arne Duncan said Thursday in a briefing with reporters. "And it undermines the
5
valuable work, the extraordinarily important work, being done by the for-profit industry as a whole."
To qualify for federal student aid programs, career college programs must prepare students for "gainful employment."
The Obama administration, amid intense lobbying from both for-profit college officials and consumer and student
advocates, is proposing a complicated formula that would weigh both the debt-to-income ratio of recent graduates and
whether all enrolled students repay their loans on time, regardless of whether they finish their studies.
Although the rules would provide schools more roads to compliance than an earlier proposal, a senator and for-profit
colleges' chief lobbying group warned that it would make college less accessible.
Republican Sen. Lamar Alexander of Tennessee, a former Education secretary, ridiculed it as "a surprisingly wacky
proposal from one of the president's best cabinet members." The government could in effect "institute price controls on
certificate and degree programs at thousands of institutions of higher education," Alexander said in a statement.
Underscoring the partisan divide on the issue, Sen. Tom Harkin of Iowa, a Democrat who is holding oversight hearings on
for-profit colleges, praised the proposed regulations as "plain common sense."
For-profit colleges have faced increased scrutiny in recent months for some questionable recruiting tactics, high loan
default rates, and low graduation and job placement rates. The government is taking notice because for-profit colleges
are bringing in record amounts of federal aid money- $26.5 billion last year, up from $4.6 billion in 2000.
Under the Obama administration proposal, vocational programs would fall into one of three categories:
_Programs fully eligible for aid will either have at least 45 percent of their former students paying down the principal on
their federal loans- or their graduates will have a debt-to-earnings ratio of less than 20 percent of discretionary
income or 8 percent of total income.
_Ineligible programs will have less than 35 percent of their former students paying down the principal on their federal
loans - and their graduates will have a debt-to-earnings ratio above 30 percent of discretionary income and 12 percent
oftotal income.
_Those programs that don't fit either definition would be restricted - meaning they would be subject to limits on
enrollment growth and schools would be required, among other things, to warn of their high debt levels.
Duncan said the department estimates that if schools make no changes, 5 percent of for-profit college programs would
be ineligible for aid in 2012 - affecting 8 percent of all students in the fast-growing sector.
If the rules went into effect now, 55 percent of for-profit schools would be required to disclose unflattering loan data in
their promotional materials, making for a strong consumer protection tool, the agency said.
To give schools time to improve and to target "the bottom of the barrel," Duncan said the administration would cap the
number of programs it would strip of aid eligibility at 5 percent in fall 2012, when that penalty would first be available.
The Career College Association, the for-profit college sector's main lobbying group, said establishing a ratio between
student debt and anticipated graduate earnings is unwise, unnecessary and unproven.
"Amounts borrowed today do not indicate what you will be able to repay in five years, ten years or over a working
lifetime," the association's president, Harris Miller, said Thursday in a statement.
Others who were hoping for tougher rules were disappointed, as well.
6
Pauline Abernathy, vice president of the Institute for College Access & Success, said while the proposal is significant and
has teeth, programs could continue to profit from federal aid when more than half their students can't afford to pay
down the principal on their loans.
"It is not as strong as it should be to protect students and taxpayers from getting ripped off by career education
programs that over-promise and under-deliver," she said.
The proposed rules will be published Friday in the Federal Register and a 45-day public comment period will follow. The
final rules are scheduled to be announced in November and would take effect next year, although enforcement action
that would strip schools of aid eligibility would not begin until the 2012-2013 school year.
Copyright 2010 The Associated Press. All rights reserved.
U.S. Releases Rules on For-Profit
Colleges
By TAMAR LEWIN
The Obama administration on Thursday released its controversial proposed regulations to end federal student aid to for-profit
colleges whose graduates do not earn enough to repay their loans.
Since most for-profit programs get the vast majority of their revenues from federal student aid, the regulations could
effectively shut down the programs whose students have the most debt and the least likelihood of finding good jobs.
The for-profit colleges have lobbied strongly against the new ugainful employment" regulations. And in a statement Thursday
evening, the Career College Association, which represents the colleges, called the proposed regulations "unwise, unnecessary,
unproven" and said they were likely to harm students, employers, institutions and taxpayers. The Department of Education
<http://topics.nytimes.com/top/reference/timestopics/organizations/e/education department/index.html?inline=nyt-org>
estimates that the rules would cut off federal aid to about 5 percent of for-profit college programs, representing about 8
percent of students, and that about 55 percent of the programs would be required to warn applicants and students that they
may have trouble repaying their loans.
The coalition of education groups, student groups and consumer groups that have pushed for stronger regulations said they
were glad to have regulations proposed in time to go into effect next year - but not impressed with their toughness.
"We are particularly concerned that programs could continue to profit from federal student aid when half their students with
loans can't afford to pay the principal," said Pauline Abernathy, vice president of the Institute for College Access and Success.
Barmak Nassirian of the American Association of Collegiate Registrars and Admissions Officers said the new regulations were a
step in the right direction. But like Ms. Abernathy, Mr. Nassirian was particularly unhappy about the standard allowing aid to
colleges where 45 percent of the graduates are repaying their principal on their loans.
"You're kidding me, 45 percent and you're golden?" he said.
The for-profit sector has mushroomed in the last decade. While overall postsecondary enrollment increased 31 percent from
1998 to 2008, the for-profits' enrollment grew by 225 percent. Although for-profit colleges, which can get up to 90 percent of
the revenues from federal student aid, enroll less than 10 percent of the nation's higher-education students, they get almost a
7
quarter of the federal aid. In 2008-9, for-profit colleges got $4.3 billion in Pell grants and $19.6 billion in Stafford loans.
The new regulations essentially create green, yellow and red zones, based on students' debt levels and repayment records.
To be in the green zone, fully eligible for federal aid, programs would either have to have at least 45 percent of their former
students paying down the principal on their federal loans or graduates with debt-to-earnings ratios of less than 8 percent of
their total income, or 20 percent of their discretionary income.
Programs in the red zone, ineligible for federal aid for new students, would have less than 35 percent of their former students
paying down the principal, with graduates carrying a debt-to-earnings ratio above 12 percent of their total income and 30
percent of di scretionary income.
Those in between would be subject to limits on enrollment growth, and required to warn applicants and students that they
may have difficulty repaying their loans.
The proposed regulation will be published Friday for a 45-day comment period, with final rules issued in November.
Chronicle of Higher Ed: Education Department Takes Aim at For-Profits With Student-Debt
Rule
By Kelly Field
After a five-week delay, the Education Department will release a rule Friday that would penal ize for-profit colleges that saddle
students with unmanageable amounts of debt.
The proposed "gainful employment" rule, which has been anticipated by for-profit colleges and short-sellers alike, would cut
off federal aid to programs whose students have the highest debt burdens and lowest loan-repayment rates, while limiting
enrollment growth at hundreds of other programs. For-profit lobbyists are calling the rule "unwise and unnecessary."
In a conference call with reporters, the Education Department said it was seeking to protect students and taxpayers from the
high costs of student-loan defaults.
"While career colleges play a vital role in training our work force to be globally competitive, some of them are saddling
students with debt they cannot afford in exchange for degrees and certificates they cannot use," said Secretary of Education
Arne Duncan in a written statement.
Department officials estimated that 5 percent of programs would become ineligible for student aid under the rule, while 55
percent would be subject to growth restrictions and required to warn consumers and current students about the dangers of
excessive borrowing.
The share of borrowers defaulting on their student loans in the first two years of repayment has climbed steadily in recent
years, reaching a 10-year high of 7.2 percent this year, according to the Education Department.
For-profit colleges, which educate less than 10 percent of students but receive close to a quarter of federal-student-loan
dollars, account for a disproportionate share of those defaults. Two years into repayment, roughly 12 percent of borrowers
who attended for-profit colleges have defaulted on their federal loans, compared with 6 percent of those who attended public
coll eges and 4 percent who attended private colleges.
When the government is unable to collect on defaulted loans, taxpayers are on the hook for the losses. Borrowers,
meanwhile, face damaged credit histories, are ineligible for additional federal aid, and may have their wages and tax refunds
seized by the government.
Though federal law has long required for-profit colleges to demonstrate that they are preparing their students for "gainful
employment," that term has never been defined. The Education Department tried to do so late last year, convening a panel
8
that included consumer advocates, for-profit-college officials, and student advocates to re-examine the rule. But the panel
was unable to reach agreement, leaving the department free to offer its own definition.
Turning Up the Heat
The new rule comes as Congress is turning up the heat on the for-profit sector, raising doubts about the cost and quality of
some proprietary institutions. In late June, Sen. Tom Harkin, Democrat of Iowa, chairman ofthe education committee, held a
hearing in which lawmakers vowed to crack down on "bad actors" in the rapidly growing sector. A second hearing is planned
for early August.
Still, lawmakers and Education Department officials recognize that for-profit colleges will be critical to achieving President
Obama's goal of leading the world in college completion by 2020, and are wary of taking steps that could cripple the sector.
Today's rule does not go as far as the department's original proposal, which would have ended aid to programs in which a
majority of students' loan payments exceeded 8 percent of the lowest quarter of graduates' expected earnings, based on a 10-
year repayment plan.
For-profit colleges lobbied vigorously against that proposal, warning that it would force them to shutter thousands of program
serving millions of students. The colleges have spent hundreds of thousands of dollars pushing an alternative that would
require programs to provide prospective students with more information about their graduates' debt levels and salaries.
The department's revised rule would replace the 8-percent cap with a two-part test that would take into account the share of
borrowers repaying their federal student loans and the relationship between total student loan debt and average earnings.
Under that approach, programs whose graduates carried debt-to-earnings ratios of less than 20 percent of discretionary
income or 8 percent of total income, or where at least 45 percent of former students (graduates and nongraduates) were
paying down the principal on their loans, would be fully eligible for aid.
Programs whose graduates carried debt-to-earnings ratios above 30 percent of discretionary income and 12 percent of total
income, and where fewer than 35 percent of former students were paying down principal on their loans, would be ineligible
for aid.
Programs that fell somewhere in between would face rest rictions on enrollment growth, would be required to demonstrate
that employers support their program, and would have to warn consumers and current students of high debt levels.
In the press call, department officials said their goal was to separate the "bad actors" from the good.
"The many good actors should be protected from being tainted or tarnished by the small minority that are doing a disservice
to the industry," Mr. Duncan said.
But lobbyists for for-profit colleges say they're unhappy that the department stuck with its "metrics based" approach to
measuring gainful employment, rather than simply requiring more disclosures, as the colleges suggested. In a statement,
Harris N. Miller, the president of the Career College Association, called the department's proposal " unwise, unnecessary,
unproven," and "likely to harm students, employers, institutions, and taxpayers."
"Adj usting the numbers in the original gainful-employment formulation is not the issue," he said.
Groups representing students and consumers, meanwhile, welcomed the proposal, saying it would protect students and
taxpayers from programs that overpromise and underdeliver.
"It is encouraging that the administration has proposed a regulation with some teeth," said Pauline Abernathy, vice president
of the Institute for College Access and Success.
The gainful-employment rule is one of 14 that the department and college stakeholders have been negotiating over the past
nine months. The other regulations, including one that would tighten a ban on incentive compensation for college recruiters,
were published in mid-June. After a period for public comment, they will likely be combined in a package of final rules due out
in November.
9
Qr t u ~ m $lost
Administration proposal aims to tighten oversight of for-profit colleges
By Daniel de Vise
Washington Post Staff Writer
Friday, July 23, 2010; A02
Education Secretary Arne Duncan proposed Thursday that for-profit colleges be required to show through certain new
measures that their graduates are not saddled with too much debt, an initiative he said was meant to protect students from
"a few bad actors" in the industry.
Through the proposal, the Obama administration aims to tighten oversight of the fastest-growing sector of higher education.
The for-profit sector enrolled 1.8 million students in 2008, more than triple the number of a decade earlier.
Starting in the 2012-13 academic year, for-profit colleges would have to demonstrate that they prepare students for "gainful
employment" in order to remain eligible for federal aid.
They could do this i n two ways. One would be to show that at least 45 percent of former students are paying down the
principal on their federal loans. The other would be to show that graduates are paying no more than one-fifth of their
discretionary income, or 8 percent of total income, toward student debt.
Colleges that fail to meet those tests would face potential limits on enrollment growth and would be required to warn
students about potential debt. They would become ineligible for aid if less than 35 percent of former students are paying
down their principal and if graduates pay more than 30 percent of discretionary income-- and more than 12 percent of total
income -- toward student loans.
The rule would become final Nov. 1, after a public comment period. Duncan estimated that it would disqualify 5 percent of
the for-profit industry from receiving federal aid.
"That 5 percent would be, frankly, the bottom of the barrel, " he told reporters in a phone briefing. "The industry as a whole,
unfortunately, has been given a black eye by a few bad actors."
The Career College Associat ion, an industry group, said in a statement that the proposed regulation was "unwise,
unnecessary, unproven and is likely to harm students, employers, institutions and taxpayers." Kaplan University, owned by a
subsidiary of The Washington Post Co., belongs to the for-profit sector. A Kaplan spokesman declined to comment pending a
review of the proposal. Representatives from other for-profit colleges could not be reached for comment.
The Education Department released 13 other regulatory changes <http://www.washingtonpost.com/wp-
dyn/content/article/2010/06/16/AR2010061600050.html> related to higher education in mid-June. The agency had delayed
action on the last and most controversial rule to settle lingering industry objections.
U.S. rule would force education cos
10
to show work
Thu Jut 22, 2010 11:59pm EDT
WASHINGTON, June 22 (Reuters) - For-profit education companies could soon have to prove that their former students are
either paying off their loans or capable of doing so, the Department of Education said on Thursday.
The proposal has for months weighed on stocks in the sector including Apollo Group Inc (APOL.O
<http://www.reuters.com/finance/stocks/overview?svmbol=APOL.O> ) and DeVry Inc (DV.N
<http://www.reuters.com/finance/stocks/overview?symbol=DV.N> ), as it could cut off access to federal funding for some
types of training.
The proposed rule is part of a broader overhaul of the industry, which has been criticized for producing poorly prepared
students with big debts.
The Education Department issued on June 15 a series of other rules that required the schools to give prospective students
their graduation and job placement rates. The schools are often aimed at lower-i ncome or minority students.
But the department left the toughest rule for last-- the monitoring of federal loan default rates -- which could lead to a
crippling loss of federal funds, and therefore profits.
Education Secretary Arne Duncan predicted that five percent of programs would lose those funds.
"Ninety percent of revenues in many for-profit schools come from student loan programs, " Duncan told reporters on a
conference call, adding that default rates approached 25 percent.
"Strong career colleges should welcome our proposal, " he said. "Overall! fi rmly believe that for-profit schools are doing a
good job of training their students. "
The Career College Association, representing 1,500 schools, 95 percent of which are for-profit, said the Department of
Education proposal "is unwise, unnecessary, unproven and is likely to harm students, employers, institutions and taxpayers."
"Amounts borrowed today do not indicate what you will be able to repay in five years, ten years or over a working lifetime,"
CCA President Harris Miller said in a statement.
Programs would lose their eligibility if more than 65 percent of former students failed to pay the principal on federal loans,
and if their graduates' debt was more than 30 percent of discretionary income and 12 percent of total income, the
department said.
Schools would be declared fully eligible for loans if they can show that 45 percent of former students are paying down their
debt, or that their debt is less than 20 percent of former students' discretionary income or 8 percent of total income, the
department said.
Other schools would fall into a middle ground and may have to warn students about incurring heavy debts, the department
said.
The rules are subject to a 45-day comment period, and are slated to go into effect for the 2012-2013 school year, officials
said.
The schools, which offer higher education programs in fields like healthcare and criminal justice, have come under increased
scrutiny for their student loan practices and the quality of their education services.
11
Seventy percent of the Education Department's investigations are into problems at for-profit schools, department inspector
general Kathleen Tighe told the Senate's Health, Education, Labor and Pensions Committee recently.
Fifty-three percent ended up owing more than $30,500, compared with 12 percent for students who attended a public four-
year college, according to a study by the College Board.
The for-profit education business can be lucrative.
Apollo Group Inc posted better-than-expected quarterly results in late June, helped by 13 percent growth in enrollments at its
University of Phoenix. It forecast revenue growth in the high single digits in fiscal 2011.
12
From:
Sent:
To:
Kvaal, James
Robert Shireman
Subject: RE: Fw: Gainful Employment Press Coverage
Attachments: image001 .png; image002.gif; image003.png; image004.png; imageOOS.png; image006.png
From: Robert Shireman
Sent: Friday, July 23,2010
To: Kvaal, James
This is quite good, and the InsideHjgherEd story is good too. Congrats. ("Wacky" isn't a terribly effective
On Fri, Jul 23, 2010 at 6:56AM, Kvaal , James <James.Kvaal@ed.gov> wrote:
From: Hamilton, Justin
To: Heather Higginbottom Roberto Rodriguez
l ; Gavin, Tom who.eo . ov>; Gannet Tseggai
; Robert Gordon < omb.eo . ov>; Zelman, Allison L.
......._,......._ ____ ........,=.!..!.!:<.==""-!. ; Kanter, Martha; Yuan, Georgia; Kvaal, James; Gomez, Gabriella; Weiss, Joanne;
Cunningham, Peter; Bergeron, David
Sent: Fri Jul 23 00:18:42 2010
Subject: Gainful Employment Press Coverage
golden?"
13
NYT: U.S. Releases Rules on For-Profit Colleges (The least flattering quote: Barmak saying " You're
Colleges
The U.S. Department of Education on Friday will propose a measure t o penalize for-profit career colleges for
graduating sh1dents with high debt-to-income ratios.
comes at a time when for-profits are under new scrutiny as they capture a growing share of federal sh1dent-aid
dollars.
recommendation set s up three tiers of eligibility, with those in the middle tier facing enrollment restrictions and
debt-to-income disclosure requirements, and the weakest tier losing access t o federal student aid for new sh1dents.
According to the Education Department, if career colleges made no changes, 5% of all programs woald no longer be
government put fmth its first proposal in late January and the stocks of for-profit colleges have soared and swooned
since, propelled by rumors of how programs cottld gain exemption from the regulation.
14
time.
criminal justice.
Write to Melissa Korn at me1issa.korn@dowjones.com
Bloomberg
Loans to Income
rhe Obama administration released a proposal that would tighten for-profit colleges' access to federal
said.
Tuition Impact
15
Stocks Decline
Lose Eligibility
Industry Reaction
underserved students," Manny llivera, a spokesman, said in an e-mail.
'Rampant Waste'
16
'Actual Wages'
colleges."
Taxpayers' Right
To contact the reporter on this story: John Lauerman in Boston at jlauerman@bloomberg.net.
17
oftotal income.
18
Colleges
By TAMAR LEWIN
19
percent of di scretionary income.
Rule
By Kelly Field
coll eges and 4 percent who attended private colleges.
20
Turning Up the Heat
some proprietary institutions. In late June, Sen. Tom Harkin, Democrat of Iowa, chairman ofthe education committee, held a
for early August.
for aid.
Programs that fell somewhere in between would face rest rictions on enrollment growth, would be required to demonstrate
Harris N. Miller, the president of the Career College Association, called the department's proposal " unwise, unnecessary,
"Adj usting the numbers in the original gainful-employment formulation is not the issue," he said.
in November.
21
Qr t u ~ m $lost
By Daniel de Vise
22
to show work
Thu Jut 22, 2010 11:59pm EDT
types of training.
department said.
department said.
said.
said.
23
24
From: Robert Shireman gmail.com]
To: Kvaal, James
Attachments: image.png; image.png; image.png; image.gif; image.png; image.png
This is quite good, and the InsideHigherEd story is good too. Congrats. ("Wacky" isn't a terribly effective
On Fri, Jul 23, 2010 at 6:56AM, Kvaal, James <James.Kvaal@ed.gov> wrote:
1UIJ00 ]@who.eop.gov>; Roberto Rodriguez
who.eop.gov>; Gavin, Tom Gannet Tseggai
lfiMli rowho.eop.gov>; Robert Gordon .P.;; @omb.eop:ov>; Zelman, Allison L.
l@who.eop.gov>; Kanter, Martha; Yuan, Georgia; Kvaal, James; Gomez, Gabriella; Weiss, Joanne;
unningham, Peter; Bergeron, David
Sent: Fri Jul 23 00:18:42 2010
golden?"
NYT: U.S. Releases Rules on For-Profit Colleges (The least flattering quote: Barmak saying "You're
25
Colleges
The U.S. Department of Education on Friday will propose a measure to penalize for-profit career colleges for
graduating students with high debt-to-income ratios.
comes at a time when for-profits are under new scrutiny as they capture a growing share of federal student-aid
dollars.
recommendation sets up three tiers of eligibility, with those in the middle tier facing enrollment restrictions and
debt-to-income disclosure requirements, and the weakest tier losing access to federal student aid for new students.
According to the Education Department, if career colleges made no changes, s% of all programs would no longer be
government put forth its first proposal in late January and the stocks of for-profit colleges have soared and swooned
since, propelled by rumors of how programs could gain exemption from the regulation.
time.
criminal justice.
Write to Melissa Korn at melissa.korn@dowjones.com
Bloomberg
26
Loans to Income
BY John Lauerman - Jul 23, 201 0
The Obama administration released a proposal that would tighten for-profit colleges' access to federal
eligibility at Apollo Group Inc., ITI Educational Services Inc., Career Education Corp. and other education
student grants and loans at about 5 percent of aU for- profit education programs, Secretary Arne Duncan
said.
Tuition Impact
The rules may hurt Carmel, Indiana-based ITI Educational, Hoffman Estates, I11inois-based Career
Stocks Decline
27
Lose Eligibility
education companies, fel113 percent over the past 12 months as of yesterday's dose. Apollo, the Phoenix-
Industry Reaction
telephone calls and e-mails requesting comment. Apo11o company officials declined to comment because
underserved students," Manny Rivera, a spokesman, said in an e-mail.
Robert Jaffe, a spokesman for Corinthian, Lauren Littlefield, a spokesman for ITI Educational and Jeff
'Rampant Waste'
prepare its students for gainful employment, as the law requires. "
28
'Actual Wages'
colleges."
Taxpayers' Right
To contact the reporter on this story: John Lauerman in Boston at ilauerman@bloomberg.net.
By ERIC GORSKI {AP) - 38 minutes ago
To qualify forfederal student aid programs, career college programs must prepare students for "gainful employment."
advocates, is proposing a complicated formula that would weigh both the debt-to-i ncome ratio of recent graduates and
certificate and degree programs at thousands of institutions of higher education, " Alexander said in a statement.
29
of total income.
_Those programs that don't fit either definition would be restricted- meaning they would be subject to limits on
30
Colleges
By TAMAR LEWIN
the revenues from federal student aid, enroll less than 10 percent ofthe nation's higher-education students, they get almost a
percent of discretionary income.
31
Rule
By Kelly Field
After a five-week delay, the Education Department will release a rule Friday that would penalize for-profit colleges that saddle
colleges and 4 percent who attended private colleges.
Turning Up the Heat
some proprietary institutions. In late June, Sen. Tom Harkin, Democrat of Iowa, chairman of the education committee, held a
for early August.
32
for aid.
Programs that fell somewhere in between would face restrictions on enrollment growth, would be required to demonstrate
Harris N. Miller, the president of the Career College Association, called the department's proposal "unwise, unnecessary,
unproven," and "likely to harm students, employers, i nstitutions, and taxpayers."
"Adjusting the numbers in the original gainful-employment formulation is not the issue," he said.
" It is encouraging that the administration has proposed a regulation with some teeth," said Pauline Abernathy, vice president
in November.
tilt f u a ~ Jloat
By Daniel de Vise
33
They could do this in two ways. One would be to show that at least 45 percent of former students are paying down the
down their principal and if graduates pay more than 30 percent of discretionary income - and more than 12 percent of total
subsidiary of The Washi ngton Post Co., belongs to the for-profit sector. A Kaplan spokesman declined to comment pending a
to show work
Thu Jul 22, 2010 11:59pm EDT
<http://www.reuters.com/finance/stocks/overview?symboi=APOL.O> ) and DeVry Inc (DV.N
<http://www.reuters.com/fi nance/stocks/overview?symboi=DV.N> ), as it could cut off access to federal funding for some
types of training.
34
their graduation and job placement rates. The schools are often aimed at lower-income or minority students.
But the department left the toughest rule for last --the monitoring of federal loan default rates-- which could lead to a
" Ninety percent of revenues in many for-profit schools come from student loan programs," Duncan told reporters on a
"Strong career colleges should welcome our proposal," he said. "Overall I firmly bel ieve that for-profit schools are doing a
good job of training their students."
Education proposal"is unwise, unnecessary, unproven and is likely to harm students, employers, institutions and taxpayers."
department said.
department said.
said.
said.
35
From: Robert Shireman gmail.com]
To: Kvaal, James
Attachments: image.png; image.png; image.png; image.gif; image.png; image.png
This is quite good, and the InsideHigherEd story is good too. Congrats. ("Wacky" isn't a terribly effective
On Fri, Jul 23, 2010 at 6:56AM, Kvaal, James <James.Kvaal@ed.gov> wrote:
y.;.;.;:;.;;.... ______ Rodriguez
Gannet Tseggai
Robert Gordon omb.eo . ov>; Zelman, Allison L.
; Kanter, Martha; Yuan, Georgia; Kvaal, James; Gomez, Gabriella; Weiss, Joanne;
Sent: Fri Jul 23 00:18:42 2010
golden?"
36
Colleges
The U.S. Department of Education on Friday will propose a measure to penalize for-profit career colleges for
dollars.
time.
criminal justice.
Bloomberg
37
Loans to Income
BY John Lauerman - Jul 23, 201 0
student grants and loans at about 5 percent of aU for- profit education programs, Secretary Arne Duncan
said.
Tuition Impact
The rules may hurt Carmel, Indiana-based ITI Educational, Hoffman Estates, I11inois-based Career
Stocks Decline
38
Lose Eligibility
education companies, fel113 percent over the past 12 months as of yesterday's dose. Apollo, the Phoenix-
Industry Reaction
Robert Jaffe, a spokesman for Corinthian, Lauren Littlefield, a spokesman for ITI Educational and Jeff
'Rampant Waste'
39
'Actual Wages'
colleges."
Taxpayers' Right
By ERIC GORSKI {AP) - 38 minutes ago
certificate and degree programs at thousands of institutions of higher education, " Alexander said in a statement.
40
of total income.
41
Colleges
By TAMAR LEWIN
42
Rule
By Kelly Field
Turning Up the Heat
for early August.
43
for aid.
Programs that fell somewhere in between would face restrictions on enrollment growth, would be required to demonstrate
unproven," and "likely to harm students, employers, i nstitutions, and taxpayers."
in November.
tilt f u a ~ Jloat
By Daniel de Vise
44
down their principal and if graduates pay more than 30 percent of discretionary income - and more than 12 percent of total
subsidiary of The Washi ngton Post Co., belongs to the for-profit sector. A Kaplan spokesman declined to comment pending a
to show work
Thu Jul 22, 2010 11:59pm EDT
<http://www.reuters.com/finance/stocks/overview?symboi=APOL.O> ) and DeVry Inc (DV.N
<http://www.reuters.com/fi nance/stocks/overview?symboi=DV.N> ), as it could cut off access to federal funding for some
types of training.
45
" Ninety percent of revenues in many for-profit schools come from student loan programs," Duncan told reporters on a
"Strong career colleges should welcome our proposal," he said. "Overall I firmly bel ieve that for-profit schools are doing a
Education proposal"is unwise, unnecessary, unproven and is likely to harm students, employers, institutions and taxpayers."
department said.
department said.
said.
said.
46
From:
Sent:
Robert Shireman J@gmail.com]
saturday, July 24, o 1 :m PM
To: Kvaal, James
Attachments: image004.png; image001 .png; image005.png; image002.gif; image006.png; image003.png
On Fri, Jul 23, 2010 at 10: 19 AM, Kvaal, James <James.Kvaal@ed.gov> wrote:
From: Robert Shi reman
Sent: Friday, July 23, 2010 9: 13 AM
To: Kvaal, James
Subject: Re: Fw: Gainful Employment Press Coven1ge
This is quite good, and the InsideHigherEd story is good too. Congrats. ("Wacky" isn't a terribly effecti ve
On Fri, Jul 23, 2010 at 6:56 AM, Kvaal, James <James.Kvaal@ed.gov> wrote:
47

IWR!J
Subject : Gainful Employment Press Coverage
The NYT article has the worst zinger from a friendly: Barmak saying "You're kidding me, 45 percent and
you' re golden?"
AP: Proposed federal rules target for-profit coll eges (Evenly mixed review)
kidding me, 45 percent and you' re golden?" )
Chronicle of Higher Ed: Education Department Takes Aim at For-Profits With Student-Debt Rule
(Good)
Colleges
The u.s. Department of Education on Friday will propose a measure to penalize for-profit career colleges for
48
comes at a time when for-profits are under new scrutiny as they capture a growing share offederal student-aid
dollars.
"Some proprietaty schools have profited and prospered but their students haven't," Secretaty of Education Arne
eligible for federal aid and 55% wouJd be required to warn students about high debt-to-income ratios. Many publicly
officials and industry representatives meeting for a year to discuss new higher-education regul ations. The
time.
criminal justice.
Bf,oomberg
Loans to Income
By John Lauerman - Jul23, 2010
49
said.
press briefing. "The 5 percent would frankly be the bottom of the barrel."
Tuition Impact
Stocks Decline
Lose Eligibility
Companies would lose their eligibility for aid if less than 35 percent of forn1er students are repaying and
education companies, fell13 percent over the past 12 months as of yesterday's close. Apollo, the Phoenix-
50
Industry Reaction
'Rampant Waste'
Bureau of Labor Statistics. The proposed rules instead call for the salary data to come directly from
'Actual Wages'
colleges. "
had taken out student loans, and 24 percent of that graduating class had more than $40,ooo in U.S.
Taxpayers' Right
51
"These schools-- and their investors-- benefit from billions of dollars in subsidies from taxpayers, and in
training programs use federal student aid to prepare students for success."
To contact the reporter on this story: J ohn Lauerman in Boston at ilauennanrmbloomberg.net
"Some proprietary schools have profited and prospered but their students haven't, and this is a disservice to students and to
taxpayers," Education Secretary Arne Duncan said Thursday in a briefing with reporters. "And it w1demunes the valuable
work, the extraordinarily important work, being done by the for-profit industry as a whole."
Republican Sen. Lamar Alexander of Tennessee, a forn1er Education secretary, ridiculed it as "a surprisingly wacky
cettificate and degree programs at thousands of institutions of higher education," Alexander said in a statement.
For-profit colleges have faced increased scrutiny in recent months for some questionable recmiting tactics, high loan
default rates, and low graduation and job placement rates. The government is taking notice because for-profit colleges are
bringing in record amounts of federal aid money- $26.5 billion last year, up from $4.6 billion in 2000.
_Programs fuJiy eligible for aid will either have at least 45 percent of their former students paying down the principal on
their federal loans - or their graduates will have a debt -to-earnings ratio of less than 20 percent of discretionary income
or 8 percent of total income.
_Ineligible programs \vill have less than 35 percent of their fom1er students paying dov.rn the principal on their federal
loans-and their graduates will have a debt-to-earnings ratio above 30 percent of discretionary income and 12 percent of
52
total income.
Duncan said the department estimates that if schools make no changes, 5 percent of for-profit college programs would be
ineligible for aid in 20 J 2- affecting 8 percent of all students in the fast-growing sector.
If the mles went into effect now, 55 percent of for-profit schools would be required to disclose unflattering loan data in
t heir promotional materi als, making for a strong consumer protection tool, the agency said.
number of programs it would strip of aid el igibility at 5 percent in fall 2012, when that penalty would first be avai lable.
student debt and anticipated graduate eamings is unwise, unnecessary and unproven.
Others who were hoping for tougher mles were disappointed, as well.
Pauline Abemathy, vice president of the Institute for College Access & Success, said while the proposal is significant and
has teeth, programs could continue to profit from federal aid when more than half their students can't afford to pay down
the principal on their loans.
"It is not as strong as it should be to protect students and taxpayers from getting ripped off by career education programs
that over-promise and tmder-deliver," she said.
The proposed n1les will be published Friday in the Federal Register and a 45-day public comment peri od will follow. The
final ntles are scheduled to be armounced in November and would take effect next year, although enforcement action that
would strip schools of aid eligibility would not begin until the 2012-2013 school year.
Colleges
By TAMAR LEWIN
The Obama administTation on Thursday released its controversial proposed regulations to end federal student aid to for-profit
colleges whose graduates do not eam enough to repay their loans.
Since most for-profit programs get the vast majority of their revenues from federal student aid, the regulations could effectively
shut down the programs whose students have the most debt and the least likelihood of finding good jobs.
The for-profit colleges have lobbied strongly against the new "gainful employment" regulations. And in a statement Thursday
53
<ht1p://topics.nvtimes.com/top/rcference/timestopics/organizations/e/education department/index.htmJ?in1ine=nvt-org>
estimates that the niles would cut off federal aid to about 5 percent of for-profit college programs, representing about 8 percent
of students, and that about 55 percent of the programs would be required to wam applicants and students that they may have
trouble repaying their loans.
The coal ition of education groups, student groups and consumer groups that have pushed for stronger regulations said they were
glad to have regulations proposed in time to go into effect next year- but not impressed with their tougi1J1ess.
"We are particularly concerned that programs could continue to profit from federal shtdent aid when half their students with
loans can' t afford to pay the principal," said Pauline Abemathy, vice president of the Institute for College Access and Success.
Bam1ak Nassirian of the American Association of CoUegiate Registrars and Admissions OITicers said the new regulations were
a step in the right direction. But like Ms. Abernathy, Mr. Nassirian was particularly unhappy about the standard allowiJtg aid to
"You' re kidding me, 45 percent and you' re golden?" he said.
1998 to 2008, the for-profits' enrollment grew by 225 percent. Although for-profi t colleges, which can get up to 90 percent of
the revenues from federal student aid, enroll less than 10 percent of the nation' s ltigher-education students, they get almost a
quarter of the federal aid. In 2008-9, for-profit colleges got $4.3 bi llion in Pell grants ru1d $19.6 billion in Stafford Ioru1s.
The new regulations essentially create green, yellow ru1d red zones, based on shtdents' debt levels and repayment records.
To be in the green zone, fully eligible for federal aid, programs would either have to have at least45 percent of their fanner
students paying down the principal on their federal loans or graduates with debt-to-earnings rati.os of less than 8 percent of their
total income, or 20 percent of their discretionary income.
Progrruns in the red zone, ineligible for federal aid for new shtdents, would have less than 35 percent of their fom1er shtdents
paying down the principal, with graduates carrying a debt-to-eamings ratio above 12 percent of their total income and 30
Those in between would be subject to limits on enrollment growth, ru1d required to wam applicants ru1d sh1dents that they may
have difficul ty repaying their Ioru1s.
The proposed regulation will be published Friday for a 45-day comment period, with final mles issued in November.
Chronicle of Higher Ed: Education Department Takes Aim at For-Profits With Student-
Debt Rule
By Kelly Field
After a five-week delay, the Education Department will release a mle Friday that would penalize for-profit colleges that saddle
students with Ulllllrutageable runounts of debt.
The proposed "gainful employment" mle, which has been ru1ticipated by for-profit colleges and short-sell ers alike, would cut off
federal aid to progrruus whose shtdeuts have the highest debt burdens and lowest Ioru1-repayment rates, while limiting
enroll ment gro"'rth at hundreds of other programs. For-profit lobbyists are calling the mle "unwise ru1d w1necessary."
In a conference call with reporters, the Education Department said it was seeking to protect shtdents and tax-payers from the
high costs of sh1dent-loan defaults.
students with debt they cannot afford in exchrutge for degrees ru1d certificates they crumot use," said Secretary of Education
Arne Duncru1 in a written statement.
Department officials estimated that 5 percent of progrruns would become ineligible for shtdent aid tmder the mle, while 55
percent would be subject to growth restrictions and required to warn consumers and current shtdents about the dangers of
54
The share of borrowers defaulting on their student loans in the frrst two years of repayment has climbed steadily in recent years,
reaching a 10-year high of7.2 percent this year, according to the Education Department.
For-profit colleges, which educate less than 10 percent of students but receive close to a quarter of federal-student- loan dollars,
account for a disproportionate share of those defaults. Two years i11to repayment, roughly 12 percent of borrowers who attended
for-profit colleges have defaulted on ti1eir federal loans, compared with 6 percent of those who attended public colleges and 4
percent who attended private colleges.
When ti1e govemment is unable to collect on defaulted loans, ta"payers are on the hook for the losses. Borrowers, meanwhile,
face damaged credit histories, are ineligible for additional federal aid, and may have their wages and tax refunds seized by the
govemment.
Though federal law has long reqttired for-profit coUeges to demonstrate that ti1ey are preparing their students for "gainful
employment," that term has never been defined. The Education Department tried to do so late last year, convening a panel ti1at
included consumer advocates, for-profit-college officials, and student advocates to re-examine the mle. But the panel was
unable to reach agreement, leaving the department free to offer its own defmition.
Tuming Up the Heat
The new mle comes as Congress is tuming up ti1e heat on the for-profit sector, raising doubts about the cost and quality of some
proprietary institutions. In late June, Sen. Tom Harki11, Democrat oflowa, chain11an of the education committee, held a hearing
in which lawmakers vowed to crack down on "bad actors" in ti1e rapidly growing sector. A second hearing is platmed for early
August.
Still, lav..-makers and Education Department officials recognize that for-profit colleges will be critical to achieving President
Obama's goal of leading ti1e world in coll ege completion by 2020, and are wary of taking steps that could cripple the sector.
Today's nde does not go as far as ti1e department's original proposal, which would have ended aid to programs in which a
majority of students' loan payments exceeded 8 percent of the lowest quarter of graduates' expected eami11gs, based on a l 0-
serving millions of students. The colleges have spent hundreds of thousands of dollars pushing an altemative that would require
programs to provide prospective students with more infonnation about ti1eir graduates' debt .levels and salaries.
The department's revised mle would replace ti1e 8-percent cap with a h:vo-part test that would take into account ti1e share of
borrowers repaying ti1eir federal student loans and the relationship between total student loan debt and average eamings.
Under that approach, programs whose graduates carried debt-to-eamings ratios of less than 20 percent of discretionary income
or 8 percent of total income, or where at least 45 percent of fonuer students (graduates and non graduates) were paying down the
principal on their loans, would be fully eligible for aid.
Programs whose graduates carried debt-to-eamings ratios above 30 percent of discretionary income and 12 percent of total
income, and where fewer ti1an 35 percent of former students were paying down principal on ti1eir loans, would be ineligible for
aid.
Programs that fell somewhere in between would face restrictions on enrollment growth, would be required to demonstrate that
employers support ti1eir program, and would have to wam consumers and current students of high debt levels.
1n the press call, department officials said ti1eir goal was to separate the "bad actors" from the good.
"The many good actors should be protected from being tainted or tamished by the small minority that are doing a disservice to
the industry," Mr. Duncan said.
But lobbyists for for-profit colleges say they're unhappy that the department stuck ,.,rith its "metrics based" approach to
measuring gainful employment, rather than simply requiring more disclosures, as the colleges suggested. In a statement, Harris
N. Miller, the president of ilie Career College Association, called the department's proposal '\mwise, tumecessary, unproven,"
and "likely to harm stltdents, employers, institlttions, and taxpayers."
55
"Adjusting the numbers in the original gainful-employment fomllllation is not the issue," he said.
"It is encouraging that the administration has proposed a regulation with some teeth," said Pauline Abemathy, vice president of
the Institute for Coll ege Access ru1d Success.
The gainful-employment mle is one of 14 that the departnlent and college stakeholders have been negotiating over the past nine
months. The other regulations, including one that would tighten a ban on incentive compensation for college recruiters, were
published in mid-June. After a period for public comment, they will likely be combined in a package of final mles due out in
November.
tl)t t\IMl)iqbm , ~ .
Administration proposal aims to tighten oversight of for-profit
colleges
By Daniel de Vise
Friday. July 23, 2010: A02
Education Secretary Ame Dw1cru1 proposed Thursday that for-profit colleges be required to show through certain new measures
that their graduates are not saddled with too much debt, ru1 initiative he said was meru1t to protect students from "a few bad
actors" in the industry.
Through the proposal, the Obama administration aims to tighten oversight of the fastest-growing sector of higher education. The
for-profit sector emolled 1.8 million students in 2008, more than triple the number of a decade earli er.
They could do this in two ways. One would be to show that at least 45 percent of former students are paying down the principal
on their federal loans. The other would be to show that graduates are paying no more thru1 one-fifth of their discretionary
income, or 8 percent of total income, toward student debt.
Colleges that fail to meet those tests would face potential limits on enrollment growth and would be required to wam students
about potential debt. They would become ineligible for aid if less than 35 percent of former students are paying down their
principal and if graduates pay more than 30 percent of discretionary income-- and more than 12 percent of total income--
toward st11dent loans.
Them le would become final Nov. 1, after a public comment period. Duncru1 estimated that it would disqualify 5 percent of tl1e
for-profit industry from recei ving federal aid.
"That 5 percent would be, frrulkly, the bottom of the barrel," he told reporters in a phone briefing. "The industry as a whole,
muorhmately, has been given a black eye by a few bad actors."
The Career College Association, an industry group, said i11 a statement tl1at the proposed regulation was "unwise, unnecessary,
unproven and is likely to hann students, employers, institutions ru1d taxpayers." Kaplru1 University, owned by a subsidiary of
The Washington Post Co., belongs to the for-profit sector. A Kaplru1 spokesman declined to comment pendi11g a review of the
proposal. Representatives from other for-profit colleges could not be reached for comment.
The Education Department released 13 other regulatory changes <http://www. washingtonpost.com/wp-
dyn/conteut/article/2010/06/ l6/AR2010061600050.html> related to higher education in mid-June. The agency had delayed
action on the last ru1d most controversial rule to settle lingering industry objections.
56
U.S. rule would force education
cos to show work
Thu Jul 22, 2010 11 :59pm EDT
WASHINGTON, June 22 (Reuters) -For-profit education companies could soon have to prove that their fom1er students are
<http://www.reuters.com/finance/stocks/overview?svmbol=APOL.O>) and DeVry Inc (DV.N
<http://www.reuters.com/finance/stocks/overview?svmbol=DV.N> ), as it could cut off access to federal funding for some types
of training.
The proposed mle is part of a broader overhaul of the industry, which has been criticized for producing poorly prepared
The Education Department issued on June 15 a series of other rules that required the schools to give prospective students their
graduation and job placement rates. The schools are often aimed at lower-income or minority students.
But the depmtment left the toughest rule for last -- the monitoring of federal loan default rates -- which could lead to a crippling
loss of federal funds, and therefore profits.
Education Secretary Ame Duncatt predicted that five percent of programs would lose those funds.
"Ninety percent of revenues in many for-profit schools come from student loan prograiUs," Duncan told reporters on a
"StTong career colleges shouJd welcome our proposal," he said. "Overall I fim1 ly believe that for-profit schools are doing a
good job of tTaining their students."
The Career College Association, representing l ,500 schools, 95 percent of which are for-profit, said the Department of
Education proposal "is unwise, mmecessary, unproven and is likely to harm students, employers, institutions and taxpayers."
Programs would lose their eligibility if more than 65 percent offomter students failed to pay the principal on federal loans, and
if their graduates' debt was more than 30 percent of discretionary income and 12 percent of total income, the department said.
Schools would be declared fully eligible for loans if they ca11 show that 45 percent of former shtdents are paying down their
debt, or that their debt is less than 20 percent of fanner sh1dents' discretionary income or 8 percent of total income, the
department said.
Other schools would fall into a middle ground and may have to warn students about incmTing heavy debts, the department said.
The mles are subject to a 45-day comment period, and are slated to go into effect for the 2012-2013 school year, officials said.
57
The schools, which offer higher education programs in fields like health care and criminal just1ce, have come under 1ncreased
Seventy percent of the Education Department's investigations are into problems at for-profit schools, departnlent inspector
Fifty-three percent ended up owing more than $30,500, compared w1th 12 percent for students who attended a public four-year
college, according to a study by the College Board.
58
From: Kvaal, James
Sent: Friday, July 23, 2010 3:14PM
To: Kanter, Martha; Miller, Tony; Ochoa, Eduardo; Gomez, Gabriella; Weiss, Joanne;
Cunningham, Peter; Hamilton, Justin; Bergeron, David; Yuan, Georgia
Cc: Martin, Phil
Subject: market reactions
Analysts on today's announcement for those interested.
Stock price data available here:
http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&ch
det=1279656000000&chddm=77809&chls=Interva1Basedline&cmpto=NASDAQ:APOL;NASDAQ:CECO;NASDAQ:APE
I;NYSE:BPI;NYSE:DV;NASDAQ:STRA;NASDAQ:CPLA;NASDAQ:LOPE;NASDAQ:COCO;NASDAQ:LINC;NYSE:ESI;NYSE:
UTI&cmptdms=0;0;0;0;0;0;0;0;0;0;0;0&q=NASDAQ:EDMC&ntsp=0
From: Phil
Sent: July 2010 3:11 PM
To: James
Subject: RE: (real-time update of stock prices)
As expect from the stock initial reactions from analysts are that the proposed
rule is favorable for for-profits:
http://quicktake.morningstar.com/Stocknetjsan.aspx?id=345330
this new proposal fits our expectation that the previously proposed regulation would
be and we see only limited impact on most of the for-profit education companies we
cover. We expect additional color on the impact of this regulation from the companies and
regulators as the proposal moves but we see no need to change any of our fair value
estimates at this time. (Morningstar)
http://www.wtop.com/?nid=111&sid=2010183
"(The) new gainful employment proposal is fair and reasonable and tries to catch the bad
actors while not hurting the good Sterne Agee analyst Arvind Bhatia wrote in a note to
clients.
While the rules may not be as damaging as they will likely limit the sector's growth
rates and make it tough for them to raise analysts said. With more Congressional
hearings the drive to increase oversight of the for-profit sector might not be over,
said Credit Suisse analyst Kelly Flynn.
Initial reaction from Andrew Steinerman:
"I think it is a thoughtful particularly a sensitivity to not displace too many
students in a given year (in a supply constrained sector).
"I surely like the ED's data driven approach."
Andrew
59
http:/fblogs.barrons.com/stockstowatchtoday/2010/07/23/dv-apol -et-al - jump-on- new-for-profit-
ed- rules/
For-profit education outfits such as DeVry Grand Canyon Education and Apollo
Group (APOL) are jumping this according to in reaction to
a piece in the publication Inside Higher by Jennifer that says the U.S.
Department of Education will go easy on new requirements for the schools that have been
eagerly anticipated.
60
From: Martin, Phil
Sent:
To:
Subject:
Friday, July 23, 2010 2:33PM
Kvaal James
update of stock prices)
Everybody up except Corinthian.
http://www.google.com/finance?chdnp=l&chdd=l&chds=l&chdv=l&chvs=maximized&chdeh=0&chfdeh=0&ch
det=1279656000000&chddm=77809&chls=Interva1Basedline&cmpto=NASDAQ:APOL;NASDAQ:CECO;NASDAQ:APE
I;NYSE:BPI;NYSE:DV;NASDAQ:STRA;NASDAQ:CPLA;NASDAQ:LOPE;NASDAQ:COCO;NASDAQ:LINC;NYSE:ESI;NYSE:
urr&cmptdms=e;e;e;e;e;e;e;e;e;e;e;e&q=NASDAQ:EDMC&ntsp=e
I'll keep watching but you can bookmark this.
Phil
61
From: Kvaal, James
Sent:
To:
Subject:
Friday, July 23, 2010 2:34PM
Martin Phil
RE: update of stock prices)
word
From: Phil
To: James
(real-time update of stock prices)
Everybody up except Corinthian.
http://www.google.com/finance?chdnp=1&chdd=1&chds=l&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&ch
det=1279656000000&chddm=77809&chls=IntervalBasedLine&cmpto=NASDAQ:APOLjNASDAQ:CECOjNASDAQ:APE
I;NYSE:BPI;NYSE:DV;NASDAQ:STRA;NASDAQ:CPLA;NASDAQ:LOPE;NASDAQ:COCOjNASDAQ:LINC;NYSE:ESI;NYSE:
UTI&cmptdms=0j0j0j0j0j0j0j0j0j0j0j0&g=NASDAQ:EDMC&ntsp=0
I'll keep watching but you can bookmark this.
Phil
62
From:
Sent:
To:
Subject:
Attachments:
Kanter, Martha
Friday, July 23, 2010 6:37AM
Weiss, Joanne
Re: Gainful Employment Press Coverage
image.png; image.gif; image.png; image.png; image.png; image.png
Thanks! Getting thanks for sending the heads-ups now!
From: Weiss, Joanne
To: Hamilton, Justin; Kanter, Martha; Yuan, Georgia; Kvaal, James; Gomez, Gabriella; Cunningham, Peter; Bergeron,
David
Cc: Miller, Tony; ....._ _______ __,
Sent: Fri Jul 23 05:32:09 2010
Subject: RE: Gainful Employment Press Coverage
I just finished reading the articles-- you all did a terrific job. Hard to imagine a better batch of stories given the
complexity of these regs and the controversy around them. Good planning and good execution.
Joanne
Arne, below are all of today's articles, in case you want to print and read for your car ride.
To: Heather Higginbottom; Roberto Rodriguez; Gavin, Tom; Gannet Tseggai; Robert Gordon; Zelman, Allison L.; Kanter,
Martha; Yuan, Georgia; Kvaal, James; Gomez, Gabriella; Weiss, Joanne; Cunningham, Peter; Bergeron, David
golden?"
63
AP: Proposed federal rules target for-profit colleges {Evenly mixed review)
Reuters: U.S. rule would force education companies to show work {Good)
Colleges
The u.s. Department of Education on Friday will propose a measure to penalize for-profit career coll eges for
dollars.
"Some proprietaty schools have profited and prospered but their students haven't," Secretaty of Education Arne
recommendation sets up three tiers of eligibility, with those in the middl e tier facing enrollment restrictions and
debt-to-income disclosure requirements, and the weakest tier losing access t o federal student aid for new students.
According to the Education Department, if career colleges made no changes, 5% of all programs would no longer be
The recommendation, known as a Notice of Proposed Rulemaking, has been a longtime coming, with federal
time.
The earlier recommendations included proposals on incentive compensation for student recntiters, a clearer
definition of a credit hour and a new metiics by which students must show academic progress in order t o continue
64
criminal justice.
Bloomberg
Loans to Income
said.
Tuition Impact
''You will see some programs being terminated," Urdan said. "No one's going to be kicked out into the
Stocks Decline
65
percent of for-profit co11ege programs would have to issue such warnings if the proposed regulations were
Lose Eligibility
based operator of the University of Phoenix and the biggest U.S. education company, fel132 percent over
Industry Reaction
'Rampant Waste'
66
'Actual Wages'
colleges."
Taxpayers' Right
Duncan said in the statement. "The rules we've proposed today wiU help ensure that career co11ege and
By ERIC GORSKI (AP}- 38 minutes ago
67
Republican Sen. lamar Alexander of Tennessee, a former Education secretary, ridiculed it as "a surprisingly wacky
thei r federal loans - or their graduates will have a debt-to-earnings ratio of less than 20 percent of discretionary
_Ineligible programs will have less than 35 percent of t heir former students paying down the principal on their federal
of total income.
68

,.. ....
Colleges
By TAMAR LEWIN
quarter of the federal aid. In 2008-9, for-profit colleges got $4.3 billion in Pel! grants and $19.6 billion in Stafford loans.
69
The proposed regulation will be publ ished Friday for a 45-day comment period, with final rules issued in November.
Rule
By Kelly Field
enrollment growth at hundreds of other programs. For-profit lobbyists are calling the rule "unwise and unnecessary. "
Turning Up the Heat
70
for early August.
for aid.
Programs that fell somewhere in between would face restrict ions on enrollment growth, would be required to demonstrate
unproven," and " likely to harm students, employers, institutions, and taxpayers."
were published in mid-June. After a period for public comment, they will likely be combined in a package offinal rules due out
in November.
71
By Daniel de Vise
The for-profit sector enrolled 1.8 mi llion students in 2008, more than t riple the number of a decade earlier.
Colleges that fai l to meet those tests would face potential limits on enrollment growth and would be required to warn
income-- toward student loans.
"That 5 percent would be, frankly, the bottom of the barrel," he told reporters in a phone briefing. "The industry as a whole,
The Career College Association, an industry group, said in a statement that the proposed regulation was "unwise,
review of the proposal. Representatives from other for-profit coll eges could not be reached for comment.
The Education Department released 13 other regulatory changes <ht tp://www.washingtonpost.com/wp-
action on the last and most controversial rule to set tle lingering industry obj ections.
to show work
Thu Jul 22, 2010 11:59pm EDT
72
WASHINGTON, June 22 (Reuters)- For-profit education companies could soon have to prove that their former students are
<http://www.reuters.com/finance/stocks/overview?symboi=APOL.O>) and DeVry Inc (DV.N
<http://www.reuters.com/finance/stocks/overview?symboi=DV.N> ), as it could cut off access to federal funding for some
types of training.
But the department left the toughest rule for last-- the monitoring of federal loan default rates-- which could lead to a
"Ninety percent of revenues in many for-profit schools come from student loan programs," Duncan told reporters on a
"Strong career colleges should welcome our proposal," he said. "Overall! firmly bel ieve that for-profit schools are doing a
department said.
department said.
said.
said.
73
74
From: Kvaal, James
Hamilton, Justin To:
Subject: Re: Gainful Employment Press Coverage
Attachments: image.png; image.gif; image.png; image.png; image.png; image.png
Congrats
To: Heather Higginbottom ov>; Roberto Rodriguez
Gavin, Tom @who.eop.gov>; Gannet Tseggai
; Robert Gordon omb.eop.gov>; Zelman, Allison L.
eop.gov>; Kanter, Martha; Yuan, Georgia; Kvaal, James; Gomez, Gabriella; Weiss, Joanne;
Sent: Fri Jul 23 00:18:42 2010
golden?"
Washington Post: Administration proposal aims to tighten oversight of for-profit colleges {Good)
75
Colleges
dollars.
"Some proprietary schools have profited and prospered but their students haven't," Secreta1y of Education Arne
them are saddling students with debt they cannot afford in exchange for degrees and ce1tificates they cannot use."
debt-to-income disclosure requirements, and the weakest tier losing access to federal student aid for new sh1dents.
eligible for federal aid and ss% would be required to warn students about high debt-to-income ratios. Many publicly
traded schools derive close to 90% oftheir revenue from federal aid.
government put f011h its first proposal in late January and the stocks of for-profit colleges have soared and swooned
The Education Department said that this version is "thoughtful," with income ca1culations based on actual graduate
time.
definition of a credit hour and a new met rics by which students must show academic progress in order to continue
The coll eges' programs include training for students to work in the culinary arts, as medical assistants, and in
criminal j ustice.
Bloomberg
Loans to Income
By John Lauerman - Jul 23, 201 0
76
said.
Tuition Impact
The rules may hurt Carmel, Indiana-based ITI Educational, Hoffman Estates, Illinois-based Career
Stocks Decline
Lose Eligibility
77
colleges, Harkin' s report said.
Industry Reaction
' Rampant Waste'
'Actual Wages'
colleges."
78
Taxpayers' Right
79
their federal loans - or their graduates will have a debt-to-earnings ratio of less than 20 percent of discretionary
of total income.
80
Colleges
By TAMAR LEWIN
coll eges whose graduates do not earn enough to repay their loans.
effectively shut down the programs whose students have the most debt and the least likelihood of fi nding good jobs.
The for-profit coll eges have lobbied strongly against the new "gainful employment" regulations. And in a statement Thursday
evening, the Career College Associat ion, which represents the coll eges, call ed the proposed regulations "unwi se, unnecessary,
estimates that the rules would cut off federal aid to about 5 percent of for-profit college programs, represent ing about 8
percent of students, and that about 55 percent of the programs would be required to warn appl icants and students that they
The coalition of education groups, student groups and consumer groups that have pushed for st ronger regulations said they
were glad to have regulat ions proposed in time to go into effect next year - but not impressed with their toughness.
loans can' t afford to pay the principal," said Pauline Abernathy, vice president of the Institute for Coll ege Access and Success.
Barmak Nassirian of the American Association of Coll egiate Registrars and Admissions Offi cers said the new regulations were a
step in the right direction. But like Ms. Abernathy, Mr. Nassirian was particularly unhappy about the standard all owing aid to
coll eges where 45 percent of the graduates are repaying their principal on their loans.
The for-profit sector has mushroomed in the last decade. Whil e overall postsecondary enrollment increased 31 percent from
1998 to 2008, the for-profits' enrollment grew by 225 percent. Although for-profit coll eges, which can get up to 90 percent of
quarter of the federal aid. In 2008-9, for-profi t coll eges got $4.3 billi on in Pell grants and $19.6 billion in Staffor d loans.
The new regulations essentiall y create green, yellow and red zones, based on students' debt levels and repayment records.
To be in the green zone, fully el igible for federal aid, programs would either have to have at least 45 percent of their former
their total income, or 20 percent of their discretionary i ncome.
Programs in the red zone, inel igible for federal aid for new st udents, would have less than 35 percent of their former students
Those in between would be subject to limits on enrollment growth, and required to warn appli cants and students that they
Rule
81
By Kelly Field
Turning Up the Heat
hearing in which lawmakers vowed to crack down on "bad actors" i n the rapidly growing sector. A second hearing is planned
for early August.
82
for aid.
Harris N. Miller, the president of the Career Coll ege Association, called the department's proposal "unwise, unnecessary,
Groups representing students and consumers, meanwhi le, welcomed the proposal, saying it would protect students and
were published in mid-June. After a period for public comment, they wi ll likely be combined in a package of final rules due out
in November.
Qe
By Daniel de Vise
Education Secretary Arne Duncan proposed Thursday that for-profit coll eges be required to show through certain new
83
"That 5 percent would be, frankly, the bottom ofthe barrel/' he told reporters in a phone briefing. "The industry as a whole,
to show work
Thu Jul 22, 2010 11:59pm EDT
types of training.
84
"Strong career colleges should welcome our proposal," he said. "Overall I firmly believe that for-profit schools are doing a
department said.
department said.
said.
said.
The schools, which offer higher education programs in fields like health care and criminal justice, have come under increased
85
From:
Sent:
To:
Arsenault, Leigh
Martin, Phil; Kvaal, James
Subject: RE: Gainful Employment Press Coverage
Attachments: image001 .png; image002.gif; image003.png; image004.png; imageOOS.png; image006.png
.
From: Martin/ Phil
Sent: Friday
1
July 23
1
2010 8:49AM
To: Kvaal
1
James; Arsenault
1
Leigh
Subject: Re: Gainful Employment Press Coverage
From: Kvaal/ James
To: Martin/ Phil; Arsenault/ Leigh
Sent: Fri Jul 23 05:56:38 2010
Subject: Fw: Gainful Employment Press Coverage
From: Hamilton/ Justin
r4:'1:,.f.t-,____
@who.eop.gov>; Roberto Rodriguez
gov>; Gavin
1
To ) who.eop.gov>; Gannet Tseggai
; Robert Gordon @omb.eop.gov>; Zelman
1
Allison L.
eop.gov>; Kanter
1
Martha; Yuan
1
Georgia; Kvaal
1
James; Gomez
1
Gabriella; WeiSS
1
Joanne;
Cunningham/ Peter; Bergeron/ David
Sent: Fri Jul 23 00:18:42 2010
The NYT article has the worst zinger from a friendly: Barmak saying
11
VOU
1
re kidding me
1
45 percent and you/re
goldenr
Congressional criticism is limited to the AP story/ which paints this issue as one of
11
partisan divide
11
It quotes
Lamar saying
1
//a surprisingly wacky proposal from one of the president's best cabinet members" and Harking
86
WSJ: U.S. to Scrutinize For-Profit Career Colleges {Good)
Bloomberg: Obama Cracks Down on For-Profit Colleges, Links Loans to Income {Good}
Chronicle of Higher Ed: Education Department Takes Aim at For-Profits With Student-Debt Rule {Good)
Washington Post: Administration proposal aims to tighten oversight of for-profit colleges {Good}
Reuters: U.S. rule would force education companies to show work {Good)
Colleges
comes at a time when for-profits are under new scrutiny as they capture a growing share offederal student-aid
dollars.
them are saddling students with debt they cannot afford in exchange for degrees and ce1ti.ficat es they cannot use."
federal loans, and the relationshi p between total student loan debt and average earnings upon graduation. The
recommendation sets up three tiers of eligibility, with those in the middle tier facing enroll ment restrict ions and
officials and industry representatives meeting for a year to discuss new higher-education reglllations. The
government put forth its first proposal in late January and the stocks of for-profit coll eges have soared and swooned
The Education Department said that this version is "thought ful," with income calculations based on actual graduate
earnings rather than Bureau of Labor Statistics figures. To give t ime for program improvement, the agency proposed
87
time.
criminal justice.
Bloomberg
Loans to Income
said.
Tuition Impact
88
Stocks Decline
federal student aid may be restricted, the statement said. That may mean that the program would have t o
Lose Eligibility
Industry Reaction
' Rampant Waste'
89
'Actual Wages'
colleges. "
Taxpayers' Right
90
oftotal income.
91
Colleges
By TAMAR LEWIN
92
Rule
By Kelly Field
93
Turning Up the Heat
for early August.
for aid.
unproven," and " likely to harm students, employers, institutions, and taxpayers."
94
in November.
O,t tllru;Jyiqton J.lost
By Daniel de Vise
"That 5 percent would be, frankly, the bottom of the barrel," he told reporters in a phone briefing. "The industry as a whole,
95
to show work
Thu Jut 22, 2010 11:59pm EDT
types of training.
department said.
department said.
said.
said.
96
97
From:
Sent:
To:
Kvaal, James

Subject: Fw: Gainful Employment Press Coverage
Attachments: image.png; image.gif; image.png; image.png; image.png; image.png
J(!)(.8l = iwwho.eop.gov>; Gavin, Tom --= !@who.eop.gov>; GannetTseggai
To: Heather Higginbottom PQ.QAAV; Rodriguez
Robert Gordon .JC: @omb.eop.gov>; Zelman, Allison L.
who.eop.gov>; Kanter, Martha; Yuan, Georgia; Kvaal, James; Gomez, Gabriella; Weiss, Joanne;
Sent: Fri Jul 23 00:18:42 2010
golden?"
NYT: U.S. Releases Rules on For-Profit Colleges (The least f lattering quote: Barmak saying " You're
Washington Post: Administration proposal aims to tighten oversight of for-profit colleges {Good)
98
Colleges
dollars.
"Some proprietary schools have profited and prospered but their students haven't," Secreta1y of Education Arne
them are saddling students with debt they cannot afford in exchange for degrees and ce1tificates they cannot use."
debt-to-income disclosure requirements, and the weakest tier losing access to federal student aid for new sh1dents.
eligible for federal aid and ss% would be required to warn students about high debt-to-income ratios. Many publicly
traded schools derive close to 90% oftheir revenue from federal aid.
government put f011h its first proposal in late January and the stocks of for-profit colleges have soared and swooned
The Education Department said that this version is "thoughtful," with income ca1culations based on actual graduate
time.
definition of a credit hour and a new met rics by which students must show academic progress in order to continue
The coll eges' programs include training for students to work in the culinary arts, as medical assistants, and in
criminal j ustice.
Bloomberg
Loans to Income
99
said.
Tuition Impact
The rules may hurt Carmel, Indiana-based ITI Educational, Hoffman Estates, Illinois-based Career
Stocks Decline
Lose Eligibility
100
colleges, Harkin' s report said.
Industry Reaction
' Rampant Waste'
'Actual Wages'
colleges."
101
Taxpayers' Right
102
their federal loans - or their graduates will have a debt-to-earnings ratio of less than 20 percent of discretionary
of total income.
103
Colleges
By TAMAR LEWIN
coll eges whose graduates do not earn enough to repay their loans.
effectively shut down the programs whose students have the most debt and the least likelihood of fi nding good jobs.
The for-profit coll eges have lobbied strongly against the new "gainful employment" regulations. And in a statement Thursday
evening, the Career College Associat ion, which represents the coll eges, call ed the proposed regulations "unwi se, unnecessary,
estimates that the rules would cut off federal aid to about 5 percent of for-profit college programs, represent ing about 8
percent of students, and that about 55 percent of the programs would be required to warn appl icants and students that they
The coalition of education groups, student groups and consumer groups that have pushed for st ronger regulations said they
were glad to have regulat ions proposed in time to go into effect next year - but not impressed with their toughness.
loans can' t afford to pay the principal," said Pauline Abernathy, vice president of the Institute for Coll ege Access and Success.
Barmak Nassirian of the American Association of Coll egiate Registrars and Admissions Offi cers said the new regulations were a
step in the right direction. But like Ms. Abernathy, Mr. Nassirian was particularly unhappy about the standard all owing aid to
coll eges where 45 percent of the graduates are repaying their principal on their loans.
The for-profit sector has mushroomed in the last decade. Whil e overall postsecondary enrollment increased 31 percent from
1998 to 2008, the for-profits' enrollment grew by 225 percent. Although for-profit coll eges, which can get up to 90 percent of
quarter of the federal aid. In 2008-9, for-profi t coll eges got $4.3 billi on in Pell grants and $19.6 billion in Staffor d loans.
The new regulations essentiall y create green, yellow and red zones, based on students' debt levels and repayment records.
To be in the green zone, fully el igible for federal aid, programs would either have to have at least 45 percent of their former
their total income, or 20 percent of their discretionary i ncome.
Programs in the red zone, inel igible for federal aid for new st udents, would have less than 35 percent of their former students
Those in between would be subject to limits on enrollment growth, and required to warn appli cants and students that they
Rule
104
By Kelly Field
Turning Up the Heat
hearing in which lawmakers vowed to crack down on "bad actors" i n the rapidly growing sector. A second hearing is planned
for early August.
105
for aid.
Harris N. Miller, the president of the Career Coll ege Association, called the department's proposal "unwise, unnecessary,
Groups representing students and consumers, meanwhi le, welcomed the proposal, saying it would protect students and
were published in mid-June. After a period for public comment, they wi ll likely be combined in a package of final rules due out
in November.
Qe
By Daniel de Vise
Education Secretary Arne Duncan proposed Thursday that for-profit coll eges be required to show through certain new
106
"That 5 percent would be, frankly, the bottom ofthe barrel/' he told reporters in a phone briefing. "The industry as a whole,
to show work
Thu Jul 22, 2010 11:59pm EDT
types of training.
107
"Strong career colleges should welcome our proposal," he said. "Overall I firmly believe that for-profit schools are doing a
department said.
department said.
said.
said.
The schools, which offer higher education programs in fields like health care and criminal justice, have come under increased
108
From:
Sent:
To:
Subject:
Attachments:
Updated
From: Kvaal, James
Arsenault, Leigh
Thursday, July 22, 2010 2:18PM
Kvaal, James
RE: Document1 [Compatibility Mode]
07221 o GE briefing papers LA.doc
Sent: Thursday, July 22, 2010 2:15PM
To: Arsenault, Leigh
Subject: Documentl [Compatibility Mode]
Fixed chart
109
From:
Sent:
To:
Subject:
Attachments:
From: Finley, Steve
Kvaal, James
Wednesday, July 21, 2010 2:35 PM
Shireman, Robert
FW: analyst projections on the unseen GE proposal --Deutsche Bank
Download aspx (3).pdf
Sent: Wednesday, July 21, 2010 1:41 PM
To: Yuan, Georgia; Kvaal, James; Bergeron, David
Cc: Kolotos, John; Jenkins, Harold
Subject: analyst projections on the unseen GE proposal-- Deutsche Bank
Interesting to see Deutsche Bank put out a new model on GE based on statements from "a Washington political analysf'
using a 12% debt to income ratio i nstead of the 8% model.
19 July 2010
DB Education Services
Gainful Employment Update
Paul Ginocchio, CFA
Research Analyst
(+1 ) 415617-4207
Adrienne Colby
Associate Analyst
() 212 25().0948
At 12% over 10 years, Gainful Employment is less onerous
A Washington polit ical analyst reported today that Gainful Employment (GEl could
now potentially be a debt repayment met ric of 12% of income over 1 0 years, vs
t he previous 8%. At 12%, using our GE model, we calculate no CY1 OE EPS impact
for APOL and DV, a 3% impact for ESI, and "only" a 26% hit to COCO. We also
updated our original EPS impact, assuming 8% over 10 years, correcting an
inconsistency in our model and updating f or new info - t his significantly reduced
t he EPS hit f or DV and ESI. Our top pick in t he sector remains APOL.
We also updated our original Gainful Employment 8% calculations
In our July 2nd not e, we showed a very significant 80% negative impact to EPS for
ESI and DV f rom a Gainful Employment with debt repayment at 8% of income
over 1 0 years. We showed t ransfer credits in our model, but did not actually
include t hem in our calculations. Correct ing t his error, plus updat ing assumptions
for other new informat ion, reduced t he negative EPS impact under the 8% over 1 0
years scenario. For Apollo, t he CY1 OE EPS impact we originally calculated was -
14%, our updated EPS impact is -10%. For DV, the impact goes from -79% to-
41 %, for ESI from -80% to -66%, and f or COCO f rom -1 20% t o -109%. For a copy
of our fully-dynamic Gainful Employment EPS impact model, please email us.
No update yet on the next Senate hearing on For Profits
At t he last Senate heari ng on t he For Profit industry on June 24th, Senator Harkin
stated t here would be another one in July and at least one more after that. We had
heard f rom contacts t hat August 4th was t he next li kely dat e, with another one in
September. Due to t he required 2-week not ice period and t he August recess
which starts on the gth, t he hearing has to be announced by Friday or t he next one
will not occur until September. An announcement is now likely in t he next four
days.
Apollo remains our favorite idea in the sector
We find APOL attract ive as 1) it is addressing most of its issues already through
t he University Orientation program, which weeds out uncommitted students
before t hey take on student debt, 2) our updated Gainful Employment calculations
(at 12% over 10 years) suggest no impact on revenues and EPS, and 3) Apol lo's 3-
year draft CDR is rising but manageable. We value APOL using relative valuation
scatter plots of CY1 OE PEs versus peers. We support our relative valuation work
with a DCF analysis. Our DCF calculations include explicit 1 0-yr forecasts. In our
terminal value we use a 3.5% long-term growth rate. Our WACC uses a beta of
1.0, a 4% risk free rate, and an elevated 8% risk premium. Key risks include:
negat ive regulatory developments that are not already priced in, higher 2009 CDRs
t han expected, a bigger negative growth impact from t he orientation program or
bachelor's degree focus, or a stronger t han expected recovery in job growth.
Deutsche Bank
Industry Update
2009A 2010E
EPS (USD) 3.79 5.35
P/ E !xl 18_0 8.5
EV/EBITDA (x) 8.1 3.9 3.5
American Publi c Ed. Inc (APEI.OQ),US042.67 Hold
2009A 2010E 2011E
EPS(USD) 127 1.74 2.50
P/ E !xl 28.6 24.5 17.1
EV/EBITOA (x) 13.5 11.6 7.8
Corinthi an Colleges Inc (COCO.OQ),US010.40 Buy
2009A 2010E 2011E
EPS (USD) 0.82 1.63 2 04
P/E !xl 19.4 64 5.1
EV/EBITDA(x) 7.0 3.0 1.9
OeVry (OV.N),U$052.85 Hold
2009A 2010E 201 1E
EPS(USD) 2.30 3.78 5.12
P/ E !xl 22.2 14.0 10.3
EV/EBITDA (x) 12.2 74 4.9
ITT Education Services (ESI.N),U$086.53 Buy
2009A 2010E 2011E
EPS(USD) 7.98 11.04 11.71
P/ E !xl 12.9 7.8 7.4
EV/EBITDA (x) ~ 3 42 as
MICA(P) 007/05/2010
19 July 2010 Business Services & Education DB Education Services
Deutsche Bank l/l
Gainful employment calculations at 12% of income over 10 years
We have updated our analysis of the estimated effects of the Department of Education's
(DoE) Gainful Employment (GE) proposal on revenues and EPS for Apoll o, Corinthian, DeVry
and ITI at a 12% income repayment threshold. There were reports out today from a
Washington political analyst suggesting gainful employment's metrics on debt repayment
could be 12% of income over 10 years, versus the previ ous 8% over 10 years. Due to this
news, we felt it would be helpful to run this potential new scenario through our Gainful
Employment EPS impact model (please see our assumptions in the next section which are
important to understanding our EPS impact).
We bel ieve that under this potent ial new scenario, that Gai nful Employment is less onerous.
The EPS impact to Apoll o and DeVry, we believe, could be zero, at ITI it is very minor, and at
COCO the impact is vastly reduced - from wiping out earnings to "only" a 26% EPS impact.
Figure 1: Summary of impact of Gainful Employment under various scenario's
Estimated
Revs
0%
-3%
0%
-1% -3% -29%
Revs
-10% -4%
-109% -16%
-41 % -19%
-66% -35%
EPS
-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 f or ITI and DeVry did not include
these transfer credits. This was a significant oversight on our part and this change alone took
the EPS impact for DeVry from -79% to about -40%, while for ESI the EPS impact moved
from -80% to -50%. In addition to now correctly incl uding transf er credits, we have made
some other adjustments to our assumptions for all the companies which we outli ne below.
These changes take us from the "original" 8% calcs to the "updated" 8% calcs in Figure 1
above.
Apollo Group: We reduced APOL's online BA enrollment exposure from 14% to 4%
as on APOL's last earnings call they stated most of their on-ground students were
BA's and most of their online students were Associates'. We also increased our
transfer credit assumptions for the online BA program due to its higher cost versus
on-campus. We assume students who chose this higher cost program would not
need many credits to graduat e. Apollo did disclose on its website that its average
debt per bachelor graduate in 2007-2008 was $25,200, whi le for associates was
$14,200. We are still 11 o/o and 12% above these averages in our model, which
should generally account for the 2-years of tuition increases that have occurred.
DeVry: We slightly decreased DeVry's transfer credit assumptions from 1 year in the
BA program to 0.75, to be conseNative. We raised the average BA salary slightly to
be "above $50,000", which is what we believe DeVry BA's average. We also raised
the Associate salary to $33,288, which is the low end of the starting salaries
disclosed in DeVry's 10K.
ITI Technical Institute: We slightly decreased ITI Tech's t ransfer credit assumptions
from 1.25 years in the BA program to 0.75, t o be conseNative. Due to their slightly
Page 2 Deutsche Bank Securities Inc.
Deutsche Bank l/l
lower High School student exposure, ITI's transfer credits may be slightly higher
than DV's, but we assume the same to reduce complexity. We lowered the cash
pay assumption from 10% of tuition to 5% as there is commentary in the 1 OK that
suggests this level; something we overlooked in the first go around. Finally, we
slightly lowered salaries as the $32,800 average salary in 2008, disclosed in the
2009 1 OK, is likely the product of a 80/20 mix of associates/bachelor's, not the 85/15
that we originally assumed.
Corinthian Colleges: We increased our cash pay assumption from 2% t o 5%, as we
assume COCO's cash pay is similar to ESI's, and we now have a hard data point for
ESI. Otherwise, we made no other meaningful changes to our COCO gainful
employment calculations.
Please note that the Dept of Education has yet to release its Gainful Employment
proposal. In the last version of the proposal in January, the Dept proposed requi ri ng
students of For-Profit Title IV eligible programs to be able to replay their total
student debt with less than 8% of a graduates' expected annual income and be
repayable over a 10 year period. With the publi cation of its Program Integrity NPRM
in mid-June, the Dept indicated its plans to release GE in a second NPRM later this
summer (we believe late July to Mid-August ).
Major assumptions in our Gainful Employment calculations
We make five key assumptions in our Gainful Employment EPS impact calculations:
1) The number of credits the average student transfers in with from another institution,
2) We do not assume that students have any debt associated with these transfer
credits, which is not a correct assumption but one we have absolutely no data on t o
help guide us,
3) We assume a percentage of cash tuition contri bution per student,
4) We assume starting graduate salaries for APOL, DV & ESI based on disclosed data
by the companies and their peers (we use Standard Occupational Code-Bureau of
Labor Statistics data, which may no longer be valid, for COCO),
5) We are assuming no offsetting cost cut s or potential revenues, from increased
tuition at certain programs or larger class sizes. In light of this final assumption, our
calculations may somewhat reflect a worst case scenario.
We remind investors that the DoE's GE draft proposed evaluating Title IV eligibil ity on an
individual program by program basis, not on an institution-wide basis. Due to the lack of
granular program dat a available, our GE estimates above are constrained to high level,
school-wide calculations. which could lead to significant variation from the actual program by
program impact.
Finally, we note that although our analysis assumes that schools would cut tuition costs in
response to a GE proposal, schools may decide to eliminate specific programs, rather than
lower tuition. We believe this is largely due to a school's inability to control or limit the
amount of debt a student qualifies for and may chose to take on. In Apollo's FY 3010 100
filing, the company makes the following comments in regards to Gainful Employment: "If this
regulation is adopted in a form similar to the U.S. Department of Education's proposal in the
negotiated rulemaking process, it could render many of our programs, and many programs
offered by other proprietary educational institutions. ineligible for Title IV funding ... If a
Page 3
Deutsche Bank l/l
Page4
particular program ceased to be eligi ble for Title IV funding, in most cases it would not be
practical to continue offering that course under our current business model."
We have included snapshots of our Gainful Employment analysis for Apollo, Cori nthian,
DeVry and ITI in Appendix 1, at the end of this note.
Deutsche Bank l/l
Appendix 1
Figure 2: Gainful Employment Calculations- Apollo Group
St ep 1 - Cal culat1ng potent ial t u1t1on cuts Source/Calc APOL APOL APOL
Tuition & Fees
source
Program
% of Total Enrollment
Avg. Pell Grant '08-'09 (DoE)
Percent of Students getting Pell
Assumed years of credits t ransferred
Total Tuit ion & Fees
Cash/out of pocket payments
Pell Grants
Avg. Debt f rom School
Monthly payments over 10 years at 6.8% interest rate
DB ests.
DoE
DoE
DB ests.
calc
7%
calc
sum
mort calc
$ 67,000
online
website
BA
4%
$ 2,695
55%
2.00
$ 33,500
2,345
2,960
28,195
$ 324
$ 54,400 $ 22,200
avg. ground online
website website
BA Assoc
38% 40%
$ 2,695 $ 2,695
55% 55%
1.50 0.20
$ 34,000 $ 19,980
2,380 1,399
3,700 2,664
27,920 15,91 7
$ 321 $ 183
lrnpl1ed Required Salary to meet monthly r:! e

12%
Assumed starting salary
Total monthly student debt payments
Max Debt Load
add Avg. Pel I Grants
Total Tuit ion & Fees
Implied Pr'ice.Cut @-8% ofsalary over 10yrs
Step 2- Revenue Reduction
Estimat e of impact of current Gainful Employment
PhD & Master's
Online Bachelor's degrees*
On campus Bachelor's degrees*
Online associates**
On campus associates
DB est.
Mort. Cal c.
o/o of Revs
19%
4%
38%
39%
0%
100%
$ 50,000 $ 50,000
$ 500 $ 500
43.448 43,448
2,345 2,380
2,960 3,700
$ 48,753 $ 49,528
46% 46%
Price Cut Rev impact
0% 0.0%
0.0% 0.0%
0.0% 0.0%
0.0% 0.0%
0% 0.0%
0.0%
St ep 3 - Impact t o EPS and PE EPS PE
Current Calendar 201 OE DB EPS
NOt<> PriCes as ol July 19" r PM E1
I ' JP-eut sc t/>31 star11trg b#l:hell>t'ss.l.,yls$501:
rJNcprJcecut tf .lf
Soorcs. Com,oany dJt.) 06utsche &tnt estimates
$ 5.66 8.6x
$ 5.66 8.6x
$ 25,000
$ 250
21,724
1,399
2,664
$ 25,787
29%
Page 5
19 July 2010 Business Services & Educati on DB Educati on Services
Deutsche Bank l/l
Figure 3: Gainful Employment Calculations- DeVry
---------------------------------
Step 1 - calculation Source/Calc DV DV
Exposure to HS Grads Co. comments 30% 30%
Tuition & Fees $ 61,700 $ 35,038
source 10-K 10-K
Program BA Assoc.
%of Total Enrollment 52% 15%
Avg. Pell Grant '08-'09 (DoE) DoE $ 2,572 $ 2,572
Assumed years of credits transferred DB est. 0.75 0.25
Total Tuition & Fees calc $ 50,131 $ 30,658
Pell Grants calc 6,420 3,457
Avg. Debt from School sum 38,698 24,135
Average Starting Salary est, See Calc A $ 50,071 $ 33,288
Monthly payment at 8% of salary
I
12% $ 501 $ 333
Max Debt Load, over 10 years, 6.8% int.rate mort calc $ 43,510 $ 28,926
Cash/out of pocket payments from above 5,013 3,066
add Avg. Pell Grants from above 6,420 3,457
Total Tuition & Fees $ 54,943 $ 35,449
lmphed Price Cut@ 8% of salary over lOyrs 10% 16%
Step 2 - Revenue Reduction
Estimate of impact of current Gainful Employment %of Revs Price Cut Rev impact
Ross Medical 12% 0% 0.0%
Keller Graduate School 14% 0% 0.0%
Bachelor's degrees* 40% 0% 0.0%
Associate's degrees 12% 0% 0.0%
US Healthcare & Chamberlain 15% 0% 0.0%
Becker CPA/CFA & Other (Fanor, Advanced Academics HS) 7% 0% 0.0%
Total revenue impact 100% 0.0%
Estimated impact from Gainful Employment
Note Pnces as of July rg .., J PM ET
1' /P- cur .ssumlrq swrorq Oachelors .. lary Is $50K
1" /Pnce cur assum.,gnanJ119.scNres salary IS $271<
Source Company datil ono Oe<Jiscl>o 8ilnk entnlilles
Page 6
$
$
4.48
4.48
0%
11 .9x
11 .9x
0%
Deutsche Bank l/l
Figure 4: Gainful Employment Calculations -ITT Education
---------------- ----
Step 1 -calculat ion Source/Calc ESI ESI
Tuition & Fees $ 69,600 $ 34,800
source 10-K 10-K
Program BA Assoc.
% ofTotal Enrollment Company data 15% 85%
Avg. Pell Grant '08-' 09 (DoE) DoE 2,550 2,550
Assumed years of cred1ts transferred DB ests. 0.75 0.25
Total Tuition & Fees calc $ 56.550 $ 30,450
I
5% 2,828 1,523
Pell Grants calc 6,630 3,570
Average Starting Salary est. See Calc A $ 50,000 $ 29,000
Implied monthly payments to cover debt (D) (8%. 1 Oyrs, 6.8%) $ 542
Implied starting salary by debt !D) $ 54,194
Max Debt load, over 10 years, 6.8% int.rate mort calc $ 43,448 $ 47,093 $ 25,200
Cash/out of pocket payments from above 2,828 2,828 1.523
add Avg. Pell Grants from above 6,630 6,630 3,570
Implied Pnce Cut@ 8% oi salary over10yrs -6% -1 ~ ; .
Bachelors
Associates
%of Revs
15%
85%
100%
Price Cut Rev impact
-6% -1.0%
-1% -0.4%
-1 .4%
Nolo Prices as of July 19'), 1 PM ET
Source COmpany data aOO Deutsch6 fUnk esflmates
$
$
11.04
(0.36)
10.68
-3%
8.0x
8.3x
3%
$ 292
$ 29,181
$ 25,358
1,523
3,570
$ 30,450
Page 7
Deutsche Bank l/l
Figure 5: Gainful Employment Calculations- Corinthian Colleges
, Source/Calc COCO COCO COCO COCO COCO COCO
Exposure to HS Grads ttl Co oomments 5%to tO%
TUitiOn & Fees $ 15.409 $31,000 $ 26,450 $ 26.450 $ 26.450 $ 19.026
source College Nav Assoc. College Nav College Nav College Nav College Nav
Program Med ASSISt Biz& HC AutoMech D1esel Auto Body Electncian
%of Total Enrollment -4% (6% revsl <I% II% revsl <I% II% revsl <1%11%revsl
Avg Pell Grant '08-'09 (DoE I DoE $ 2.407 $2.407
Percent of Students genmg Pell DB est 90% 90%
Total Tuition & Fees calc $ 15,409 $31,000
I 5% 770 1,550
Pell Grants cafe 2.100 4,333
Avg Debt from School sum 12.4n 25.117
Average Starting Salary SOCoodes $ 24.060 I $ 24.200 1
sou roe BLS DB est
lmphed monthly paymerus to oover debt in row IS (8%. IOvrs, 6.8%1
lmplled Sl'l<Mgsalarv by.;lebtm row IS
Monthly poymem t ofsatuy I
12%
Max Debt Load. over 10 years. 6 S9'o 1ntrate mort calc $ 20,907 21,029
Cash/out of pocket payments !rom abOve 770 1,550
add Avg Pell Grants !rom abOve 2100 4,333
Total Tu1t1on & Fees 23.844 26,911
Estimate of impact of current Gainful Employment %of Revs PnceCut Rev impact
CertifiCate 1n Healthcare 56% 0% 0.0%
Assoaate's 1n Bus1ness 13% -13% -17%
Associate's'" Cnmmal Just1oe 16% 13% 2.1%
Auto mechan1c 10% 2% .02%
D1ese1 mechan1e+ 2% 20% 0 4%
Auto body 2% II% 02%
Trades 196 D% DO%
Total revenue impact IOD9b -3.4%
., rr EPS PE
Current Calendar 2D1 DE DB EPS
EPS 1mpact hom revenoo decrease wuh no cost offset
Esbmated 1m pact from Ga1nful Employment
No!e Prie; as of July IS" I PM ET
$
$
I 71
(D45l
126
269'o
6.0<
S.lx
na
$ 2,407 $
90%
$ 26,450 $
1,323
2,100
22.961
$ 25.880 $
BLS
$ 289
$ 2a905
$ 25e $
$ 25,117 $ 22.489 $
1.550 1,323
4,333 2.100
31,000 25.977
POC-e cut assummg stdrting salary for In business and Comindl Justice is $24k. $26K tor Auto Mechanic. $33/K for Diesel Mechanic and $30K for Auto Body.
SWu:e Cc"'Piny d.>t mi OeU!s.;he S.nl-esrr,.te>
Page 8
2.407 $ 2.407 $ 2,407
90% 90% 90%
26,450 $ 26,450 $ 19.026
1.323 1,323 951
2,100 2.100 2.100
22.961 22.961 1!,908
32.880 $ 29.620 $ 35.990
BLS BLS BLS
$ 25.739 $ 31,274
1.323 951
2,100 2,100
29,227 34,391
Deutsche Bank l/l
Appendix 2
Apollo Group APOL.OQ 45.56 (USD) 16 Jul 1 0 2
* Prices are sourced from local exchanges via Reuters. Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Disclosures marked with an asterisk may also be requi red by at least one jurisdi ction in addition to t he United States. See
"Important Disclosures Required by Non-US Regulators" and Explanatory Notes.
2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by thi s company.
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.
website at http:Uqm .db .com/qer/disclosure/DisclosureDirectory.eqsr.
The views expressed in this report accurately reflect t he personal views of the undersigned lead analyst about t he subject
issuers and the securit ies of t hose issuers. In addit ion, t he undersigned lead analyst has not and will not receive any
compensat ion for providi ng a specific recommendat ion or view in this report. Paul Ginocchi o
Deutsche Bank l/l
Historical recommendations and target price: Apollo Group (APOL.OQ)
(as of 7/16/2010)
'00.00
90.00
80.00
70.00
Q)
0
~ 60.00
0...
>-
50.00 ....
~
::J
40.00 0
Q)
U)
30.00
20.00
'0.00
Strong Buy
Buy
Market Perform
Underperform
Not Rated
Suspended Ratmg
Buy
Hold
Sell
Not Rated
Suspended Rating
0.00 +----.----,----,----,----.----.----.---.----.----.----.---_J
Jul07 OctO? Jan08 Apr08 Jul 08 Oct08 JanOO Apr09 Jul09 Oct09 Jan'O Apr'O
Date
1. 4/20/2009: Buy, Target Price Change US080.00 2. 7/1/2010: Buy, Target Price Change US075.00
Equ1ty ratmg key Equ1ty ratmg d1spers1on and bank1ng relat1onsh1ps
Buy: Based on a current 12- month view of total share-
holder return (TSR = percentage change in share price
f rom current price to projected target price plus pro-
jected dividend yield), we recommend t hat investors
buy the stock.
holder return, we recommend that investors sell the
stock
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:
10% or more over a 12-month period
Hold: Expected total return (i ncluding dividends)
Sell: Expected total return (including dividends) of-
Page 10
500 . - - - 4 9 ' ~ ~ - - ~ ~ - - - ~ ~ % . - ~ ~ ~ ~ ~ ~ ~ ~
400
300
200
100
0 +-_L_-
Buy
1% 27%
Hold Sell
0 Companies Covered Iilli Cos. w/ Banking Relat ionship
Deutsche Bank l/l
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review t his information bef ore investing.
http://qm.db.com.
Australia: This research, and any access to it, is intended only for "wholesale cl ients" within t he meaning of t he Australian
Corporations Act.
amount by the commission rate agreed with each customer. St ock t ransactions can lead to losses as a result of share price
f luctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming f rom foreign exchange
f luctuations.
New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of the
Russia: This informat ion, interpretat ion and opinions submitted herein are not in the context of, and do not constit ute, any
appraisal or evaluat ion activity requiring a license in the Russian Federat ion.
60 Wall Street
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price of any stock.
From:
Sent:
To:
Subject:
Terrie, Omar [OTerrie@cci.edu]
Tuesday, July 13, 201 o 4:36 PM
Arsenault, Leigh
Monday, July 19th confirmed
Attachments: image001 .jpg; Jack Massimino and Mark Pelesh BIO.docx; CCi FastFacts.pdf
Good afternoon Leigh,
Yes, Jack Massimino and Mark Pelesh are available next Monday, July 19
1
h at 2pm to meet with
Undersecretary Kvaal. I have attached bios for both gentlemen and a one page profile on Corinthian Colleges,
Inc. Would you mind sending the room number within the ED dept where the meeting will take place?
Thank you for your patience and help with this. It is truly appreciated.
Regards,
Omar Terrie II Manager, Grassroots Advocacy
Corinthian Colleges, lnc. ll 1350 I St, N.W. Suite 1270, Washington, DC 20005
Ph: (202) 682-9494 11 Fax: (202) 682-9170 II OTerrie@cci.edu II www.cci.edu
From:
Sent:
To:
Subject:
Terrie, Omar [OTerrie@cci.edu]
Arsenault, Leigh
Attachments:
RE: Monday, July 19th confirmed
image001 .jpg
Good morning Leigh,
Unfortunately the week of July 26th does not work since Jack is flying out from California to be here all next
week and is already booked for the week of the 26th. Can we reschedule for another time either on the 19th or
later in the week on Tuesday, Wednesday, or Thursday?
Omar Terrie
From: Arsenault, Leigh [mailto:Leiqh.Arsenault@ed.govl
Sent: Friday, July 16, 2010 10:39 AM
To: Terrie, Omar
Subject: RE: Monday, July 19th confirmed
Omar,
Unfortunately, Deputy Under Secretary James Kvaal is now unavailable to meet at this time. I apologize for
the inconvenience.
Would you be willing to send time for the week of July 26tn that might work for Jack and Mark?
Thanks in advance for your understanding and flexibility.
Best,
leigh
Office of the Under Secretary
U.S. Department of Education
leigh.arsenault@ed.gov
From: Terrie, Omar [mailto:OTerrie@cci.edul
Sent: Tuesday, July 13, 2010 4:36 PM
To: Arsenault, Leigh
Subject: Monday, July 19th confirmed
Good afternoon Leigh,
Yes, Jack Massimino and Mark Pelesh are available next Monday, July 19th at 2pm to meet with
Undersecretary Kvaal. I have attached bios for both gentlemen and a one page profile on Corinthian Colleges,
Inc. Would you mind sending the room number within the ED dept where the meeting will take place?
Thank you for your patience and help with this. It is truly appreciated.
Regards,
Omar Terrie II Manager, Grassroots Advocacy
Corinthian Colleges, lnc. ll 1350 I St, N.W. Suite 1270, Washington, DC 20005
2
Ph: (202) 682-9494 11 Fax: (202) 682-9170 II OTerrie@cci.edu II www.cci.edu
3
Jack Massimino, Executive Chairman of the Board
Jack D. Massimino has been Executive Chairman of the Board since July 2009. He served as Chief Executive Officer
of the company from November 2004 through June 2009. In addition, he was Chairman of the Board from August
2008 through June 2009.
Mr. Massimino was first appointed to Corinthian's Board of Directors in 1999, and has served as Chair of the Audit
Committee and as a member of the Compensation Committee. Prior to Corinthian, Mr. Massimino served as
President and Chief Executive Officer of Talbert Medical Management Corporation, a publicly traded physician
practice management company from 1995 through late 1997. Prior to his association with Talbert, Mr. Massimino
held various senior executive positions with FHP International Corporation, a multi-state, publicly traded HMO, with
revenues in over $4 billion.
Mr. Massimino holds a Bachelor of Arts degree in Psychology from California Western University and earned a
Master's Degree in Management from the American Graduate School for International Management. He has served
on several boards, including Talbert Medical Management Corporation, FHP, Inc., Texas Health Plans, Great States
Insurance Company, Art Institute of Southern California, Thunderbird World Business Advisory Council and the
Orange County Business Committee for the Arts.
Mark Pelesh, Executive Vice President for Legislative and Regulatory Affairs
Mr. Pelesh has served as Corinthian's Executive Vice President for Legislative and Regulatory Affairs since
September 2003. Prior to joining Corinthian, Mr. Pelesh was a partner in the Washington DC law firm of Drinker
Biddle & Reath LLP from 1997 to September 2003, where he founded and led the firm's Education Law Group. His
work with Drinker Biddle & Reath LLP encompassed dealing with Congress, the U.S. Department of Education and
many state authorities, as well as representation of accrediting agencies. He also served as a participant in the
Department of Education's negotiated rulemaking procedures.
From 1981 to 1997 Mr. Pelesh was with the law firm of Cohn and Marks, where he served as partner from 1985 to
1997 and associate from 1981 to 1985. At Cohn and Marks, Mr. Pelesh helped establish the firm's education practice
and served on its management committee. He began his career at the law firm of Arnold & Porter, where as an
associate from 1978 to 1981 his work focused on corporate, antitrust, real estate and litigation matters.
Mr. Pelesh holds a J.D. degree from Yale Law School, where he was an editor of the Yale Law Journal, and a
Bachelor's degree with Honors in History from Stanford University, where he was elected Phi Beta Kappa. His articles
on the legal issues surrounding education have been published in law reviews at Duke and Notre Dame and for the
National Association of College and University Attorneys, among other publications.
CCi
CORINTHIAN
COLLEGES, INC.
Who WeAre
Our mission is to help students prepare for careers that are in demand
or advance in their chosen field. With more than 105,000 students as
of September 30, 2009, we are one of the largest post-secondary educa-
tion companies in North America. We offe.r short-term diploma pro-
grams and associates, bachelor's, and master's degrees for occupations
in demand. Our main program areas include health care, criminal jus-
rice, business, information technology, transportation technology and
maintenance, and construction trades. In addition, we offer online degree programs that include business,
accounting, criminal justice, paralegal and information technology.
Everest

Three Schools

Corinthian changes lives by providing students the

C 0 L L E. 0 E
skills they need to pursue the careers they want. And
EST. 18G3
we do this through three distinct educational systems
Interesting Facts
Private sector graduation rates exceed public
schools among 1st Generation college stu-
dents 65o/o to 45o/o -NCES BPS 1996-2001
Private sector students report average in-
creased income gain of 54o/o to public
schools 36o/o -NCES BPS 2004-2006
Legal
Criminal Justice
Paralegal
Technology
Network Security
Network Systems Administration
A Few Programs
Business
Accounting
Business Administration
Construction Management
Office Skills
Sales and Marketing
Software Technologies
Health care
Dental Assisting
Medical Assisting
Medical Insurance Billing and Coding
Medical Office Administration
Pharmacy Technology
CCi Legislative and Regulatory Affairs 111350 I St, NW, Ste 1270 II Washington, DC 2000511 P:(202) 682-949411 oterrie@cci.edu
From:
Sent:
To:
Subject:
Martha gmail.com]
Friday, July 16, 2010 8:31 AM
Kvaal, James
Apollo Group Vice Chair Sells $6.6M Worth - TheStreet
http://www.thestreet.com/story/10804970/1/apollo-group-vice-chair- sells- 66m-worth.html
Sent from my iPhone
From:
Sent:
To:
Cc:
Subject:
Kanter, Martha
Thursday, July 15, 2010 7:33AM
Weiss, Joanne; Rosenfelt, Phil
Rose, Charlie; Cunningham, Peter; Hamilton, Justin; Kvaal , James
FYI : Final Alert Memorandum, "Lender Agreements between Sallie Mae and Student Loan
Xpress and Corinthian Colleges, Inc. , Contained Inducements", Control Number ED-
OIG/L02K0001
Here's the article posted yesterday in the Chronicle of Higher Education.
July 2010
2 Lenders Violated Ban on Education Dept. Audit Finds By Kelly Field Washington
Sallie Mae and Student Loan Xpress offered illegal inducements to borrowers and and
should be penalized for their a new audit by the inspector general of the U.S.
Department of Education concludes. But the department may have few means of punishing the
lending companies.
According to a report on the which was released on Sallie Mae offered parents
of students attending Corinthian Colleges a $500 closing-cost credit on a Sallie Mae home
mortgage if they took out a Parent PLUS loan from the lender.
Student Loan tied Corinthian students' access to private loans to the
company's guaranteed-loan volume and its cohort default the audit found. Under a risk-
sharing agreement between the lender and Student Loan Xpress could stop issuing
private loans to Corinthian students if private loans made up more than 15 percent of the
lender's total volume at any Corinthian college or if any colleges' cohort default rate
exceeded 15 percent. In Student Loan Xpress agreed to help Corinthian develop a
student-aid Web site with a link to the lender's own site.
The audit recommends that the Education Department take "appropriate administrative action''
against the lenders. it's unclear how the department might penalize the lenders:
Student Loan Xpress exited the federal guaranteed-loan program in in the thick of the
credit and Sallie Mae stopped making federal loans this after Congress ended
the bank-based program in favor of direct in which federal loan dollars flow
directly to colleges. The department noted that shift in its response to the saying
that any or termination of future participation" in federal lending
"would have little effect."
In a separate response to the Sallie Mae said that the closing-cost credit was not an
inducement because it was not marketed to parents or students and because Corinthian parents
could borrow PLUS loans even if they didn't take out a Sallie Mae home loan.
Student Loan Xpress also maintained its while arguing that any potential problems
have been resolved by a recent settlement agreement with the department. The which
was reached in March dealt with problems identified in a separate audit that also
involved Fifth Third Bank. That audit also touched on the alleged though it's
unclear whether the resulting restrictions on offering services to colleges apply or
just to Corinthian's agreement with the University of Wisconsin at Milwaukee.
From: Joanne
Sent: July 2010 6:13AM
To: Phil
Cc: Martha; Charlie; Peter; Justin
2
Subject: RE: Final Alert MemorandumJ "Lender Agreements between Sallie Mae and Student Loan
Xpress and Corinthian CollegesJ Inc.J Contained Inducements"J Control Number ED-OIG/L02K0001
Joanne
From: RosenfeltJ Phil
Sent: ThursdayJ July 15J 2010 12:51 AM
To: WeissJ Joanne
Cc: KanterJ Martha; RoseJ Charlie
Subject: RE: Final Al ert MemorandumJ "Lender Agreements between Sallie Mae and Student Loan
Joanne: ~ ~ ~
~ ~ > ! Please let me know
if you have any questions about it. Thanks.
Phil
- - - - -Original Message-----
From: WeissJ Joanne
Sent: WednesdayJ July 14J 2010 3:57 PM
To: Rosenfel tJ Phil
Cc : KanterJ Martha; RoseJ Charlie
Subject: FW: Final Alert MemorandumJ "Lender Agreements between Sallie Mae and Student Loan
Joanne
From: YuanJ Georgia
Sent : WednesdayJ July 14J 2010 3:30PM
To: RoseJ Charlie; WeissJ Joanne
Subject: FW: Final Alert MemorandumJ "Lender Agreements between Sallie Mae and Student Loan
This is the document that Martha mentioned during todayJs meeting.
3
Georgia
From: Carolyn
To: Harold
Cc: Georgia; Franklyn
Subject: FW: Final Alert "Lender Agreements between Sallie Mae and Student Loan
Xpress and Corinthian Contained Control Number ED-OIG/L02K0001
From: Daniel
To: OIG All Audit Staff; OIG ITACCI; OIG Report Distribution; OIG All Inspection Staff;
@omb.eop.gov'
Subject: Final Alert "Lender Agreements between Sallie Mae and Student Loan
Xpress and Corinthian Contained Control Number ED-OIG/L02K0001
This is to notify you of the issuance of the subject alert Control Number ED-
OIG/L02K0001 . A copy of the report is attached. You are being notified because the report
may contain information of interest to you. No response on your part is necessary.
During our audits of {(Everest Institute's Lender ED-OIG/A02J0001 and {(National
Aviation Academy-New Lender we reviewed agreements
between two Sallie Inc. (SLM) and Student Loan Inc. and
Corinthian Inc . which contained inducements prohibited by the Higher
Education Act of as amended. we found three inducement violations: (1) a
private loan agreement between SLM and Corinthian that offered parents of Corinthian students
inducements to borrow PLUS loans with (2) a private loan agreement between SLX and
Corinthian that tied Corinthian access to alternative private loans to
FFELP loan volume and the Federal cohort default and (3) another private loan agreement
between SLX and Corinthian in which SLX would provide Corinthian with assistance in the
development of a Web site and administrative reports.
The draft of this alert memorandum was provided to FSA. In its which is attached
to the final alert FSA concurred that the agreements examined by OIG need further
review and appropriate action. FSA did not agree with the draft recommendation that
it take action against SLM and SLX under Subpart G of 34 C.F.R. Part 682. As of July
no new loans will be made under FFELP. a suspension or
termination of future participation would have very little effect. FSA responded to our
suggested administrative remedy with a discussion of appropriate remedies after the July
2010 changes to FFELP. We have revised our draft recommendations for administrative action
under specific regulatory provisions and have instead recommended that FSA take appropriate
administrative without suggesting the specific action that should be taken.
4
In accordance with the Freedom of Information Act (5 u.s.c. reports issued by the
Office of Inspector General are available to members of the press and general public to the
extent information contained therein is not subject to exemptions in the Act.
If you have any please contact me at (646) 428- 3888.
Dan Schultz
Regional Inspector General
New York/Boston Audit Region
From: Charlie
To: Martha; Adrian; Phil
Cc: Joanne; James
Subject: RE: Kathy Tighe check in
Phil:
From: Martha
Sent: July 2010 2:20PM
To: Adrian
Cc: Joanne; Charlie; James
Subject: Kathy Tighe check in
Charlie
--r---------------------------------------------------------------------------------------
5
6
From:
Sent:
To:
Subject:
Attachments:
Martin, Phil
Monday, July 12,2010 8:13PM
Kvaal, James
Fw: for-profit stories
For Profit college stories.doc
This is from stephanie, incorporating leigh's work, I haven't reviewed yet (doing interviews for new roommate in our
house) , let me know what you think or I'll get back to you first thing in am.
From: Anyaeche, Stephanie
To: Martin, Phil
Sent: Mon Jul 12 16:20:44 2010
Subject: for-profit stories
Update
Stephanie Anyaeche
Intern for Financial Education and Student Aid
Office of the Secretary
stephanie.anyaeche@ed.gov
202.401.0425 (t)
202.205.0063 (f)
7
From:
Sent:
To:
Cc:
Subject:
Attachments:
Justin,
Kvaal, James
Wednesday, July 14, 201 o 5:48 PM
Hamilton, Justin
Martin, Phil ; Arsenault, Leigh
FW: for-profit stories
For Profit college stories.doc
8
USA Today: For-profit Colleges' Increased Lending Prompts Concerns by Justin Pope
August 2009
http://www .usatoday.com/news/ education/2009-08-15-profit-college-lending N.htm
Jessica Rosales was seventeen when she enrolled at Westwood, but dropped after one term. She was told
she owed $18,000, half of which was in collection and interest fees. Ms. Rosales states she was mislead by
the school about the source of her student aid and that she did not enter into a loan agreement with the
school. The interest on the loan has been forgiven; however, the bill remains on her credit report, she
receives collection calls and I shaving trouble securing a mortgage.
McClatchy-Tribune News Service: A lesson they won't forget: For-Profit School error costs students
certification
June 22, 2010
http:l/articles.chicagotribune.com/2010-06-22/news/ct-met-for-profit-schools-20100622 1 for-profit-
health-careers-illinois-school
Denise Parnell, a single mother and former student at the Illinois School of Health Careers, enrolled at
ISHC under t he impression that attending the school would allow her to become a certified nursing
assistant. After investing more than $13,000, including $8,546 in federal loans, Ms Parnell was informed
by the school that she would not be able to take the state certified nursing assistants exam because t he
schools program was not approved by the Illinois Department of Public Health. Ms. Parnell along with
former ISHC students are fil ing a lawsuit against the school claiming they were given material explicitly
stating she would be qualified to take the state certified exam. The school has offered to pay for students
to attend an approved certified nursing assistant's program in the Chicago area; in addition to paying
$1500 for additional expenses.
CBS News: For-Profit College: Costly Lesson 60 Minutes
January 30, 2005
http://www.cbsnews.com/stories/2005/01/31/60minutes/main670479.shtml
Three top graduates of Brooks College, a college owned by the Career Education Corporation, stated they
were signed up for tens of thousands of dollars in student loans after the school promised them work
placement after college. These students have been unable to find jobs because they claim Brooks College
is not recognized as a credible school and has not provided assistance with work placement as initially
promised during enrollment. These students are joining the many others who are filing a lawsuit against
CEC, a company where government backed loans make up 60% of their revenue.
Washington Monthly: The Subprime Student Loan Racket by Stellhen Burd
November/December 2009
http://www. washingtonmonthlv .com/featu res/2009/09ll.bu r d.htm I
Excerpt:
Since graduating in 2008, Leveque has been unable to find a nursingjob, perhaps
because she never learned 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 qjjher 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, ''!made one mistake, and I will be paying for it for the rest of my
ltfe. "
ABC News: How For .Profit Colleges Are Uke Subprine Mortgages
June 19, 2010
http:ljabcnews.go.com/Business(TheBigMoney/profit-colleges-subprime-mortgages/story?id=10949046
Time: For-Profit Colleges: Educators or Predators?
June 29, 2010
http://www.time.com/time/business/article/0,8599,2000160,00.html?xid=rss-topstories
WFAA TV- news report: Westwood College Expose
http://fight-westwood .blogspot.com/2009/03/westwood-college-scam.html
Filed lawsuit against American International University AIU
http://aiulawsuit.com/
AIU is being sued for committing fraud on a federally appointed accreditation authority, Southern
Association of Colleges and Schools (SACS) to receive accreditation and federal funds. The school is being
charged with committing fraud against student through selective enrollment, falsely stating that an AIU
education increases graduates income and opportunities and falsifying credibility of AIU professors
ABC News: Why the
1
College' lawsuit Is No Joke
August 16, 2009
http://abcnews.go.com/Business/TheBigMoney/storv?id=8315461&page=1
lawsuit Accuses U. of Phoenix of Protecting Its Default Rate at Students' Expense
January 19, 2009
http://chronicle.com/article/lawsuit-Accuses-U-of-Phoen/1450/
Former students at the University of Phoenix are filing a lawsuit against the school for using
deceiving practices to mask the status of student-loan defaults. The University of Phoenix is
being charged with paying off loans from students who withdraw from the school soon after the
enroll, and then eliciting payments from students under more difficult terms than the original
loan agreement. The students filing the lawsuit obtained federal loans through banks and after
withdrawing for the school, the University of Phoenix sent the dollars back to the original
lender, without consent from the students and sought to collect tuition directly from the
students.
As for-profit colleges flourish, focus turns to grads' success and debt
January 21, 2010
http://www.consumerwarningnetwork.com/2010/01/21/for-profit-colleges-under-the-
microscope-as-students-complain/
23 year old Zarina Musheyera, graduated from Westwood College with a fashion
merchandising degree in 2008. Zarina now owes more than $60,000 in debt after not being able
to find a job in her field of study. Her current job does provide enough support to enable Zarina
to meet her monthly loan payments, which is expected to reach $1000 a month. Her student
loan debt has maxed out her credit cards and has made it impossible for her to obtain a loan to
buy a car. Thirty-eight year old, William Tooley is another former student at Westwood College.
William enrolled in the school's $68,380 game software development program and had dreams
of attending an engineering graduate program after graduating from Westwood. William states
he was under the impression from admissions officer and advisors that his attendance at
Westwood would allow him to apply for graduate degree programs at other schools.
Unfortunately, William was denied acceptance to engineering graduate programs because his
degree from Westwood was not from a regionally accredited program.
From: Minor, Robin
Sent:
To:
Thursday, April 08, 201 o 1 :38 PM
Gust, Mary
Subject:
Attachments:
FW: education connection commercials
4-7-10 Smartmoney.doc
MaryJ
From: ShiremanJ Bob
Sent: ThursdayJ April 08J 2010 1:30 PM
To: MinorJ Robin
Thanks.
Cc: GustJ Mary; ManheimerJ Ann; ArsenaultJ Leigh; DannenbergJ Michael
Subject: Re: education connection commercials
Great.
----- Original Message
From: MinorJ Robin
To: ShiremanJ Bob
Cc: GustJ Mary; ManheimerJ Ann; ArsenaultJ Leigh; DannenbergJ Michael
Sent: Thu Apr 08 11:53:30 2010
Subject: RE: education connection commercials
Mary and I discussed this
From: ShiremanJ Bob
Sent: WednesdayJ April 07J 2010 9:31 PM
To: MinorJ Robin
Cc: ManheimerJ Ann; ArsenaultJ Leigh; DannenbergJ Michael
Subject: education connection commercials
Robin-
OJ)(6)
-Bob
Robert Shireman
Deputy Undersecretary
u.s. Department of Education
(202) 260-0101
From: Woodward, Jennifer
Sent:
To:
Thursday, April 08, 201 o 5:43 PM
Jenkins, Harold; Wolff, Russell
Subject:
Attachments:
Importance: High
Any day next week works for me between 2 and 4 PM.
From: GustJ Mary
Sent: Thursday) April 08J 2010 5:38 PM
To: Jenkins) Harold; Woodward) Jennifer; WolffJ Russell
Subject: FW: education connection commercials
Importance: High
and I briefl discussed toda
From: Shireman) Bob
Sent: Wednesday) April 07J 2010 9:31 PM
To: MinorJ Robin
Cc: ManheimerJ Ann; Arsenault) Leigh; Dannenberg) Michael
Subject: education connection commercials
Robin-
- Bob
Robert Shireman
(202) 260-0101
2
From:
Sent:
To:
Subject:
Attachments:
Importance:
Woodward, Jennifer
Wolff, Russell
High
From: Gust_, Mary
Sent : Thursday_, April 08_, 2010 5:38 PM
To : Jenkins, Harold; Woodward, Jennifer; Wolff_, Russell
Subject: FW: education connection commercials
Importance: High
Robin and I briefly discussed today
Thanks .
From: Shireman, Bob
Sent: Wednesday_, Apri l 07_, 2010 9:31 PM
To: Minor, Robin
Cc : Manheimer, Ann; Arsenault, Leigh; Dannenberg_, Michael
Subject: education connect ion commercials
-Bob
Robert Shireman
(202) 260-0101
3
Your Worth to a College Referral Service
(Page all of 2)
With everything that's going on in the economy, it isn't hard to see the appeal of Education
Connection's various television pitches. In a typical spot, a cute, perky twenty-something dances
her way around the screen, offering to help viewers "Find the right college for free." There's a
catchy jingle (rhyming "degree" with "bigger salary") , fun bright colors and hipster graphics.
What the ad doesn't tell you is how Education Connection defines "right college." In this case,
"right" college means a select group of for-profit and non-profit schools that Education Connection
says pay for contact information for potential students. Such fees, typical throughout the
education-matching industry, can range from $20 to $60 per referral , according to financial
industry researchers who are studying the issue.
Typically, after a potential student signs on, he or she is contacted by a representative of the
service, who verifies some data, then passes the prospect onto a university recruiter.
The referral business is growing in large part because one of its biggest clients-the for-profit
university sector-is booming. According to the most recent data available from
the Department of Education, 1.79 million students were enrolled in a for-profit university during
Fall 2008, a 21 .4% increase over Fall 2007. That expansion is fueling a cottage industry of
matchmaking companies. Probably the biggest is California-
headquartered QuinStreet (QNST: 17.55*, -0.25, -1 .40%), which had a publ ic stock offering
(handled by one-time internet dealmaker Frank Quattrone) in February. QuinStreet reported $261
million in revenues in its most recent fiscal year, up 36%, while earnings jumped by more than
half, to $57 million. Similarly, the Nebraska-based Nelnet, a student loan firm, earned $88.9
million or about 15% of its consolidated revenue, from its educational-matching services in 2009;
that's up 23% from a year earlier.
The referral businesses and the for-profit schools are distinct businesses, and while the the
Department of Education does not currently regulate these companies, it says it holds schools
accountable for the actions of their agents. "When students enroll in these courses, they should
have some assurance that the financial rewards are worth the debt that they may be incurring,"
says Robert Shireman, deputy under secretary at the Department.
To that end, the Department is pushing for some pretty big changes in the for-profit sector. For
one, schools may have to tell prospective students about salaries in the fields they are pursuing,
not to mention how rigorous (or not) training will be. What's more, the revised rules-which will be
proposed this summer-may involve tighter scrutiny of students' academic progress and how the
schools handle federal financial aid. (If adopted, the rules will go into effect in July 2011 ). As for
the matchmakers, the new rules could bar schools from paying recruiters based on the number of
leads that turn into actual students.
Selling referral information of course is standard in a variety of industries, ranging from credit
cards to fashion catalogs to magazine subscriptions. And all kinds of universities spend millions
each year to attract new students with flashy brochures and marketing campaigns. But most fee-
generating referrals in education are fairly new, and are raising red flags among educators and
consumer advocates on transparency grounds and because of the nature of the solicitations that
can follow. While a consumer can easily toss out an unwanted credit card application or shopping
catalog, it is often more challenging to refuse a phone sales person.
Within the education sector, these matching services are known as lead generators-companies
that compile names of potential students-and lead aggregators, which buy and sell the data to
universities. The schools that rely on the services say they are a valuable marketing tool, one that
is used by both for-profit and non-profit colleges. The aggregators and generators not only allow
participating universities to showcase their products, they give students information about the
programs, and make it easier for students to compare the offerings of multiple universities, say
the schools.
Typically, an aggregator buys the data from web sites (or runs its own site) where consumers fill
out applications most often for education queries, but sometimes also for credit cards,
mortgages, insurance policies or magazine subscriptions. That information is sold to colleges,
which might phone up consumers directly, or turn to an outside referral business to manage a call
center. Either way, the recruiting process can look like a game of dialing-for-dollars, with a single
firm making hundreds or even thousands of calls per day, according to two analysts who work for
at hedge funds and who have been studying educational matchmakers. They say recruiters can
be well-compensated, too, earning as much as $90,000-plus a year.
While there is nothing wrong with paying people to recruit students, consumer advocates and
lawyers who have worked for reform in the online education field say the process can be like a
mind game. Nancy Krop is a Redwood City, Calif.-based attorney who recently represented two
former University of Phoenix recruiters in a whistleblower lawsuit filed in the Eastern District of
California. In the case, the plaintiffs alleged and sought to show that the University used incentive
compensation to pay recruiters-a practice barred by federal law for schools that receive federal
financial aid.
Aggressive questioning can intimidate prospective students, says Deanne Loonin, director of the
"Student Loan Borrower Assistance" project at the National Consumer Law Center (NCLC). The
practices, she says, help bolster admissions to schools that are promising more than they can
deliver. Aside from the debt students might take on to cover tuition, Loonin wonders whether
graduates of the programs "are going to get jobs at all in the field that they're supposed to be
trained in, and if they will get jobs that will pay well enough."
Aggressive marketing can take advantage of people who aren't mature or savvy enough to deal
with the calls, say some high school advisors. Young people in particular need counselors to help
wade through the variety of options with colleges and majors, says Claudia Gard, a high school
counselor in Philadelphia who helps students with college planning. "If these people are being
contacted just because they filled something out, then is that student really given the opportunity
to look at all options or is that student just zeroing in on the one thing in front them at the
moment?"
In the case of Apollo, a Phoenix-based company which owns the University of Phoenix, it already
has begun reducing its reliance on the third-party markets. According to an Apollo spokeswoman,
the school admitted to no wrong-doing in the lawsuit, but agreed to pay more than $67.5 million to
settle it. (Since it was a whistleblower case alleging that the government was being defrauded,
the bulk of the recovery went to the U.S. government; typically whistleblowers in federal cases get
between 15% and 30% of the award, though Krop would not specify how much her clients
received). The spokeswoman says Phoenix is now shifting to more direct recruitment through a
subsidiary. "Apollo is actively monitoring and, as necessary, taking enforcement action against
our remaining affiliate partners to drive compliance," she says.
How does the hard-sell work? John Rogers, a Honolulu-based flight attendant, found out when he
filled out a registration form on Education Connection's web site five months ago. Since then,
Rogers says, recruiting calls have rolled in at all hours, and sometimes in the middle of the night.
The salesmen quickly launch into a monologue about how getting a degree from their school will
help improve his life, he says. Rogers adds that their pitches are along the lines of: "We can see
you want to improve yourself in this day and age, this is exciting and we are ready to help you do
that." The 40-year old compares the speech to "a high-pressure infomercial; they were very, very
aggressive; I don't want it shoved down my throat."
Rogers says he phoned Education Connection twice to stop the calls, but only heard back after
he placed numerous posts on the company's Facebook page, with a statement saying the
company would contact the web designer and the customer service manager "to see what can be
done," but calls continued. According to Rogers, the most aggressive of the schools was Kaplan
University. A spokesman for Kaplan, says that once a consumer registers with Education
Connection, his information "becomes the property of the lead-buying party," a standard practice
in the industry. "An individual like Mr. Rogers who voluntarily opts in but changes their mind must
follow up directly with the schools that now control the information he provided," responds the
spokesman in an email. The spokesman adds that Kaplan has no record of Rogers telling the
university that he didn't want to be called. (The spokesperson says they removed Rogers from
their call list after SmartMoney alerted the company that Rogers was unhappy.)
As it happens, Education Connection is a division of Kaplan, the education company best known
for its test prepping, but which also operates the web-based school, Kaplan University (Kaplan in
turn is owned by the Washington Post) . The Kaplan spokesman points out
that online learning offers opportunities to students that bricks and mortar campuses can't. For
example, he says there is no law school in Alaska, "But Alaskans who aren't interested in moving
out of state can earn thei r JD degree from Kaplan University's Concord Law School-online."
From:
Sent:
To:
Subject:
Attachments:
FYI.
Woodward, Jennifer
Shireman, Robert
FW: Homeless Recruiting--further follow-up
Ray Dirks and the Equity Funding Scandal (2).docx
Sent: Tuesday, July 13, 2010 2:03 PM
To: Finley, Steve; Siegel, Brian; Wanner, Sarah; Morelli, Denise; Wolff, Russell; Sann, Ronald
Subject: Homeless Recruiting--further follow-up
Note that in the article below, which is similar to the one Steve circulated earlier today, Jane Burch, the CEO of New
Beginnings for Women and Children, a homeless shelter in Tucson, Arizona, does not back down from her decision to
sign the letter to the Secretary. p . K ~
To: Jenkins, Harold
Subject: FW: Another Article
Harold-
Just to close the loop on the article I sent to you on Friday that discredited the letters from the homeless shelter
organizations, I wrote to Rob MacArthur, the person who first sent me the letters. Here is what he had to say. The
attachment is quite long, but it makes for interesting reading.
And, of course, Daniel Golden is a Pulitzer Prize winner from when he worked at the Wall Street Journal. His j ournalism
credentials go way back to the Boston Globe.
Jennifer
From: Robert MacArthur [mailto:rmacarthur@altresearch.com]
Sent: Monday, July 12, 2010 11:34 AM
To: Woodward, Jennifer
Subject: RE: Another Article
I have a pretty good idea. The reporter in this story has no credibility. She works at Propublica which was founded with
the intent of recruiting well seasoned i nvestigat ive reporters from the major newspapers. Several have cut back on their
investigative journalism budgets. Propublica was founded by private money to bring these people together. I am not
sure whose money. The journalists are generally credible; however, Sharona is not. She is from Australia. She's
young-under 30. She's trying to make a mark for herself. As you know, often times the press finds me through God
knows where. I dealt with her last year and found her to be unprofessional and difficult. Thankfully, I stopped talking to
her. I think cl ients of mine or other hedge funds have continued to supply her with information. We are already doing
the research so it's a way for them to take a short-cut. In any event, someone handed me a copy of the homeless
letters at the hearing. I don't know this Johnette Early. I don't know what she said or did. I have never misrepresented
myself. Manuel Asensio is an even bigger sleaze. Both are giving short sellers bad name. I think Dan Golden of
Bloomberg is a Pulitzer prize winner. Sharona, effectively threw her sources under the veritable bus for a story that's
not reall y a story. I am paid consultant, too. I contacted Eisman about this comment, "Eisman did not return calls
requesting comment." He said he never received a call. I think there is a mildly paranoid view that the Career College
Association manufactured this. I just point to the Ray Dirks case and the accolades made by the Attorney General and
Solicitor General.
From: Woodward, Jennifer [mailto:Jennifer.Woodward@ed.gov]
Sent: Monday, July 12, 2010 11:16 AM
To: rmacarthur@altresearch.com
Subject: FW: Another Article
Rob-Do you know what's going on here? Thanks, Jennifer
http://www.propublica.org/article/investment-funds-stir-controversy-over-recruiting-by-for-profit-colleges
Investment Funds Stir Controversy Over Recruiting
by For-Profit Colleges
by Sharona Coutts
ProPublica, 56 minutes ago
Nancy Panico runs a large center for homeless and at-risk youth in Tucson, Ariz. About a year ago, a woman
contacted her with some questions about for-profit schools that have tried to recruit homeless youths-- a
problem that Panico's shelter had encountered. The woman, Johnette McConnell Early, visited Panico at the
center and, a few months later, asked for her signature on a letter [1 ] alerting the U.S. Department of Education
to the issue.
Panico and 19 other executives from homeless shelters and service agencies around the country eventuall y
signed the letter, addressed to Secretary of Education Arne Duncan, asserting that "for-profit trade schools and
career colleges are systematically preying upon our clients." The June 17 letter pledged "unequivocal" support
to the department's steps to tighten regulation of the for-profit industry.
Some who signed had personal knowledge of aggressive recruiting tactics, but others told ProPublica they had
only heard about them secondhand from colleagues and news reports. Early visited with many of the executives,
they said, drafted the letter and coordinated the effort to get them to sign.
What Early did not tell Panico or several others who signed: She was working for a financial firm that pays her
to investigate for-profit schools.
"Had I known, I probably wouldn't have signed on," Panico said. "I probably would have contacted one of the
other people and said, 'Hey, now that we have all this information, let's do this ourselves.' I think it's sleazy to
basically use me and use other executive directors that have a real issue to make a profit for some companies."
For-profit universities have come under increasing scrutiny of regulators [2] and congressional committees [3]
who have heard complaints about alleged recruiting abuses [4] (PDF). More recently, attention has turned to the
behind-the-scenes influence ofhedge funds [5] (PDF) that are also critical of the industry and have sold short,
betting that the stock of publi cly traded universities will drop in price if, for instance, Congress or the
Department of Education cracks down.
2
To cover tuition costs, the schools rely heavily on federal grant and loan programs controlled by Duncan's
agency.
In an interview, Early confirmed to ProPublica that an "investment firm is paying for my time" but would not
disclose the identity of that firm. When asked whether her client was betting against the for-profit higher
education industry, Early said she did not know.
"Since I'm not part of their firm, I can't say what their position is," Early said. "But clearly an investment firm is
not going to look into something unless they're thinking about whether it's a good or bad investment."
Last month, the prominent investment fund manager Steven Eisman testified [6] before a Senate education
subcommittee hearing [3] on the "emerging risk" posed by increasing federal subsidies to for-profit schools.
Eisman is best known for predicting the crash of the subprime mortgage market [7]. He's become a scathing
critic of for-profit colleges and universities, and in his testimony referred to the practice of recruiting at
homeless shelters. Eisman predicted that students at these schools will default on $275 billion in government
loans over the next 10 years.
Less than a week after Eisman's appearance, Sen. Dick Durbin, D-TII., called for congressional action to tighten
the rules governing for-profits. Referring to Eisman's testimony, Durbin said some schools were enticing "low-
income, high-risk students" into "mortgaging their futures -- not on overpriced homes this time, but on
worthless diplomas," and said Congress must clamp down on the quality of education the schools deliver, and
the way the government administers financial aid.
Eisman's testimony was controversial. Advocates of for-profit schools and a government watchdog group
criticized the subcommittee, saying Eisman was allowed to present himself as an expert and make self-serving
criticisms of an industry in whose failure they believe he has a vested interest. One group, Citizens for
Responsibility and Ethics [8], wrote to Health, Education, Labor and Pensions Committee Chairman Sen. Tom
Harkin, D-Iowa, to complain that Eisman had a conflict of interest in delivering his testimony.
Eisman did not return calls requesting comment. He told the Senate subcommittee he had a stake in the
industry, but did not disclose specifics. In an earlier speech [9], Eisman named five particular companies that he
said would suffer if the Education Department adopted regulations tying tuition to the employment their
graduates obtain-- Apollo Group, the owner of the University of Phoenix; ITT Educational Services; Corinthian
Colleges; Education Management Corporation; and The Washington Post Company, which owns Kaplan
University.
Since April, a nonprofit group associated with another high-profile investor, Manuel P. Asensio, has written
five letters [1 0] criticizing the for-profit education industry and calling for tighter regulation to congressmen
and regulators with jurisdiction over the sector.
Short sellers have shown a steadily increasing interest in for-profit schools, according to Will Duff Gordon, an
analyst at Data Explorers, a company that collects and analyzes data about short-selling. Since April, his
company has also seen a spike in short positions in the sector, indicating a strengthening view that the stocks
will fall. In general , short sellers place bets that a company's stock or some other financial instrument will
decline in value.
"This is not an opportunist1c bit of short selling," Gordon said of for-profit schools. "People have worked out
that these companies are overvalued. They've put on bigger and bigger short positions as the price keeps going
down. And they have been right because the price keeps dropping."
For their part, short sellers claim they are merely bringing to light the fundamental problems of an industry that
survives in large part on taxpayer largesse.
More than 1,600 for-profit colleges, universities and trade schools received $3.3 billion in Pell grants in the year
ending last June, according to Department of Education data. About 950 schools shared some $2.5 billion in
federal loans in the same period. Proprietary schools are slated to pocket significantly more this year, thanks to
the Obama administration's increased funding for the need-based Pell grants.
3
Short sellers say they provide a public service by exposing fraud or mismanagement of publicly traded
companies. Most academic studies that have examined the issue confirm that short sellers are most often correct
in their assessment that particular companies or industries are overvalued, according to William N. Goetzmann,
director of the International Center for Finance at the Yale School of Management.
But some short sellers appear to be moving beyond assessing particular companies and taking a financial
position accordingly. Now, says the Career College Association, some are trying to stage-manage the repotiing
of negative stories to fuel the impression of a groundswell of anger against the schools.
"Certainly there are legitimate critics. l may not agree with them, but they're not in it to fatten their wallets,"
said Harris Miller, president of the CCA, which represents for-profit schools. "But I think that a lot of the
activity going on, and with other media reports, is being driven by the short sellers, who are hiring people who
are semi-disguising who they are and not being candid with people about the.ir role in trying to drive down the
stock price of certain companies."
Early terminated the interview with ProPublica when asked whether the hedge fund knew she had drafted the
letter and coordinated the effort to have it cosigned by representatives for homeless shelters.
But when informed of Early's connection to an investment firm, several people who signed the letter said they
found the episode disquieting.
Two who signed told ProPublica they were under the impression that Early was conducting research for a
Bloomberg Businessweek reporter working on a story about for-profit schools enrolling homeless people. Early
confirmed in the interview that she "connected" the reporter with several people at homeless shelters.
Bloomberg Businessweek in May ran an article under the headline, "Homeless high school dropouts lured by
for-profit colleges [11]." In a statement, a Bloomberg spokesperson said: "We did not obtain information from
anyone working on our behalf Our story was the product solely of our own reporting."
The PBS investigative news program Frontline posted the letter [12] on its website after it was provided by
another short seller, Frontline producer Marrie Campbell told ProPublica. Campbell said she would "absolutely
not" have posted the letter had she known the full circumstances of its provenance.
It is not unusual for reporters to follow up on tips from hedge funds, financial firms or other sources with an
interest in how a story might shape events. ProPublica has interviewed hedge fund managers and their
researchers about for-profit colleges and universities to learn about their concerns and get leads. They disclosed
they were short on the sector; any information or sources they provided were independently verified and vetted
by a reporter.
Others who signed the letter said Early told them that she worked for a think tank, or that they believed she was
working on a book. Like Panico, they supported the substance of the letter. But one of the signers-- Jennifer
Brandon, executive director of Community Voicemail in Seattle, Wash.-- said she had no direct knowledge of
for-profits recruiting homeless people.
Early told Neil Donovan, executive director and president of the National Coalition for the Homeless [13] in
Washington, D.C., that she worked for a Dallas company that offered advice and private research called J.W.
McConnell & Sons, Donovan said. ProPublica contacted state and local officials in Texas who said they could
find no record of the firm.
Donovan said he was angered to learn of Early's association with an investment firm.
"My next letter will be to Arne Duncan saying that I didn't know that, and l'm going to ask his inspector general
to look into the fact that they received a letter where the source of the letter was misrepresenting themselves,"
Donovan said. "I think that's completely inappropriate and it's using homeless people as pawns, and that is what
our mission is against."
"It makes me feel uncomfortable, " added Larry James, president and CEO of Central Dallas Ministries. "I'm
quite certain none of us knew that connection, and that would have given me pause."
4
Not all those who signed were troubled by Early's conduct. Jane Burch, CEO ofNew Beginnings for Women
and Children in Tucson, said Early told a staffer that she had "something to do with an investment firm," and
that her organization would never have signed a letter unless they agreed with its contents.
"I have no evidence that there is any wrongdoing here," Burch said. "Why would I not want to see another
avenue to have our clients' ri ghts protected?"
Both sides in the debate claim moral ground. The for-profits argue they are performing a social service by
making education available to many who have been excluded from traditional four-year colleges; the short
sellers claim they are protecting the same groups of people from deceptive marketing techniques and a
mountain of debt.
A Department of Education spokesperson said the agency remains focused on regulatory matters. Among other
things, the department has announced plans to scrap regulations that watered down a ban on schools paying
recruiters according to how many new students they brought in.
ProPublica intern Joe Kokenge {1 4} contributed reporting to this story.
5
Ray Dirks and the Equity Funding Scandal
Brian Trumbore
President/Editor, StocksandNews.com
Over 30 years ago, a scandal broke involving a large insurance company, Equity Funding Corporation
based out of Los Angeles. The central figure ended up being a securities analyst at Delafield, Childs,
Inc., Raymond L Dirks, who one day in March 1973 received a call from a disgruntled employee at
Equity Funding, Ronald Secrist Secrist was upset over his small Christmas bonus and he had a story
to tell. As you read what follows, you'll be reminded of today's headline grabbing cases, ranging from
Enron and Parmalat to Martha Stewart. Yes, we've been here before, and we'll just keep repeating
the same mistakes, over and over again until the end of time.
Equity Funding had been creating false insurance policies for years, which the company then turned
around and packaged to reinsurers, pocketing the cash. Incredibly, the fraud was known by as many
as a thousand employees. As reporter Robert Cole wrote for the New York Times back on April 15,
1973, "Those closest to (the scam) were believed to have cleverly concealed their tracks through
intimidation, subterfuge, threats of violence and the use of doctored computer tapes."
Equity Funding would use the fake profits to maintain the share price and the hope was that one day it
would be able to buy a major life insurance company and then "go straight" Equity Funding's books
were loaded with fake bonds and COs, but when questions arose, the accountants trusted the
explanations of company officials. Remember, it was 1973 and computers weren't in use anywhere
near what they are today, so at times the auditors accepted handwritten lists as proof various
positions existed. Employees involved in the scam also created computer printouts and paper files
during late-night parties after receiving a specific auditor request And all this time that Equity Funding
deceived the auditors, the analysts on Wall Street and various insurance industry watchdogs were
taken in as well.
For example, one month before it all unraveled, Cowen & Co. issued a report where the analyst
recommended purchase of Equity Funding "for aggressive accounts." Burnham & Co., Inc. said on
January 30 "We regard the stock, selling at 9.9 times estimated 1973 earnings, an excellent value and
rate it a Buy."
On March 26, the day before the NYSE halted trading, the analyst for Hayden, Stone, Inc. wrote a
memo addressing the fact that "several rumors have been circulating which have affected Equity
Funding's stock; we have checked these rumors, and there appears to be no substance to any of
them." This particular analyst had checked with insurance regulators in various states and each one
said they had no present intention of conducting any inquiries.
As for Ray Dirks, he told his favored institutional clients of the scam and alerted the SEC. There was
a mad dash to get out, and those who didn't act quickly enough, or who didn't have the knowledge,
lost everything. Overall, the fraud exceeded $300 million.
Dirks ended up being censured by the SEC for his actions and over the next ten years he fought the
decision, all the way up to the U.S. Supreme Court. Following is an extensive excerpt from a brief filed
by the Justice Department, in defense of Dirks, before the Supreme Court, October 1982. It's as good
a description of the issues in the case as you'll find anywhere.
[In order to make this read a bit easier, I have substituted "Dirks" for "Petitioner." Some of the quotes
noted in the brief refer to the original SEC case, as well as the Appeals Court ruling.]
"Dirks is a securities analyst, 'well-known for his investigative talents,' who researched insurance
company securities. In March 1973, Dirks applied those investigative talents to uncover a major fraud
perpetrated by the officers of a publicly-owned insurance company. As the court of appeals observed,
'in two weeks of concerted effort, at times resembling something from detective fiction, Dirks
investigated and confirmed rumors of massive fraud by the Equity Funding Corporation of America,
an insurance holding company whose stock traded on the New York Stock Exchange. Largely thanks
to Dirks one of the most infamous frauds in recent memory was uncovered and exposed. Despite his
efforts to uncover and expose the criminal scheme at Equity Funding, the Securities and Exchange
Commission charged Dirks with 'tipping' material inside information in violation of Section 10(b) of the
Securities Exchange Act of 1934.
"Dirks first learned of the fraud at Equity Funding from a former officer of the company, Ronald
Secrist, who met with him for several hours on March 7, 1973. 'Secrist made a series of detailed but
nearly incredible allegations about Equity Funding,' including allegations that the company had
produced large numbers of spurious insurance policies to inflate its sales revenues and that 'its top
officers had Mafia connections which they used to threaten the lives of employees who objected to
the fabrications.' Secrist urged Dirks to verify the existence of the fraud and then expose it He
expected Dirks to transmit evidence of the fraud to 'his firm's customers' and 'clients,' thereby
triggering large-volume securities sales that would lead to a full investigation: 'by jarring the stock, he
would jar the corporation -this was my plan - he would jar the corporate officers and would also rattle
the Wall Street financial community to the extent that someone would take action very quickly.' Secrist
believed that selling pressure would cause the price of Equity Funding stock to 'drop close to zero
very quickly,' and thus 'reveal the fraud to the world' and 'prevent its continuation.'
"During their initial meeting, Dirks sought and obtained Secrist's permission to convey evidence of the
fraud to the Wall Street Journal. Secrist warned, however, that merely presenting the information to
regulatory authorities, including the SEC, would be abortive. Secrist stated that employees who
attempted to do this in the past had been 'brushed aside with a comment that that's a ridiculous story;'
those employees also found that the information was sometimes relayed back to Equity Funding and
that 'they were placed in personal jeopardy as a result of having gone there.'? ..
"In addition to interviewing former employees of Equity Funding, Dirks also met with Equity Funding's
present and former auditors in an attempt to spread word of the fraud and bring it to a halt As the
Commission explained:
'Dirks also learned that Equity Funding's auditors were about to release certified financial statements
for the company on March 26. He immediately contacted them and apprised them of the fraud
allegations, hoping that they would withhold release of their report and seek a halt in the trading of
Equity Funding securities. Instead, the auditors merely reported Dirks' allegations to management.'
"As early as March 12, 1973, Dirks also attempted to communicate his evidence to the Wall Street
JournaL 'Dirks expected that a highly respected publication like the (Journal) could be effective in
helping him investigate the Secrist allegations and to expose the fraud if it proved to exist' Those
efforts also were unavailing.
'During the entire week that Dirks was in Los Angeles investigating Equity Funding, he was also in
touch regularly with William Blundell, the Wall Street Journal's Los Angeles bureau chief. Dirks kept
Blundell up to date on the progress of the investigation and badgered him to write a story for the
Journal on the allegations of fraud at Equity Funding. Blundell, however, was afraid that publishing
such damaging rumors supported only by hearsay from former employees might be libelous, so he
declined to write the story.'
"Dirks provided Blundell with 'the substance of all he knew,' including his 'notes' and the 'names' of all
witnesses. Nevertheless, given the 'scope of the fraud,' Blundell doubted that it could have been
'missed by an honest auditor' and discounted the entire allegation.
"Increasing circulation of rumors about the fraud led Dirks to believe that it was 'unlikely that Equity
Funding stock would open for trading on Monday, March 26, because trading would be halted by the
NYSE.' This did not occur, however, and Dirks again spoke to William Blundell of the Wal l Street
Journal and urged him to publish a story exposing the fraud. Blundell refused to do so but stated that
he intended to discuss the matter with the SEC's Los Angeles Regional Office. Blundell secured Dirks'
permission to propose a meeting with the SEC that would include himself and two other key
witnesses. Dirks then contacted the SEC and voluntarily presented all of his information at the SEC's
regional office beginning on March 27 and continuing throughout the next three days.
"During the two-week period in which Dirks pursued his investigation and spread word of Secrist's
charges, the price of Equity Funding stock fell precipitously from $26 per share to less than $15. This
led the NYSE to halt trading in the stock on March 27. Shortly thereafter, Illinois and California
insurance authorities impounded Equity Funding's records and uncovered evidence of the fraud. Only
then did the SEC file a complaint against Equity Funding and only then did the Wall Street Journal
publish 'a front page story written by Blundell but based largely on information assembled by Dirks.'
Three days later, Equity Funding filed a petition (for bankruptcy).
"While Dirks' investigative activities succeeded in revealing in a few days that 'one of the darlings of
Wall Street, a company that had managed to produce continued high earnings growth for a decade,
was, instead, a gigantic fraud,' government authorities with jurisdiction over Equity Funding did not
move so quickly. As early as 1971, the SEC had received allegations of fraudulent accounting
practices at Equity Funding. Moreover, on March 9, 1973, an official of the California Insurance
Department informed the SEC's regional office in Los Angeles of Secrist's charges of fraud. The
SEC's staff attorney 'stated that similar allegations had been made about Equity Funding before by
disgruntled employees.' He nonetheless recommended 'delaying any type of inspection of the Equity
Funding operations until next year absent further corroboration. Equity Funding's Chairman - one of
the principal architects of the fraud - testified that, prior to March 1973, he received no questions from
auditors, state regulatory authorities, or federal regulatory authorities that suggested 'they suspected
there was a fraud at Equity Funding.' When asked whether Dirks was 'personally responsible for
having uncovered the events at Equity Funding,' he candidly stated: 'I think Mr. Dirks is entitled to
personal credit for that.'
"Following public revelation of the Equity Funding scandal, a federal grand jury in Los Angeles
returned a 105 count indictment against 22 persons, including many of Equity Funding's officers and
directors?(Guilty pleas or convictions were obtained on all 22. Chairman Stanley Goldblum received
an 8-year prison sentence and a substantial fine.]
"While the Wall Street Journal's reporter, William Blundell, was 'nominated for a Pulitzer Prize for his
coverage of the Equity Funding scandal ,' Dirks was charged by the SEC with violating the antifraud
provisions of the federal securities laws based on his selective revelation of information about Equity
Funding prior to general public disclosure. Following an administrative hearing, the Commission found
that Dirks had 'tipped' non public information concerning Equity Funding in violation of those
provisions. It observed that 'Dirks received the information from inside corporate sources. From the
nature of the information, the inference must have been obvious that his sources had received it
during the course of their corporate duties, and that the company intended that it should be kept in
confidence.'?
"Despite its finding of a violation, the Commission imposed only a censure - its mildest sanction - on
Dirks. It observed that 'it is clear that Dirks played an important role in bringing Equity Funding's
massive fraud to light, and that he reported the fraud allegations to Equity Funding's auditors and
sought to have the information published in the Wall Street Journal."
In a 6-3 decision, the Supreme Court overruled prior judgments and Dirks was finally cleared, ten
years later. Essentially, the Court ruled that for a recipient of a tip to be guilty of insider trading, the
insider who provided the tip must have been seeking to profit from the tip. There never was any
evidence Ray Dirks personally made a dime off of his actions.
Today, Dirks is head of his own research I investment banking shop, specializing in small companies
steeped in controversy. I'll leave it at that.
But I do have to note a comment Dirks made during the above proceedings concerning the New York
Stock Exchange and its internal procedures.
"There is the question of the NYSE, a venerated American institution which advertises the safety and
security of investing in its listed companies, but which, in fact is an antique, costly and dangerous
system perpetuated for the convenience of its members." [Charles Geisst]
A little ahead of his time, don't you think?
Sources:
U.S. Department of Justice archives
Robert J. Cole I New York Times (1973)
Linda Greenhouse I New York Times (1983)
"The New York Times Century of Business" Floyd Norris and Christine Bockelmann
"Wall Street: A History" Charles R. Geisst
Brian Trumbore
Brian Trumbore
PresidenUEditor, StocksandNews.com
I thought I would clean up some loose ends on the Ray Dirks story. If you didn't read Qill!J, the
following won't make any sense to you. And admittedly this is very dry stuff, but the case of Raymond
L. Dirks v. Securities and Exchange Commission was an historic one and helped define insider
trading, as well as the treatment of whistleblowers, analysts and the press. As you read the full tale,
though, it's also more than a bit apparent that the SEC has continually failed to execute its regulatory
duties, decade after decade.
Reminder, the Justice Department under the presidency of Ronald Reagan fought for Dirks when he
took his suspension all the way to the U.S. Supreme Court. Following are further details, in the
solicitors' words, of the 'brief filed by Dirks' supporters. The High Court later reversed the ruling of the
Appeals Court and Dirks was cleared. (Note: "Commission" refers to the SEC and I have substituted
Dirks where "petitioner" was used to make it a little easier to read.)
Both the state and the public at large have an interest in exposing corporate misconduct. Ordinarily,
we would expect that official law enforcement agencies would be sufficient for that task, but this case
shows that the organs of government are not always able to accomplish swift investigation of possible
crimes. The press also has an historic role in discovering and exposing wrongdoing, but here, too, the
press failed to move as quickly as Dirks, who had more immediate financial and reputational
incentives to discover the truth about Equity Funding?.
The Commission's erroneous imposition of liability in this case has serious consequences for federal
law enforcement, which frequently depends on private initiative to uncover criminal conduct. If the
antifraud provisions of the federal securities laws, backed by administrative, civil, and criminal
sanctions, forbid analysts to trade with or transmit evidence of crime obtained through honest
investigation, then few analysts will have an incentive to invest the resources needed to investigate
corporate frauds like the Equity Funding fraud. Few analysts will be willing to devote substantial
resources and expose themselves to personal danger to investigate rumors of crime - as Dirks did - if
they are forbidden to utilize the information they obtain until after it is fully revealed to the investing
public?.
The Commission and the court of appeals concluded that Dirks was subject to a duty to disclose to
the public at large his evidence of criminal conduct or abstain from passing it on to anyone. The
premise of that conclusion was that the sources of the information - present and former officers of
Equity Funding - were subject to a fiduciary duty to the company's security holders. The Commission
believed that Dirks "assumed" that fiduciary duty simply by receiving the information, and that this
prevented him from either tipping or trading?.
?The information at issue in this case - evidence of a massive, ongoing criminal scheme - was not
"confidential" information available "only for a corporate purpose." Evidence of crime is not the private
property of anyone. It is not amenable to "conversion." Those who discover it and spread the news to
others are not guilty of misappropriation or theft. Quite to the contrary, any effort to disseminate such
information is encouraged by the law, while efforts to preserve its secrecy are strictly forbidden?.
?Secrist (the Equity Funding official who first went to Dirks), originally provided the information and
monitored its use, (intending for Dirks) to divulge the information to institutional traders who would
precipitate large-scale market activity, and thereby hasten the investigation and termination of the
fraud. Secrist also gave his permission to convey the information to the Wall Street Journal. Dirks'
communications with the auditors further advanced Secrist's stated objective of exposing the fraud.
And, precisely as Secrist anticipated, Dirks' activities quickly achieved the desired objective while
regulatory authorities lagged behind. Far from inflicting a tortuous injury on the corporation, Dirks'
actions served to expose and terminate corrupt wrongdoing by some of its highest ranking officials?
As (Appeals Court) Judge Wright observed, "Largely thanks to Dirks one of the most infamous frauds
in recent memory was uncovered and exposed," while governmental authorities "repeatedly missed
opportunities to investigate Equity Funding." The Commission also acknowledged Dirks' "important
role in bringing Equity Funding's massive fraud to light", but concluded that its censure order would
not "chill" other analysts in the "investigation of rumors" of similar corporate frauds. We are not so
sanguine about the impact of the Commission's order on the private investigation of corporate
crime? ..
Dirks spent several weeks investigating Secrist's allegations - on his own time, at his own expense,
and despite substantial personal danger. The direct result of his investigation was that the price of
Equity Funding stock fell dramatically, trading was suspended, and government authorities ultimately
took remedial action. As the principal architect of the Equity Funding fraud conceded, Dirks deserves
"personal credit" for uncovering it. Had Dirks not taken action, the illegal scheme, which lasted for
nearly a decade, could have persisted for an additional period of time - causing even greater injury to
the public?.
The Commission's decision in this case (to suspend Dirks) threatens to undermine, rather than
enhance, investor confidence. If administrative rulings strip away the incentive of security analysts to
investigate frauds, there will be more frauds in the future and they will persist for longer periods of
time. By contrast, if investors may continue to expect that competent analysts, acting in their own
economic interest, will assist the government in policing the securities markets, their reliance on the
integrity of the marketplace will be strengthened?.
It was inevitable that the Equity Funding fraud would have victims. Because of Dirks' actions leading
to the discovery of the fraud, there were fewer victims than there otherwise would have been. And to
the extent that private parties retain an incentive to act as Dirks acted there are likely to be fewer
victims of such frauds in the future.
Respectfully submitted,
Rex E. Lee, Solicitor General
Dl Lowell Jensen, Assistant Attorney General
Stephen M. Sharpiro, Special Assistant to the Solicitor General
Roger M. Olsen, Deputy Assistant Attorney General
October, 1982
Note: As part of the investigation into the fraud, it was discovered that of more than $3 bi llion worth of
life insurance ostensibly issued by Equity Funding between 1964 and 1973, more than $2 billion
proved to be fictitious.
Source: U.S. Department of Justice archives, briefs /1982
Brian Trumbore
From:
Sent:
To:
Subject:
Deanne Loonin [dloonin@nclc.org]
Tuesday, March 30, 2010 5:13PM
Arsenault, Leigh
RE: Borrower Complaint Follow-up
great...and congratulations on the SAFRA work. lm sure it's been very crazy around there.
Once I send the memo next week, I also want to check in with you (and hopefully you can with Bob) about some follow-up
work re: rehabilitation. I have been meeting with various folks at FSA and the process is very much stuck. I am putting
together a small group of legal aid advocates to work on this and we hope to set up some meetings on this relatively soon
(maybe in June??), so more on this too. take care.
From: Arsenault/ Leigh [mailto:Leigh.Arsenault@ed.gov]
Sent: Tuesday/ March 30
1
2010 4:26 PM
To: Deanne Loonin; Manheimer/ Ann
Subject: RE: Borrower Complaint Follow-up
Thanks Deanne. I'll be on the lookout for the document-would love to walk through it with you too.
Hope you're well-
Leigh
From: Deanne Loonin [mailto:dloonin@nclc.org]
Sent: Tuesday/ March 30
1
2010 4:09PM
To: Manheimer/ Ann
Cc: Arsenault/ Leigh
great, thx. I will send the info. I have and then coordinate with the other advocates. We weren't sure if we should give out
your info. directly, but that's good to know.
Definitely ok to give my info. to FTC. We've been meaning to follow up with them.
Leigh--FYI , one other unrelated thing. Pauline told me you were interested in the memo I am writing on various options
for defaulted borrowers. I am almost done and will send a copy to you and Bob next week. thanks.
From: Manheimer/ Ann [mailto:Ann.Manheimer@ed.gov]
Sent: Tuesday/ March 30, 2010 3:35 PM
To: Deanne Loonin
Cc: Arsenault/ Leigh
Deanne - suggest you just send me whatever you have- don
1
t worry about formatti ng. Also, I would be glad to take
input that you have gotten from other advocates and investigators - or you can have them contact me directly-
whatever works best for you. I am copying Leigh Arsenault who works with me and Bob Shireman.
One more question: would it be ok if I forwarded your email to the folks at FTC? I am working with Julie Lady, who was
the contact person taking comments on t he voc tech guides. I think the volume and type of complaints you describe
would help move her folks in the direction of improving the Guides. BTW- she tells me that she is hoping for a decisions
about next steps on the Guides by the end of t he week. Thanks -Ann Manheimer, 202.260-1488
From: Deanne Loonin [mai lto:dloonin@nclc.org]
Sent: Thursday, March 25, 2010 3:55 PM
To: Manheimer, Ann
ok, thx. I will send you my summaries next week. Should I also be sending you summaries from other advocates and
investigators or tell them to contact you directly?
From: Manheimer/ Ann [mailto:Ann.Manheimer@ed.gov]
Sent: Wednesday, March 24, 2010 4:55 PM
To: Deanne Loonin
Thanks so much - I have not forgotten - Ann
From: Deanne Loonin [mai lto:dloonin@nclc.org]
Sent: Wednesday/ March 24
1
2010 10:02 AM
To: Manheimer, Ann
Subject: Borrower Complai nt Follow-up
Thanks for getting in touch last week. I can send you some borrower complaint summaries, but was waiting to get from
you a copy of the table you are using to input the info. I can also get similar info. from others if you are interested. Please
let me know.
In the meantime, here are some borrower complaint sites on-line to review: Some of these go back for several years, but
it looked like many were still being updated, with the more recent pages towards the bottom of the page.
http://www.complaintsboard.com/complaints/educational-loans-incorrect-charges-c290972.html- Complaint about Devry,
with links to several more complaints. Reader comments are at the bottom of some of these pages.
http://www.consumeraffairs.com/ education/devrv.html- Several pages of Devry Complaints
http://www.rateitall.com/i-5875-devrv-institute-of-technology.aspx- Reviews of Devry
http://www.complaintsboard.com/bycompany/university-of-phoenix-a8989.html - University of Phoenix Complaints
http://www.ripoffreport.com/colleges-and-universities/university-of-phoeni/university-of-phoenix-witheld-Sbgdb.htm - a
slightly different complaint about University of Phoenix
http://university-of-phoenix.pissedconsumer.com/- A number of University of Phoenix Complaints
http://hubpages.com/hub/University-of-Phoenix-Fraud--Huqe-Scam - more University of Phoenix
http://www .compla intsboard. com/complaints/itt-tech nical-institute-c 70827. html - ITT Complaints
http://www. ripoffreport. com/ Ad u It-Career -Cantin u i nq-Education/ITT-Tech n ica I-I nstit/itt-tech n ica 1-instit ute-ri poff-c 7 54j. htm -
more on ITT
http://itt-technical-institute.pissedconsumer.com/- another ITT page, with links to more complaints towards the bottom of
the page
http://www.complaintsboard.com/complaints/wyotech-c190900.html - Wyotech, one of the Corinthian schools
http://www.jalopyjournal.com/forum/archive/index.php/t-34803.html - more on Wyotech
http://www.complaintsboard.com/bycompany/everest-college-a63130.html - Everest College, another Corinthian School
2
http://www.consumeraffairs.com/education/everest.html - More on Everest
http://www.viewpoints.com/Everest-Colleqe-review-3dac- Everest Reviews
r:1 ~ - . eanne Loonin
L..J NATIONAL CONSUMER LAW CENTER
7 Winthrop Square, 4th Floor
Boston, MA 0211 0-1245
(617) 542-8010
dloonin@nclc.org
www.stude ntloanborrowerassistance .org
3
From: Manheimer, Ann
Sent: Friday, July 09, 2010 11 :24 AM
To:
Cc:
Lauren Asher (ljasher@ticas.org); Pauline Abernathy
Martin, Phil ; Ceja, Alejandra; Arsenault, Leigh
Subject: FW: Borrower Complaint Follow-up
Attachments: clientsu mmariescrittmar20 1 O.docx
Forwardi ng - per your request - you may have seen these a l ready.
Sent: Wednesday, March 31, 2010 8:09 AM
To: Manheimer, Ann
Cc: Arsenault, Leigh
Here is the first in a number of client summaries that I will send. These are recent clients through my work at Crittenton
Womens Union in Boston. Most of the clients there are homeless or recently homeless. Crittenton works with them to
help get them back to school or to work. I started working with the program last year because about 30 to 40% of the
women they were working with had student loan debt and were unable to go back to school. So far, about 60 to 70% of
these women have debts have proprietary schools. I also work with local legal aid offices and will send summaries of
some of those clients as well. I can give you more detail if you need it since these are all clients I work with directly. I will
also send you some e-mail summaries from borrowers who contact me through my web site. Please let me know if you
need anything else, thanks.
From: Manheimer, Ann [mailto:Ann.Manheimer@ed.gov]
Sent: Tuesday, March 30, 2010 3:35 PM
To: Deanne Loonin
Cc: Arsenault, Leigh
Deanne - suggest you just send me whatever you have- don' t worry about formatting. Also, I would be glad to take
input that you have gotten from other advocates and investigators- or you can have them contact me directly -
whatever works best for you. I am copying Leigh Arsenault who works with me and Bob Shireman.
One more question: would it be ok if I forwarded your email to the folks at FTC? I am working with Julie Lady, who was
the contact person taking comments on t he voc tech guides. I think the volume and type of complaints you describe
would help move her folks in the direction of improving the Guides. BTW- she tells me that she is hoping for a decisions
about next steps on the Guides by the end of t he week. Thanks- Ann Manheimer, 202.260-1488
Sent: Thursday, March 25, 2010 3:55 PM
To: Manheimer, Ann
ok, thx. I will send you my summaries next week. Should I also be sending you summaries from other advocates and
investigators or tell them to contact you directly?
Sent: Wednesday, March 24, 2010 4:55PM
To: Deanne Loonin
4
Thanks so much -I have not forgotten - Ann
Sent: Wednesday, March 24, 2010 10:02 AM
To: Manheimer, Ann
Subject: Borrower Complaint Follow-up
Thanks for getting in touch last week. I can send you some borrower complaint summaries, but was waiting to get from
you a copy of the table you are using to input the info. I can also get similar info. from others if you are interested. Please
let me know.
In the meantime, here are some borrower complaint sites on-line to review: Some of these go back for several years, but
it looked like many were still being updated, with the more recent pages towards the bottom of the page.
http://www.complaintsboard.com/complaints/educational-loans-incorrect-charges-c290972.html- Complaint about Devry,
with links to several more complaints. Reader comments are at the bottom of some of these pages.
http://www.consumeraffairs.com/education/devrv.html - Several pages of Devry Complaints
http://www.rateitall.com/i-5875-devry-institute-of-technology.aspx- Reviews of Devry
http://www.complaintsboard.com/bycompany/university-of-phoenix-a8989.html- University of Phoenix Complaints
http://www.ripoffreport.com/colleges-and-universities/university-of-phoeni/university-of-phoenix-witheld-Sbgdb.htm - a
slightly different complaint about University of Phoenix
http://university-of-phoenix.pissedconsumer.com/- A number of University of Phoenix Complaints
http://hubpages.com/hub/University-of-Phoenix-Fraud--Huge-Scam - more University of Phoenix
http://www .compla intsboard. com/complaints/itt -tech nical-institute-c 70827. html - ITT Complaints
http://www. ripoffreport. com/ Ad u It-Career -Continuing-Education/ITT-Tech n ica I-I nstitlitt-tech n ica 1-institute-ri poff-c 7 54j. htm -
more on ITT
http://itt-technical-institute.pissedconsumer.com/- another ITT page, with links to more complaints towards the bottom of
the page
http://www.complaintsboard.com/complaints/wyotech-c190900.html - Wyotech, one of the Corinthian schools
http://www.jalopyjournal.com/forum/archive/index.phplt-34803.html - more on Wyotech
http://www.complaintsboard.com/bycompany/everest-college-a63130.html- Everest College, another Corinthian School
http://www.consumeraffairs.com/education/everest.html - More on Everest
http://www.viewpoints.com/Everest-College-review-3dac- Everest Reviews
Deanne Loonin
NATIONAL CONSUMER LAW CENTER
7 Winthrop Square, 4th Floor
Boston, MA 02110-1245
(617) 542-8010
dloonin@nclc.org
www.stude ntloanborrowerassistance .org
5
Client Summaries from Work Force Development (Crittenton Women's Union), Boston (partial list)
From Deanne Loonin, National Consumer Law Center {March 2010)
As of December 2009
1. Nicole. She went to Bryman Institute in Brighton, medical asst. course. Job placement was not
helpful, they told her they would help her get a job, never got one. Last worked in Nov. 2008. Wants to
go back to school. She did make payments to the school while in the school, started at $100/month,
then went to $40. But stopped making payments to the school before graduating, so she never got the
certificate. She thought she was paying the loan.
2. Mary Jane. About $6,000 in federal loans. Computer Learning Center in the mid-90's. Born Feb.
1966, one son. Looking for work now, but she gets only 329/month TAFDC plus 353 food stamps. Sent
in consolidation application.
3. Carlyn. Met with client on Sept. 10, 2009. She has a FFEL consolidation loan of about $5520. She
was making payments post-default to Ed Fund, but didn't know that it was a rehabilitation plan. I
confirmed that it was a rehabilitation and that she had already renewed eligibility for new federal loans
and grants b/c she made 6 payments. The rehab. Was supposed to be completed in October. I gave her
information about what to expect post-rehab. And information about selecting IBR. Did not hear back
from her. I also got a copy of the written rehab. Notice from Ed Fund which client said she never saw.
She is planning to go back to school.
She was a proprietary school student. Graduated from Bryman in massage therapy. Did not work in
field. She also went to Everest Institute in 2007, has loans from there, 3 FFEI Stafford loans. (maybe this
is the same as Bryman). All of her loans are from this school. Total of about 5520.
4. Kimberly. She also went to the Travel Institute in 1998, graduated, Education America in 2000.,
didn't finish. Now living in shelter, DTA of 429/month plus son's SSI of 640/month. Born Dec. 1973. 4
children
5. Laura. She was about 265 days delinquent, so we called Sallie Mae and got an economic hardship
deferment. Met on Oct. 1. She went to Lincoln Tech. in 2005-2006. Never got work.
6. Tanika, met on Dec. 16 Born May 1978, 4 children. 400/month tafdc, Also works at TJ Max, about
95/week plus 691 food stamps. Went to Millennium Training Institute in 2007, Blaine in 2004. Loans,
federal of over 8,000. In default. Started rehab. With ASA of 100, way too high. Got to the last month
at Blaine and kicked out b/c she owed the school$, or so they said. Same thing happened with
Millennium, went for business administration certificate.
7. Bobbi Born Jan. 1982. 5 chi ldren. Income is 768/month SSI plus 687 food stamps.
Met on Dec. 16. She went to Lincoln Tech. in 2004 for about three months, got pregnant, went back in
2005. She finished a massage program, never found work except for some volunteer work at a
chiropractor. She did pay the school, 80/month, she thought it was for the loans. But school wasn't
what she expected b./c they said they would help her find work. Job placement was sending a group of
people to the same place. Total loans of about 6501 plus 8100 in Pell. All loans are in default.
From:
Sent:
To:
Subject:
From: MartinJ Phil
Bergeron, David
Wednesday, July 07, 2010 10:15 PM
Martin, Phil; Kvaal, James; Yuan, Georgia
RE: just for fun, but it's scary
Sent: WednesdayJ July 07J 2010 10:05 PM
To: KvaalJ James; BergeronJ David; YuanJ Georgia
Subject: just for funJ but it's scary
My "live chat" with WyoTechJ a Corinthian school. (IJll spare you the one I did with Everest
-same conclusion.)
DavidJ ~ ~ ~ ~ >
Operator
Please stand byJ a site representative has been paged.
Kate
Hello! My name is Kate and I'm a LIVE Wyotech representative here to help you with any
questions you may have.
Kate
How are you doing today?
You
good thanks - i was wondering how much your automotive and diesel programs cost Kate That's
something the Admissions Representative will be able to review with you Kate Which campus are
you considering?
You
not sure- just came across your website- i'm just trying to get basic sense of potential
costsJ is there a link on your website to tuition? I saw financial aid info but not tuition
info.
Kate
I am afraid that information is not available on line. An admissions representative will be
more than happy to go over this matter with you.
Kate
We offer that program at our BlairsvilleJ PAJ LaramieJ WYJ and SacrementoJ CA campuses.
Kate
Do any of these interest you?
You
that's strange - other schools usually have that onlineJ how come you guys don't?
Kate
I am not sure. The people who decide what goes on the site do not work in my office
unfortunately You haJ okayJ thanks- well i'll surf around for some other schools - thanks for
your time Kate You're welcome and have a great day.
From:
Sent:
To:
Cc:
Subject:
Kvaal, James
Thursday, July 01 , 201 o 4:44 PM
Arsenault, Leigh; Smith, Zakiya; Weko, Tom; Shireman, Bob
Madzelan, Dan
RE: Analysis Working Group Discussion
Here's some paper to start our conversation tomorrow. Thanks
James
-----Original Appointment-----
From: Arsenault, Leigh
Sent: Monday, June 28, 2010 1:38PM
To: Arsenault, Leigh; Smith, Zakiya; Kvaal, James; Madzelan, Dan; Weko, Tom; Shireman, Bob; WDCFB6-7C100
Subject: Analysis Working Group Discussion
When: Friday, July 02, 2010 3:00 PM-4:00 PM (GMT-05:00) Eastern Time (US & Canada).
Where: WDCFB6-7C100 or 1-877-784-4150 leader passcode )(8) participant passcocle ....._ _ ___.
When: Friday, July 02, 2010 3:00PM-4:00PM (GMT-05:00) Eastern Time (US & Canada).
Where: WDCFB6-7C100 or 1-877-784-4150 leader passcod articipant passcod,__ __ __,
Note: The GMT offset above does not reflect daylight saving time adjustments.
We need to reschedule due to a Secretary scheduling change, but would like this meeting to happen this week, in-
person, if possible.
Looks like this works for all on the scheduling assistant. Please let me know if you need a change.
2
Goals/1 mpetus
Analysis Group Agenda
July 2, 2010
Bui ld on GE data calls to inform policy development
Improve capacity to use data from different offices/databases
Analyze trends to support budget modeling
Respond to OMB interest
Possi ble Subjects of Analysis
For-profits/risky schools
Student debt
Completion
Other?
First Steps
Bettet Understanding the Impact of For-Profit Sector Trends
Challenge:
The for-profit sector has been growing at an astronomical rate with the number of institutions rising
by 222% and enrollment increasing over 450% since 1990. Live Pell Grant and Direct Loan
disbursement data indicate that these growth trends are now increasing at an even higher rate in part
due to the cont1nued economic downturn.
This unprecedented growth has generated significant interest in the media and among policymakers
due to its significant societal, political, and budgetary impacts. Just two weeks ago, an early voice
against the housing bubble, Steven Eisman, likened growth in the for-profit sector to that seen in the
sub-prime mortgage market. Given the massive surge of student aid going to for-profit institutions
due to growing enrollments, Senator Harkin has announced a series of hearings to begin on June
24th. Senior WH officials have expressed significant interest in better understanding the for-profit
sector, the likely effects of these trends, and if appropriate, considering possible policy responses
during the 2012 Budget development process.
Using the rich data sources at its disposal, the Department has the potential to become an
authoritative voice on the state of the for-profit sector and to drive policy changes when needed.
Aid disbursement data from FSA' s Common Origination and Disbursement (COD) system would
provide real-time information on how loan and grant assistance are allocated to these institutions
while National Student Loan Data System (NSLDS) data would help us better understand the
indebtedness and repayment patterns of these students. These operational data would complement
the broad statistical collections regularly conducted by the National Center for Educational
Statistics (NCES).
With a high-level commitment across critical offices, the Department can generate additional data
and analysis that will significantly improve our policy responses to the challenges in the for-profit
sector.
Road map for Addressing Issues in the For-Profit Sector:
To understand what policy actions to pursue, to ensure budget forecasts reflect current trends, and to
ensure we understand borrower outcomes and budget implications under different scenarios, the
Administration needs to improve its analytical capacity to answer the following key policy
questions:
Enrollment Trends: What are the enrollment trends in 2- and 4-year for-profit schools, how do
they compare to other institutions, and how do they diverge from past trends? If enrollment at
for-profit institutions continues to skyrocket, how will it affect borrower outcomes (e.g.,
indebtedness) and budgetary costs in Pell Grants and student loans?
ED currently tracks data for 2-year publics, 2-year for-profits, 4-year publics, and 4-year
privates, but its published analysis does not distinguish between traditional private 4-year
schools and private 4-year for-profit schools. If the average borrower at a for-profit school
generates higher costs to taxpayers, or if the ratio of for-profit institutions and non-profit
institutions changes significantly in the outyears, the specific costs associated with 4-year for-
profit institutions may not be fully captured in ED' s budget model. Because these schools are
included in a category with all four-year private schools, changes in the growth and behavior of
students attending these schools are not accounted for in the model as precisely as they could be.
Default Trends: What are the default trends at for-profit institutions, how do they compare to
other institutions, and how do they diverge from past trends? For the for-profit and other
sectors, has there been a not1ceable spike in defaults at the expiration of the cohort default
period?
ED assumes that increased defaults generally do not result in costs to the taxpayer because ED
will collect loans with added interest and fees in the future. However, it is not clear how
collection costs and other factors affect the budgetary costs of defaults. It is also not currently
possible to identify which types of defaulters from which types of schools are likely to repay
and which are not. If a new analysis demonstrated that students at certain for-profit schools
were not likely to repay enough of their loans to make the government whole, actions to restrict
enrollment at those institut1ons, or actions to otherwise reduce defaults at these institutions,
could generate taxpayer savings.
Repayment: Do borrowers from for-profit institutions choose different repayment options (IBR,
ICR) than those from other schools? Do borrowers from for-profit schools use deferments and
forbearances more frequently than other borrowers?
Repayment patterns can have a significant impact on program costs. However, ED does not
currently track repayment plans or use of deferments/forbearances for graduates of different
types of schools.
Using the data in its various systems - including NSLDS, COD, and NCES- to track and analyze
each of the five school sectors separately - using real-time data to spot trends - ED could:
Identify emerging patterns that merit close attention by policy officials and program staff
Look for causal relationships between enrollment and default trends and portfolio performance
Accurately document past portfolio performance for each school sector, develop assumptions
for future performance, and track how actual performance compares to these assumptions;
Develop altemati ve scenarios of future performance to better understand how different
assumptions would affect borrower outcomes and taxpayer costs;
Implement administrative actions (regulations, monitoring and oversight, use of appropriate
debt collection tools) to address problems and monitor impact; and
Develop strong legislative proposals backed by data, potentially with scoreable savings.
Other Questions:
There are a host of other related questions related to the for-profit sector that, if answered, could
lead to better understanding of trends and causes, improve cost projections, and enhance the
Department' s ability to devise effective administrative and legislative solutions. These include:
Federal Pelf Grants
What are for-profit sector Pel! Grant costs and what do we estimate that they will be over the
next few years?
If current for-profit growth trends continue, how will this change future Pell costs? What will
they look like if these trends grow at an even higher rate?
Indebtedness
What do we know about the high indebtedness and lower financial standing of for-profit
borrowers compared to others? How has this been changing over time?
How does our budgetary exposure change if current growth trends continue? How about at rates
higher than the current one?
Completers v. Non-completers
What is the mix of completers to non-completers at each type of school ?
What is the impact of non-completion on repayment and default performance?
How might our budgetary exposure change if the mix of borrowers between completers and
non-completers shifts?
Employment Outcomes
What wages are recent for-profit program completers receiving upon graduat1on?
How many program completers are working in fields associated with their education? If
applicable, how many of them are able to be certified for employment in their respective fields?
Next Steps:
OMB and ED should agree on a process and timeline to:
Refine the list of questions to be answered
Identify data and human capital needs and how to meet them
Collect the data and conduct analysis to answer the questions
Incorporate these new data into to existing budget models
Determine what legislative, budgetary, or administrative actions should be taken based on
the analysis
Prepare a polished report to Congress and the public with findings and supporting analysis
Develop mechanisms to monitor and report significant changes in this sector, in real-time
Institutionalize these steps, with clear roles for each contributing office
This process, if implemented well, could support a range of analytical needs in the student aid
programs going forward.
TO: Elise MWer, !PEDS Program Director; Thomas Weko, Associate Commissioner,
Postsecondmy Studies Division
FROM: Matthew Reed, Prot,:rram Director, The Institute for College Access & Success; Chair,
NP EC Financial Aid Data Working Group
RE: Challenges in Matching Campus-Level Datafrom U.S. Department of Education sources
Timely, accurate, and comprehensive data are critical to identifying and addressing what is and is
not working in higher education. Consumers, policymakers, and researchers all need user-
friendly access to meaningful data - data that can deepen our understanding of important issues
and inform decision-making at all levels. However, within the U.S. Department ofEducation,
different datasets use different identifiers for schools and campuses, and some datasets report
data for each campus while others group related campuses together. This makes it difficult if not
impossible to compare schools or campuses to analyze the impact of federal, state, and
institutional policies on outcomes such as enrollment, persistence, and completions. Although
other types of data are available, campus-based analyses can uniquely shed light on the
relationship between federal , state, and institutional financial aid investments and outcomes for
students with varied demographic characteristics.
This memo discusses preliminary findings and recommendations of the NPEC Financial Aid
Data Working Group (see Attachment A) regarding matching campus-level data from
Department of Education sources. It first describes the major data-matching challenges facing
users of these different data sources and their implications for research, policy and practice. It
then provides recommendations for improving the usability and accuracy of campus-level data.
The Context
Several agencies within the U.S. Department ofEducation provide higher education data. The
National Center for Education Statistics (NCES) conducts the National Postsecondary Student
Aid Survey (NPSAS) every four years, which provides representative data at the national level
and for several states. More frequently released data at the institution, state, and national levels
are available from NCES' Integrated Postsecondary Education Data System (IPEDS) surveys
and programmatic data and reports from Federal Student Aid (FSA) and the Office of
Postsecondary Education (OPE).
To make full use of these data sources, it is often necessary to combine FSNOPE data on the
usage of specific federal financial aid programs with comprehensive !PEDS data on enrollment,
completions, graduation rates, and other topics. For example, determining the percentage of all
undergraduates at a school applying for federal aid or using Pell Grants, PLUS loans, or any
other financial aid program requires combining FSA program data with IPEDS enrollment data.
The necessity of matching data from different sources in an accurate and comprehensive manner
is especially apparent in the Department's own efforts to combine data from NCES and
FSA/OPE sources, both for research and policy purposes and for public-facing consumer
information. For example:
o Graduation, transfer, and retention rates from NCES' s IPEDS appear on FSA' s FAFSA-On-
The-Web (FOTW) site alongside school information from FSA sources.
1
o Loan volume and cohort default rate data from FSA' s NSLDS appear on NCES' s College
Navigator site alongside data from IPEDS.
Without resolving the matching problem, consumer information from the Department may be
incomplete or even misleading for certain schools or campuses. For example, a student using
F AFSA-On-The-Web to apply for financial aid at the University of Phoenix would not be able to
view graduation, transfer, and retention rates for a specific campus due to mismatched levels of
reporting; the University of Phoenix only has one entry in FSA and one federal school code, but
reports its IPEDS data as 73 separate campuses.
The Root of the Problem: Inconsistent School Identifiers
Within the Department of Education, different data sources use different identifiers for schools
and campuses. IPEDS uses a unique 6-digit identifier (UNITID) for each campus included in its
surveys.
1
All schools receiving Title IV aid funds are required to report data in IPEDS, and other
postsecondary institutions have the opt1on to report.
FSA and OPE data use a separate identifier called the OPEID in their databases, though some
databases use other identifiers which are mapped to OPEIDs. At least in the datasets available on
the FSA and OPE web sites, the main campus of a school will have a 6-digit OPEID with a 2-
digit suffix of"OO," while other campuses will have the same 6-digit OPEID as the main campus,
but with a different 2-digit suffix (also called a location code
2
) . The IPEDS Header (HD) and
fnstitut1onal Characteristics (IC) files include 8-dig1t OPEIDs (which combine the 6-digit school
identifier and the 2-digit location code) in addition to the UNITIDs.
In the FSA Data Center, most datasets have 6-dig1t OPEIDs or 8-digit OPEIDs where the 2-digit
branch code is always "00", meaning data are effectively reported at the 6-digit OPEID level. It
is unclear if this is due to limitations in how the data are collected and stored in the underlying
databases, decisions about how to extract and report the data on the public data center, or some
combination of both. Data are reported at the 8-digit OPEID level, at least for some schools, in
the FSA data file on the usage of Pel I Grants and other federal financial aid grants.
While some schools process financial aid centrally across multiple campuses, in many cases it
should be possible for the FSA databases to capture information about financial aid usage based
on the campus the student attended while receiving the aid ("attending school"), as well as the
main office or location of the school ("reporting school"). This would make it easier to compare
data across campuses and combine financial aid usage data with other information about
enrollment and completion.
1
In this memo. we use "campus" to mean the institutions with mtique UNITIDs in the IPEDS HD file. wltich
generally correspond to t11e school " locations" in FSNOPE data. There may be cases where distinct UNlTIDs
represent different parts of a scl10ol t11at share a physical campus or where one UNITID represents parts of a school
tllat are not physically contiguous. As noted in the recommendations section of tllis memo, further documentation of
tl1e existing definitions for reporting mlits in botll FSA and IPEDS data would be helpful.
2
Some "locations" appear to be desi!,'llated as " bmnches" while otllers are not.
2
Data-Matching Challenges
To illustrate some of the challenges in matching IPEDS data to FSNOPE data, this section will
provide examples using the FSA grant volume data extracts available on the FSA Data Center
3
,
the FISAP data file from OPE
4
and the header (HD) and 12-month enrollment (EFFY) files
available on the IPEDS Data Center
5
for 2007-08. Similar issues arise when using other
FSA/ OPE data including the institution-level data files on loan volume, campus-based aid,
F AFSA applications, and cohort default rate data, as well as the OPE Pell data files .
6
In contrast,
other IPEDS data files can be easily matched to the IPEDS HD file via the UNITIDs.
Incomplete Matches Based on 8-digit OPEID
Even when FSA data are reported with 8-digit OPEIDs, one-to-one matches to IPEDS may not
be correct. As background, the IPEDS HD file contains 7,055 entries for postsecondary
institutions, each with a unjque UNITID and in most cases a unique 8-digit OPEID as we11.
7
Most FSA data files contain entries with unique 8-digit OPEIDs. To merge an FSA file with
IPEDS data, most users would start by matching the records based on the 8-digit OPEIDs
available in each file. However, some of these matches may not be accurate: an entry in the FSA
data extract with a given 8-digit OPEID may not refer specifically to the entry in IPEDS with
that same 8-digit OPEID.
8
To illustrate this point, the FSA data extract on federal financial aid grants has 5,505 entries with
unique 8-digit OPEIDs. Merging this FSA file with IPEDS using 8-digit OPEIDs results in 5,353
matches. However, these include 457 cases where the number of Pel/ Grant recipients reported
in the FSA Grant data is greater than the 12-month enrollment reported in IP EDS. This suggests
that these entries in the FSA data extract may actually represent data for more than one location
at a school.
9
3
See "Federal Student Aid- Data Center- Programmatic Volume Reports."
federdlstudenta id.ed. gov I datacenter/progranunatic. html
4
The FISAP is the application schools file with t11e Department annually to participate in campus-based financial
aid programs. The FISAP data file. available upon request from OPE. contains more extensive data t11an that shown
in the campus-based aid data e>.tract posted on U1e FSA Data Center.
5
See "Integrated Postsecondary Education Data System Data Center." nces.ed.gov/ipeds/datacenter/
6
federalstudentaid.ed.gov/datacenter/programmatic.html, "Federal Student Aid- Data Center- Application Volume
Reports." federalstudentaid.ed.gov/datacenter/application. html. "Federal Student Aid- Data Center- Default
Rates: federalstudentaid.ed.gov/datacenter/cohort. ht:InL "Federal PeU Grant Program End-of-Year Report and Other
Annual Data Reports." www2.ed.gov/finaid/prof/resources/data/pell-data. html
7
There are 44 cases where the OPEID is missing and 4 cases witl1 non-unique 8-digit OPEIDs.
8
Tllis matching problem is evident in FSA files where 8-digit OPEIDs all end in "00" as well as FSA flies where
some 8-digit OPEIDs have oilier suffixes.
9
There may be additional cases where one entry in the FSA data corresponds to multiple entries in IPEDS. These
occur when the 6-digit school identifier (ftrst 6 digits of t11e OPEID) appears in only one entry in the FSA data but in
multiple entries in the IPEDS data, regardless of whether t11e Pell count is greater than the enrollment.
3
For example, the 8-digit OPEID 00467300 matches to one entry in the FSA Grant file for "Baker
College" with 22,591 Pell Grant recipients. That 8-digit OPEID matches the campus named
"Baker Coll ege of Fli nt" in IPEDS, with a 12-month undergraduate enrollment of only 7,480.
This discrepancy suggests that this entry in the FSA Grant fi le actuall y represents many if not all
of the 11 Baker College campuses listed in IPEDS with the 6-digit OPEID 004673, as listed
below.
10
However, there is no definitive documentation of which campuses in !PEDS correspond
to each ent1y in FSA data. As discussed in the recommendations section, a comprehensive
crosswalk between OPEIDs in FSA data and UNlTIDs in IPEDS data would be very helpful in
ensuring that all entries on both sides are accurately matched, whether the matches are one-to-
one, or one-to-many.
FSA Fedetal G.-ant Volume File, 2007-08
OPEID Name State Zip Code School Ty(>e Federal Pell
Grant
Recipients
00467300 Baker College MI 48507-5508 Private-nonprofit 22.591
IPEDS HD/EFFY Files, 2007-08
8-digit UNITID Institution Name State Zill Code Sector 12-month
OPEID undergraduate
enr ollment
00467300 168847 Baker College of Flint MJ 48507-9987 Private not-for-profit,
4-year or above 7,480
00467301 404648 Baker College of MI 49601-9600 Private not-for-profit,
Cadillac 4-year or above 2.444
00467302 404082 Baker College of MI 48035 Private not-for-profit,
Clinton Township 4-year or above 7.569
00467303 171298 Baker College of MJ 49442 Private not-for-profit,
Muskegon 4-year or above 6,708
Owosso 4-year or above 3,804
Auburn Hills 4-year or above 5.357
00467306 381617 Baker College of Port MI 48060 Private not-for-profit,
Huron 4-year or above 2.271
00467309 414160 Baker College of MJ 49202-1290 Private not-for-profit,
Jackson 4-year or above 2,430
00467313 414708 Baker College Center MJ 48507 Private not-for-profit,
for Graduate Studies 4-year or above 7,068
Allen Park 4-year or above 3.249
004673A2 419572 Baker College MI 48326-2642 Private not-for-profit,
Corporate Services 4-year or above 707
10
Some campuses may not be represented in the FSA file because they do not participate in campus-based aid, but it
is not possible to detenuine that from the infonuation in these two files alone.
4
Arbitrary Groupings of Campuses based on 6-digit OPEID
In the example ofBaker College (previous page), one entry in an FSA fi le appears to correspond
to a group of entries in IPEDS that share the same 6-digit OPEID. There are also cases where it
appears that a school has multiple entries in an FSA dataset, each with its own distinct 6-digit
OPEID, corresponding to one or more IPEDS entries.
For example, Vatterott College appears under four distinct OPEIDs in the FSA Grants File,
giving the impression that these are four separate schools with the same name or four campuses
of the same school. However, looking at the IPEDS file, these same four 6-digit OPEIDs cover
17 campuses in groupings of one to ten campuses per 6-digit OPEID. To illustrate, the
percentage of undergraduates with Pell Grants is calculated below, first by matching the full 8-
digit OPEID in each file and then by matching each FSA Grant File entry to the IPEDS entries
with the same 6-digit OPEID. As in the examples on the previous page, there are several cases
where matching on the 8-digit OPEID is clearly inaccurate, as the number of Pel/ recipients
greatly exceeds the enrollment. Matching on the 6-digit OPEIDs, we get more plausible figures
for the percentage receiving Pell Grants, but they are difficult to interpret. For the 6-digit OPEID
025997, the Pell Grant percentage oj73% includes many campuses in Missouri but not all the
Missouri campuses of the school, and also includes campuses in several other states.
FSA Grants File, 2007-08
8-digit 6-digit School State School type Pell Gr;mt %with Pell, %with Pell,
OPEID OPEID recillicnts 8-digit 6-digit
OPEID match OPEID match
00750100 007501 VAITEROTT NE PROPRIETARY 677 68% 68%
COLLEGE
02069300 020693 VATTEROTT IL PROPRIETARY 1111 215% 76%
COLLEGE
02599700 025997 VATTEROTT MO PROPRIETARY 5412 371% 73%
COLLEGE
02609200 026092 VATTEROTT lA PROPRIETARY 1104 271% 69%
COLLEGE
IPEDS HD and EFFY Files, 2007-08
12-mont h
8-digit 6-digit undergaduate
OPETD OPEID UNITID Institution name City State Secto enrollment
Vatterott College-
Spring Valley Private for-
00750100 007501 181756 C:uupus Omaha NE profit, 2-year 991
Private for-
02069300 020693 148140 Vatterott College Quincy IL profit, 2-year 516
Private for-
Oklahoma profit, 4-year or
02069301 020693 437060 Vatterott CoLlege City OK above 631
Private for-
Vatterott Education profit, less-than
020693AJ 020693 450553 Center Dallas TX 2-year 309
5
12-month
8-digit 6-digit undergraduate
OPEID OPEID UNITID Institution name City State Sector enrollment
Private for-
profit, 4-year or
02599700 025997 245342 Yatterott College Berkeley MO above
Private for-
02599701 025997 404383 Vaucrott College Kansas City MO profit, 2-year
Private for-
02599702 025997 404365 Yatterott College Springfield MO profit, 2-year
Private for-
02599703 025997 404374 Vatterott CoUege Joplin MO profit, 2-year
Private for-
profit, 4-year or
02599705 025997 436191 Vaucrott College Sunset Hi li s MO above
Vatterott College- Private for-
02599706 025997 440882 Tulsa Tulsa OK profit, 2-year
02599709 025997 440891 Wichita Wichita KS profit 2-year
Vatteroll College- Private for-
02599710 025997 440873 Memphis Memphis TN profit, 2-year
Yatterott College- Broadview Private for-
0259971] 025997 442408 Cleveland Heights OH profit, 2-year
Yatterot College- Private for-
025997A1 025997 445559 O'Fallon Campus O'Fallon MO profit, 2-year
Private for-
02609200 026092 373058 Vatterott CoUege Des Moines IA profit, 2-year
Private for-
02609202 026092 436182 Yatterott CoLlege Saint Joseph MO profit, 2-year
Private for-
02609203 026092 445726 Lecole Culinaire Saint Louis MO profit, 2-year
In cases llke this, there is no single variable in the FSA or IPEDS data files which clearly
indicates which entries should be grouped together as one school. However, the name, web
address, and employer identification number (EIN) is the same for all or almost of these
campuses in IPEDS, suggesting that they are all part of one school. The implication of these
groupings is that FSA data such as cohort default rates and loan volume may represent neither
an individual campus nor the entire school, but an intermediate grouping that appears to be
based on the historical assignment of OPEIDs.
Campus Groupings Across 6-digit OPEIDs
In some cases, multiple campuses (with unique 6-digit OPEIDs) may report data as a group
under one campus' 6-digit OPEID. One such case is the University of Michigan' s FISAP data.
The FISAP is the application schools file to participate in federal campus-based aid programs.
The three University of Michigan campuses fil e a single FISAP under the University of
Michigan-Ann Arbor's OPEID, as shown in the following data file excerpts:
6
1459
1220
711
538
977
256
370
868
461
531
408
406
777
OPE FISAP File, 2007-08
OPEID Name State Zip code School t)'Jle 12-month
undergraduate
enrollment
00232500 University of Michigan - Ann MI 48109-1340 Public 4 year 41,833
Arbor
!PEDS HD/EFFY Files, 2007-08
8-digit 6-digit UNITID I nstitution name State ZiJl code Sector 12-month
OPEID OPEID undergraduate
enrollment
U Diversity of
Michigru1-Ann Public, 4-year
00232500 002325 170976 Arbor MI 48109 or above 26.964
University of
Michigru1- 48128- Public, 4 - y e ~ u
00232600 002326 171137 Dearbom MI 1491 or above 7,875
University of 48502- Public, 4 - y e ~ u
00232700 002327 171146 Michigru1-Flint Ml 1950 or above 7,046
There may be other cases like the University of Michigan, but the current configuration of
federal financial aid data files make it difficult to determine which matches are appropriate. The
12-month undergraduate enrollmentfigure reported on the FISAP exceeds the equivalent figure
from !PEDS in many cases when using a 6-digit OPE!D match, even when taking into account
groupings ojcampuses in !PEDS with the same 6-digit OPE/D. There are also many campuses
in !PEDS that have 6-digit OPE!Ds that do not appear in the FISAPfile. However, it is difficult
to determine if this is because they do not participate in campus-based aid programs or if, as with
the University of Michigan campuses in Flint and Dearborn, they really should be grouped with
other campuses that file FISAP together.
Recommendations for Improving Usability of FSA/OPE and IPEDS data
In recent years, the Department has taken steps toward increased transparency by posting more
institution-level data online than ever before. To ensure that these data are fully usable to answer
questions posed by consumers, researchers, and policymakers, the Department should make its
datasets more compatible so that when combined, they provide comprehensive, comparable, and
accurate data on a] I schools and campuses. By better facilitating the matching process between
datasets, the Department would substantially improve both consumers' ability to make informed
choices about post-secondary education and training, and researchers' and policymakers ability
to identify trends and analyze the impact of federal, state, and institutional policies on student
outcomes such as enrollment, persistence, and completions.
At minimum, the Department should provide sufficient documentation to allow users to match
data from IPEDS with data extracted from FSA/OPE databases and reports:
For each data year (the academic year that a dataset describes), provide a crosswalk
mappmg:
7
o each 6 digit OPEID in FSA/OPE data to the corresponding UNITID(s) and vice
versa.
versa.
Include documentation with each dataset detailing which crosswalk to use for that dataset
and any caveats or special notes.
Clearly document any cases where data reported in one file represent more than one
campus.
Only provide the 6-digit OPEID in FSA/OPE files where data are only reported at the 6-
dig1t OPEID level , not the 8-digit OPEID for the main campus.
Format OPEIDs as text so leading zeroes appear.
Clearly document the date at which data were extracted or collected and whether the data
might be updated in the future.
fn addit1on, we urge the Department to consider these additional steps to reduce the need for
such crosswalks and improve the availabil1ty, quality and comparability of data:
Require reporting of financial aid data based on the attended campus/location (rather than
the main campus for a group of schools) for all FSA, OPE, and NCES data.
Adopt common identifiers for each school and campus/location to be used across all
datasets.
Adopt common rules and practices for adding, deleting, and changing the identifier for a
given campus or school as changes in status, control, or affiliation occur over time.
Include a consistent sector designation which is based on program level and type of
control (ex. public 4-year) in all datasets.
8
National Postsecondary Education Cooperative (NPEC)
Financial Aid Data Working Group
Mission Statement
Attachment A
Timely, accurate, and comprehensive data is critical to understanding and addressing persistent
disparities in both access and success. The NPEC Working Group on Financial Aid Data will
consider improvements to federal data on:
financial aid usage
financial need and the economic background of students
the role of financial aid in persistence and completion
The group will investigate options for improving data collection and dissemination and produce
a white paper with recommendations for how NCES could improve the IPEDS Student Financial
Aid (SFA) survey and work with Federal Student Aid (FSA) and the Office ofPostsecondary
Education (OPE) to incorporate their data to:
Maximize the accuracy and usefulness of available federal data for policymakers, consumers,
and researchers
Limit institutional burden
Provide frequent and timely updates of financial aid data between the quadrennial release of
National Postsecondary Student Aid Survey (NPSAS) data
NPSAS provides accurate and comprehensive data on financial aid, but is only conducted every
four years and provides little or no data at the state and institution levels. IPEDS and the
FSA/OPE data sets are updated at least annually and include state- and institution-level data, but
are not as comprehensive in scope. Current IPEDS SF A data cover only first-time, full-time
undergraduates and provide only annual snapshots, with no information about cumulative usage
of financial aid. Data are self-reported by thousands of campuses, leading to some differences in
the interpretation of survey questions and calculation of the figures. Programmatic data from
FSA/OPE are usually provided without important contextual information about the
demographics, fields of study, and enrollment and completion status of students at the
institutions of higher education. Matching data from FSA/OPE sources to IPEDS data is impeded
by differences in the campus identifiers used and the aggregation or disaggregation of multiple
campuses in different data sets. Using data from FSA and OPE could potentially increase the
accuracy and scope of campus-level and aggregate statistics and reduce institutional burden by
eli minating the need for certain questions in IPEDS.
2
Student Financial Aid Data Working Group
Meeting Roster
May 18,2010
Matthew Reed (Chairperson)
Program Di rector
TI1e Institute for College Access and Success
405 14th Street Suite 1100
Oakland, CA 94704
Phone: 510-318-7900
MREED@TICAS.ORG
Victor Borden
Associate Vice President
University Planning, Institutional Research and
Accountability
Indiana Uni versity
400 East 7th Street, Poplars 807
Bloomington, TN 47405
Phone: 812-856-0855
Fax: 812-856-1209
VBORDEN@INDJANA.EDU
Rita Grogan
Director
Financial Aid
Mission College
3000 Mission College Boulevard, MS#9
Santa Clara, CA 95054
Phone: 408-855-5072
Fax: 408-855-5546
RITA.GROGAN@WVM.EDU
Denise Hammon
Vice President for Policy & Research
Association of Independent Colleges &
Universities in Massachusetts
11 Beacon Street, Suite 1224
Boston, MA 02108-3093
Phone: 617-742-5147 ext. 104
Fa..x: 617-742-3089
DENISE.HAMMON@BC.EDU
Sandy Baum
Higher Education Policy Analyst
College Board
161 East Chicago A venue
Apartment 45C
Chicago, IL 60611
Phone: 518-369-3774
SBA UM@SKIDMORE.EDU
Bryan Cook
Director
Center for Policy Analysis
American Cotmcil on Education
One Dupont Circle, NW
Washington, DC 20036
Pbone:202-939-938l
Fa..x: 202-785-2990
BRYAN_ COOK@ACE.NCHE.EDU
Tammy Halligan
Director
Regulatory Affairs, Government Relations
Career College Association
1101 Connecticut Avenue, NW, Suite 900
Phone: 202-336-6839
Fa.. x: 202-336-6828
TAMMYH@CAREER.ORG
Gigi Jones
Senior Research and Policy Analyst
National Association oflndependent Colleges
and Universities
Phone: 202-785-8866
Fax: 202-835-0003
GIGI@NAICU.EDU
Page 1
Meeting Roster
Mark Kantrowitz
Publisher
FinAid.org and FastWeb.com
PO Box 2056
Cranberry Township, PA 16066
Phone: 724-538-4500
Fax: 724-538-4502
MKANT@F ASTWEB.COM
Lesley McBain
Government Relations and Policy Analysis
American Association of State Colleges and
Universities
1307 New York Avenue, NW, Suite 500
Phone:202-478-7831
F a,-x: 202-4 78-5491
MCBAINL@AASCU.ORG
Brian Prescott
Director of Policy Research
Policy Analysis and Research
Western Interstate Commission for Higher
Education
3035 Center Green Drive, Suite 200
Boulder, CO 80301-2204
Phone: 303-541-0255
Fax: 303-541-0243
BPRESCOIT@WICHE.EDU
NCES Staff
Elise Miller
IPEDS Program Director
Postsecondary, Adult, and Career Education
Division
National Center for Education Statistics
1990 K Street NW, Suite 8ll3A
Phone: 202-502-7318
fa,'(: 202-502-7460
ELISE.MILLER@ED.GOV
May 18,2010
Christine Keller
Director of Research & Policy Analysis and
Association of Public & Land-Grant Universities
Phone: 202-478-6043
Fa,-x: 202-478-6061
CKELLER@APLU .ORG
Shirley Ort
Associate Provost and Director
Student Aid
University ofNorth Carolina- Chapel Hill
PO Box 1080, CB #2300
Chapel Hill , NC 27514-1080
Phone: 919-962-2315
Fa,x: 919-962-2716
SAO@UNC.EDU
Dawn Geonimo Terkla
Associate Provost
Institutional Research
Tufts University
28 Sawyer Avenue
Medford, MA 02155
Phone: 617-627-3274
Fa,x: 617-627-3993
DA WN.TERKLA@TUFTS.EDU
Guest
Diane Cheng
Research Associate
The lnstitute for College Access and Success
Oakland, CA 94612
Phone: 510-318-7900
DCHENG@TICAS.ORG
Page 2
Meeting Roster
Consultants/Contractors
Brenda Albright
Consultant
Franklin Education Group
220 Countryside Drive
Franklin, TN 37069-4149
Phone: 615-790-2739
Fa,'C 6.1 5-791-6087
BNALBRlGHT@AOL.COM
May 18,2010
Patdcia Steele
Research Consultant
HigherEd Insight, LLC
5335 Wisconsin Avenue, NW, Suite 440
Phone: 202-730-1252
PSTEELE@HIGHEREDfNSIGHT.COM
Page 3
From:
Sent:
To:
Subject:
Attachments:
Lauren Asher (LAsher@ticas.org]
Thursday, July 01 , 2010 4:01 PM
Arsenault, Leigh; Smith, Zakiya; Kvaal, James
npec opeid memo
OPEID matching memo.pdf
Here's an electronic copy of the memo on OPEID matching we discussed on Monday. FYI, Elise shared it with Bob last
week.
(Please note our new phone number and address!)
Lauren Asher
President
The Institute for College Access & Success
405 14th St. , 11th Floor
Oakland, CA 94612
(510) 318-7900, x304
ljasher@ticas.org
www.ticas.org
www. projectonstudentdebt. org
www. college-insight. org
DATE: June 21, 2010
TO: Elise Miller, !PEDS Program Director; Thomas Weko, Associate Commissioner,
Postsecondary Studies Division
FROM: Matthew Reed, Program Director, The Institute for College Access & Success; Chair,
NPEC Financial Aid Data Working Group
RE: Challenges in Matching Campus-Level Data from US. Department of Education sources
friendly access to meaningful data- data that can deepen our understanding of important issues
other types of data are avai lable, campus-based analyses can uniquely shed light on the
relationship between federal, state, and institutional financial aid investments and outcomes for
The Context
Several agencies within the U.S. Department of Education provide higher education data. The
To make full use of these data sources, it is often necessary to combine FSA/OPE data on the
usage of specific federal financial aid programs with comprehensive IPEDS data on enrollment,
undergraduates at a school applying for federal aid or using Pel! Grants, PLUS loans, or any
is especially apparent in the Department' s own efforts to combine data from NCES and
FSA/ OPE sources, both for research and policy purposes and for public-facing consumer
1
o Graduation, transfer, and retention rates from NCES's IPEDS appear on FSA's FAFSA-On-
o Loan volume and cohort default rate data from FSA's NSLDS appear on NCES's College
FAFSA-On-The-Web to apply for financial aid at the University ofPhoenix would not be able to
reports its !PEDS data as 73 separate campuses.
and campuses. IPEDS uses a unique 6-digit identifier (UNTTID) for each campus included in its
surveys. All schools receiving Title IV aid funds are required to report data in IPEDS, and other
postsecondary institutions have the option to report.
digit suffix of "OO," while other campuses will have the same 6-digit OPEID as the main campus,
2
). The IPEDS Header (JID) and
Institutional Characteristics (IC) files include 8-digit OPEIDs (which combine the 6-digit school
fn the FSA Data Center, most datasets have 6-digit OPEIDs or 8-digit OPEIDs where the 2-digit
combinat1on of both. Data are reported at the 8-digit OPEID level, at least for some schools, in
the FSA data file on the usage ofPell Grants and other federal financial aid grants.
data across campuses and combine financi al aid usage data with other information about
1
In tllis memo. we use "campus" to mean t11e institutions with unique UNITIDs in t11e IPEDS HD file. which
generally correspond to the school "locations" in FSA/OPE data. There may be cases where distinct UNITIDs
represent different parts of a school that share a physical campus or where one UNITID represents parts of a school
that are not physically contiguous. As noted in the recommendations section of this memo. further documentation of
t11e existing definitions for reporting units in both FSA and IPEDS data would be helpful.
2
Some "locations" appear to be designated as "branches" wllile others are not.
2
3
,
4
5
6
In contrast,
7
8
matches. However, these include 457 cases where the number of Pel! Grant recipients reported
at a school.
9
3
See "Federal Student Aid- Data Center- Prognunmatic Volume Reports,"
federalstudentaid.ed.gov/datacenter/prof..>rdnunatic.html
4
The FISAP is the application schools file with the Department annually to participate in campus-based financial
aid programs. The FISAP data file, available upon request from OPE, contains more e>..1ensive data than that shown
in the campus-based aid data e>..trdct posted on the FSA Data Center.
5
See "Integrated Postsecondary Education Data System Data Center. " nces.ed.gov/ipeds/datacenter/
6
See "Federal Student Aid- Data Center- Prognunmatic Volume Reports,"
federalstudentaid.ed.gov/datacenter/prob,>rdnunatic.html, "Federal Student Aid- Data Center- Application Volume
Reports." federdlstudentaid.ed.gov/datacenter/application.htmL "Federal Student Aid- Data Center- Default
Rates," federdlstudentaid.ed.gov/datacenter/cohort.html. "Federal Pel! Grant Program End-of-Year Report and Other
Annual Data Reports." www2.ed.gov/:finaid/prof/resources/data/pell-data. html
7
There are 44 cases where the OPEID is missing and 4 cases with non-unique 8-digit OPEIDs.
8
This matching problem is evident in FSA files where 8-digi t OPEIDs all end in "00" as well as FSA files where
some 8-digit OPEIDs have ot11er suffixes.
9
There may be additional cases where one entry in the FSA data corresponds to multiple entries in !PEDS. These
occur when the 6-digi t school identifier (first 6 digits of the OPEID) appears in only one entty in the FSA data but in
multiple entri es in the !PEDS data, regardless of whether the Pel! count is greater than the enrollment.
3
below.
10
However, there is no definitive documentation ojwhich campuses in IPEDS correspond
to each ently in FSA data. As discussed in the recommendations section, a comprehensive
OPEID Name State Zi1> Code School Ty(>e Federal Pell
Grant
Recipients
00467300 Baker College Ml 48507-5508 Private-nonprofit 22,591
8-digit UNITID Institution Name State Zit> Code Sector 12-month
OPEID undergraduate
enrollment
Aubum Hills 4-year or above 5.357
00467317 444167 Baker College of MI 48101 Private not-for-profit
AllenPmk 4-year or above 3.249
10
Some campuses may not be represented in the FSA fi le because they do not participate in campus-based aid. but it
is not possible to detenuine that from the information in these two files alone.
4
where matching on the 8-digit OPEID is clearly inaccurate, as the number of Pel! recipients
025997, the Pel! Grant percentage of 73% includes many campuses in Missouri but not all the
8-digit 6-di git School State Scbool type Pell Grant %with Pell, % witb Pell,
OPEID OPEID reciJlicnts 8-digit 6-digit
OPEID match OPEID matcb
00750100 007501 VAITEROTT NE PROPRlETARY 677 68% 68%
COLLEGE
02069300 020693 VATIEROTT IL PROPRIETARY 1111 215% 76%
COLLEGE
02599700 025997 VATIEROTT MO PROPRIETARY 5412 371% 73%
COLLEGE
02609200 026092 VATTEROTT IA PROPRIETARY 1104 271% 69%
COLLEGE
12-month
Vatterotl College-
Spring VaJiey Private for-
00750100 007501 181756 Campus Omaha NE profit, 2-year 991
Private for-
02069300 020693 148140 Vatterott College Quincy lL profit, 2-year 516
Private for-
02069301 020693 437060 Vatterolt College City OK above 631
Private for-
Vatterott Education profit, less-tl1<m
020693Al 020693 450553 Center Dallas TX 2-year 309
5
12-month
8-digit 6-di git undergraduate
Private for-
profit, 4-year or
02599700 025997 245342 Vatterott College Berkeley MO above
Private for-
02599701 025997 404383 Vattcrott College Kansas City MO profit, 2-year
Private for-
02599702 025997 404365 Vatterott College Springfield MO profit, 2-year
Private for-
02599703 025997 404374 Vatterott College Joplin MO profit 2-year
Private for-
profit, 4-year or
02599705 025997 436191 Vatterott College Sunset Hills MO above
Vatterotl College- Private for-
02599709 025997 440891 Wichita Wichita KS profit, 2-year
Vatterott College- Broadview Private for-
02599711 025997 442408 Cleveland Heights OH profit, 2-year
Vatterot College- Private for-
025997A1 025997 445559 O'Fallon Campus O'Fallon MO profit, 2-vear
Private for-
02609200 026092 373058 Vatterott College Des Moines IA profit 2-year
Private for-
02609202 026092 436182 Vatterott College Saint Joseph MO profit, 2-year
Private for-
em individual campus nor the entire school, but an intermediate grouping that appears to be
The three University of Michigan campuses fil e a si ngle FISAP under the University of
Michigan-Ann Arbor' s OPEID, as shown in the following data file excerpts:
6
1459
1220
711
538
977
256
370
868
461
531
408
406
777
undergraduate
enrollment
00232500 University of Michigan- Ann MI 48109-1340 Public 4 year 41,833
Arbor
enrollment
University of
Michigan-Ann Public, 4-year
00232500 002325 170976 Arbor MT 48109 or above 26,964
University of
Michigan- 48128- Public, 4-year
00232600 002326 171137 Dearborn MI 1491 or above 7,875
University of 48502- Public, 4-year
00232700 002327 171146 Michigan-Flint MT 1950 or above 7,046
from JPEDS in many cases when using a 6-digit OPEJD match, even when tahng into account
groupings ofcampuses in !PEDS with the same 6-digit OPEID. There are also many campuses
in !PEDS that have 6-digit OPE!Ds that do not appear in the FISAP file. However, it is difficult
accurate data on all schools and campuses. By better facilitating the matching process between
7
mappmg:
o each 6 digit OPEID in FSAJOPE data to the corresponding UNITID(s) and vice
versa.
versa.
campus.
dig1t OPEID level, not the 8-digit OPEID for the main campus.
In addition, we urge the Department to consider these additional steps to reduce the need for
such crosswalks and improve the availability, quality and comparability of data:
datasets.
given campus or school as changes in status, control , or affiliation occur over time.
8
Mission Statement
Attachment A
financial aid usage
and researchers
2
Meeting Roster
May 18,2010
Program Di rector
Oakland, CA 94704
Phone: 510-318-7900
MREED@TICAS.ORG
Victor Borden
Accountability
Indiana Uni versity
Phone: 812-856-0855
Fax: 812-856-1209
VBORDEN@INDJANA.EDU
Rita Grogan
Director
Financial Aid
Mission College
Phone: 408-855-5072
Fax: 408-855-5546
RITA.GROGAN@WVM.EDU
Denise Hammon
Boston, MA 02108-3093
Phone: 617-742-5147 ext. 104
Fa..x: 617-742-3089
Sandy Baum
College Board
Apartment 45C
Chicago, IL 60611
Phone: 518-369-3774
SBA UM@SKIDMORE.EDU
Bryan Cook
Director
Pbone:202-939-938l
Fa..x: 202-785-2990
Tammy Halligan
Director
Phone: 202-336-6839
Fa.. x: 202-336-6828
TAMMYH@CAREER.ORG
Gigi Jones
and Universities
Phone: 202-785-8866
Fax: 202-835-0003
GIGI@NAICU.EDU
Page 1
Meeting Roster
Mark Kantrowitz
Publisher
PO Box 2056
Phone: 724-538-4500
Fax: 724-538-4502
MKANT@F ASTWEB.COM
Lesley McBain
Universities
Phone:202-478-7831
F a,-x: 202-4 78-5491
MCBAINL@AASCU.ORG
Brian Prescott
Education
Phone: 303-541-0255
Fax: 303-541-0243
BPRESCOIT@WICHE.EDU
NCES Staff
Elise Miller
Division
Phone: 202-502-7318
fa,'(: 202-502-7460
ELISE.MILLER@ED.GOV
May 18,2010
Christine Keller
Phone: 202-478-6043
Fa,-x: 202-478-6061
CKELLER@APLU .ORG
Shirley Ort
Student Aid
PO Box 1080, CB #2300
Phone: 919-962-2315
Fa,x: 919-962-2716
SAO@UNC.EDU
Dawn Geonimo Terkla
Associate Provost
Tufts University
28 Sawyer Avenue
Medford, MA 02155
Phone: 617-627-3274
Fa,x: 617-627-3993
Guest
Diane Cheng
Research Associate
Oakland, CA 94612
Phone: 510-318-7900
DCHENG@TICAS.ORG
Page 2
Meeting Roster
Brenda Albright
Consultant
Phone: 615-790-2739
Fa,'C 6.1 5-791-6087
BNALBRlGHT@AOL.COM
May 18,2010
Patdcia Steele
Research Consultant
Phone: 202-730-1252
Page 3
From:
Sent:
To:
Subject:
Tom,
Thanks
From: Shireman, Bob
Kvaal, James
Thursday, July 01 , 201 o8:12AM
Weko, Tom
FW: Executive Leadership Meeting/Postsecondary Institutional Data Team
Sent: Friday/ June 18
1
2010 7:41AM
To: Kvaal/ James
Cc: Ferguson, Keith
Subject: FW: Executive Leadership Meeting/Postsecondary Institutional Data Team
From: Weko, Tom
Sent: Thursday/ June 17
1
2010 6:25PM
To: Kanter/ Martha
Cc: Shireman, Bob; Miller/ Elise; Shedd, Jessica
Subject: Executive Leadership Meeting/Postsecondary Institutional Data Team
Dear Martha and Bob,
My regards,
Tom Weko
Postsecondary
Data Projectpdf ...
2
TO: Elise MWer, !PEDS Program Director; Thomas Weko, Associate Commissioner,
Postsecondmy Studies Division
FROM: Matthew Reed, Prot,:rram Director, The Institute for College Access & Success; Chair,
NP EC Financial Aid Data Working Group
RE: Challenges in Matching Campus-Level Datafrom U.S. Department of Education sources
friendly access to meaningful data - data that can deepen our understanding of important issues
other types of data are available, campus-based analyses can uniquely shed light on the
relationship between federal , state, and institutional financial aid investments and outcomes for
The Context
Several agencies within the U.S. Department ofEducation provide higher education data. The
To make full use of these data sources, it is often necessary to combine FSNOPE data on the
usage of specific federal financial aid programs with comprehensive !PEDS data on enrollment,
undergraduates at a school applying for federal aid or using Pell Grants, PLUS loans, or any
is especially apparent in the Department's own efforts to combine data from NCES and
FSA/OPE sources, both for research and policy purposes and for public-facing consumer
o Graduation, transfer, and retention rates from NCES' s IPEDS appear on FSA' s FAFSA-On-
1
o Loan volume and cohort default rate data from FSA' s NSLDS appear on NCES' s College
F AFSA-On-The-Web to apply for financial aid at the University of Phoenix would not be able to
reports its IPEDS data as 73 separate campuses.
and campuses. IPEDS uses a unique 6-digit identifier (UNITID) for each campus included in its
surveys.
1
All schools receiving Title IV aid funds are required to report data in IPEDS, and other
postsecondary institutions have the opt1on to report.
digit suffix of"OO," while other campuses will have the same 6-digit OPEID as the main campus,
2
) . The IPEDS Header (HD) and
fnstitut1onal Characteristics (IC) files include 8-dig1t OPEIDs (which combine the 6-digit school
In the FSA Data Center, most datasets have 6-dig1t OPEIDs or 8-digit OPEIDs where the 2-digit
combination of both. Data are reported at the 8-digit OPEID level, at least for some schools, in
the FSA data file on the usage of Pel I Grants and other federal financial aid grants.
data across campuses and combine financial aid usage data with other information about
1
In this memo. we use "campus" to mean the institutions with mtique UNITIDs in the IPEDS HD file. wltich
generally correspond to t11e school " locations" in FSNOPE data. There may be cases where distinct UNlTIDs
represent different parts of a scl10ol t11at share a physical campus or where one UNITID represents parts of a school
tllat are not physically contiguous. As noted in the recommendations section of tllis memo, further documentation of
tl1e existing definitions for reporting mlits in botll FSA and IPEDS data would be helpful.
2
Some "locations" appear to be desi!,'llated as " bmnches" while otllers are not.
2
3
,
4
5
6
In contrast,
7
8
matches. However, these include 457 cases where the number of Pel/ Grant recipients reported
at a school.
9
3
federdlstudenta id.ed. gov I datacenter/progranunatic. html
4
The FISAP is the application schools file with t11e Department annually to participate in campus-based financial
aid programs. The FISAP data file. available upon request from OPE. contains more extensive data t11an that shown
in the campus-based aid data e>.tract posted on U1e FSA Data Center.
5
See "Integrated Postsecondary Education Data System Data Center." nces.ed.gov/ipeds/datacenter/
6
federalstudentaid.ed.gov/datacenter/programmatic.html, "Federal Student Aid- Data Center- Application Volume
Reports." federalstudentaid.ed.gov/datacenter/application. html. "Federal Student Aid- Data Center- Default
Rates: federalstudentaid.ed.gov/datacenter/cohort. ht:InL "Federal PeU Grant Program End-of-Year Report and Other
Annual Data Reports." www2.ed.gov/finaid/prof/resources/data/pell-data. html
7
There are 44 cases where the OPEID is missing and 4 cases witl1 non-unique 8-digit OPEIDs.
8
Tllis matching problem is evident in FSA files where 8-digit OPEIDs all end in "00" as well as FSA flies where
some 8-digit OPEIDs have oilier suffixes.
9
There may be additional cases where one entry in the FSA data corresponds to multiple entries in IPEDS. These
occur when the 6-digit school identifier (ftrst 6 digits of t11e OPEID) appears in only one entry in the FSA data but in
multiple entries in the IPEDS data, regardless of whether t11e Pell count is greater than the enrollment.
3
below.
10
However, there is no definitive documentation of which campuses in !PEDS correspond
to each ent1y in FSA data. As discussed in the recommendations section, a comprehensive
OPEID Name State Zip Code School Ty(>e Federal Pell
Grant
Recipients
00467300 Baker College MI 48507-5508 Private-nonprofit 22.591
8-digit UNITID Institution Name State Zill Code Sector 12-month
OPEID undergraduate
enr ollment
Auburn Hills 4-year or above 5.357
Allen Park 4-year or above 3.249
10
Some campuses may not be represented in the FSA file because they do not participate in campus-based aid, but it
is not possible to detenuine that from the infonuation in these two files alone.
4
where matching on the 8-digit OPEID is clearly inaccurate, as the number of Pel/ recipients
025997, the Pell Grant percentage oj73% includes many campuses in Missouri but not all the
8-digit 6-digit School State School type Pell Gr;mt %with Pell, %with Pell,
OPEID OPEID recillicnts 8-digit 6-digit
OPEID match OPEID match
00750100 007501 VAITEROTT NE PROPRIETARY 677 68% 68%
COLLEGE
02069300 020693 VATTEROTT IL PROPRIETARY 1111 215% 76%
COLLEGE
02599700 025997 VATTEROTT MO PROPRIETARY 5412 371% 73%
COLLEGE
02609200 026092 VATTEROTT lA PROPRIETARY 1104 271% 69%
COLLEGE
12-mont h
Vatterott College-
Spring Valley Private for-
00750100 007501 181756 C:uupus Omaha NE profit, 2-year 991
Private for-
02069300 020693 148140 Vatterott College Quincy IL profit, 2-year 516
Private for-
02069301 020693 437060 Vatterott CoLlege City OK above 631
Private for-
Vatterott Education profit, less-than
020693AJ 020693 450553 Center Dallas TX 2-year 309
5
12-month
8-digit 6-digit undergraduate
Private for-
profit, 4-year or
02599700 025997 245342 Yatterott College Berkeley MO above
Private for-
02599701 025997 404383 Vaucrott College Kansas City MO profit, 2-year
Private for-
02599702 025997 404365 Yatterott College Springfield MO profit, 2-year
Private for-
02599703 025997 404374 Vatterott CoUege Joplin MO profit, 2-year
Private for-
profit, 4-year or
02599705 025997 436191 Vaucrott College Sunset Hi li s MO above
02599709 025997 440891 Wichita Wichita KS profit 2-year
Vatteroll College- Private for-
Yatterott College- Broadview Private for-
0259971] 025997 442408 Cleveland Heights OH profit, 2-year
Yatterot College- Private for-
025997A1 025997 445559 O'Fallon Campus O'Fallon MO profit, 2-year
Private for-
02609200 026092 373058 Vatterott CoUege Des Moines IA profit, 2-year
Private for-
02609202 026092 436182 Yatterott CoLlege Saint Joseph MO profit, 2-year
Private for-
an individual campus nor the entire school, but an intermediate grouping that appears to be
The three University of Michigan campuses fil e a single FISAP under the University of
Michigan-Ann Arbor's OPEID, as shown in the following data file excerpts:
6
1459
1220
711
538
977
256
370
868
461
531
408
406
777
undergraduate
enrollment
00232500 University of Michigan - Ann MI 48109-1340 Public 4 year 41,833
Arbor
enrollment
U Diversity of
Michigru1-Ann Public, 4-year
00232500 002325 170976 Arbor MI 48109 or above 26.964
University of
Michigru1- 48128- Public, 4 - y e ~ u
00232600 002326 171137 Dearbom MI 1491 or above 7,875
University of 48502- Public, 4 - y e ~ u
00232700 002327 171146 Michigru1-Flint Ml 1950 or above 7,046
from !PEDS in many cases when using a 6-digit OPE!D match, even when taking into account
groupings ojcampuses in !PEDS with the same 6-digit OPE/D. There are also many campuses
in !PEDS that have 6-digit OPE!Ds that do not appear in the FISAPfile. However, it is difficult
accurate data on a] I schools and campuses. By better facilitating the matching process between
mappmg:
7
versa.
versa.
campus.
dig1t OPEID level , not the 8-digit OPEID for the main campus.
fn addit1on, we urge the Department to consider these additional steps to reduce the need for
such crosswalks and improve the availabil1ty, quality and comparability of data:
datasets.
given campus or school as changes in status, control, or affiliation occur over time.
8
Mission Statement
Attachment A
financial aid usage
and researchers
2
Meeting Roster
May 18,2010
Program Di rector
Oakland, CA 94704
Phone: 510-318-7900
MREED@TICAS.ORG
Victor Borden
Accountability
Indiana Uni versity
Phone: 812-856-0855
Fax: 812-856-1209
VBORDEN@INDJANA.EDU
Rita Grogan
Director
Financial Aid
Mission College
Phone: 408-855-5072
Fax: 408-855-5546
RITA.GROGAN@WVM.EDU
Denise Hammon
Boston, MA 02108-3093
Phone: 617-742-5147 ext. 104
Fa..x: 617-742-3089
Sandy Baum
College Board
Apartment 45C
Chicago, IL 60611
Phone: 518-369-3774
SBA UM@SKIDMORE.EDU
Bryan Cook
Director
Pbone:202-939-938l
Fa..x: 202-785-2990
Tammy Halligan
Director
Phone: 202-336-6839
Fa.. x: 202-336-6828
TAMMYH@CAREER.ORG
Gigi Jones
and Universities
Phone: 202-785-8866
Fax: 202-835-0003
GIGI@NAICU.EDU
Page 1
Meeting Roster
Mark Kantrowitz
Publisher
PO Box 2056
Phone: 724-538-4500
Fax: 724-538-4502
MKANT@F ASTWEB.COM
Lesley McBain
Universities
Phone:202-478-7831
F a,-x: 202-4 78-5491
MCBAINL@AASCU.ORG
Brian Prescott
Education
Phone: 303-541-0255
Fax: 303-541-0243
BPRESCOIT@WICHE.EDU
NCES Staff
Elise Miller
Division
Phone: 202-502-7318
fa,'(: 202-502-7460
ELISE.MILLER@ED.GOV
May 18,2010
Christine Keller
Phone: 202-478-6043
Fa,-x: 202-478-6061
CKELLER@APLU .ORG
Shirley Ort
Student Aid
PO Box 1080, CB #2300
Phone: 919-962-2315
Fa,x: 919-962-2716
SAO@UNC.EDU
Dawn Geonimo Terkla
Associate Provost
Tufts University
28 Sawyer Avenue
Medford, MA 02155
Phone: 617-627-3274
Fa,x: 617-627-3993
Guest
Diane Cheng
Research Associate
Oakland, CA 94612
Phone: 510-318-7900
DCHENG@TICAS.ORG
Page 2
Meeting Roster
Brenda Albright
Consultant
Phone: 615-790-2739
Fa,'C 6.1 5-791-6087
BNALBRlGHT@AOL.COM
May 18,2010
Patdcia Steele
Research Consultant
Phone: 202-730-1252
Page 3
From:
Sent:
To:
Subject:
Kvaal, James
Tuesday, June 29, 2010 10:13 AM
Arsenault, Leigh
FW: FAFSA & IRS Stats
From: Lauren Asher fmailto:LAsher@ticas.orgl
Sent: Monday, June 28, 2010 10:47 PM
To: Kvaal, James
Subject: RE: FAFSA & IRS Stats
Thanks for this and making time today- so sorry you got stuck at Starbucks while I was with Leigh! Will follow up soon
on FAFSA and CCC Pell uptake. Meanwhile, here's the Corinthian quote I mentioned about IBR paperwork: -
Corinthian on IBR (emphasis and translation mine): "Peter Waller: 'Paul,let me just address that, we have been working
with the income base for payment plan since July was when it came into action. And it is an integral part now of our
programs, and as we reach out to students, contact into our new contact system, and then try and provide options for
them going forward. So, it is a tool that we have, and we expect the tools that the President that manages to get into
law will be, it's parallel tool. I will say that we'll be coaching the department and the administration on the income base
for payment plan because it is very tough bureaucratically, and there is a lot of paper work. The first job is that they
have to go into full balance [forbearance]. and when they do have that system of hardship, they are in for balance
[forbearance] and then we can then go to the second stage of getting them into what's called the IBR program. So I
would suggest that there still work in progress around that, both within the department and within the sort of flow of
information on the expectation of online completion of forms et cetera. So, which is a big idea, and over the next few
years I am sure those wrinkles will get sorted out by the (Source: call transcript at
http://seekingalpha.com/article/186144-corinthian-colleges-i nc-f2q10-qtr-end-12-31-09-earnings-call-transcript?page=-
l&find=COCO )
From: Kvaal, James fmailto:James.Kvaal@ed.govl
To: Lauren Asher
Subject: FW: FAFSA & IRS Stats
From: Kollock, Shamarli
Sent: Wednesday, June 23, 2010 8:15AM
To: Martin, Phil; Kvaal, James; Arsenault, Leigh; Shireman, Bob
Cc: Brown, Michele
Subject: FAFSA & IRS Stats
Stats through June 20th. Let me know if there are any questions.
Shamarli Kollock
Student Aid Awareness & Applicant Services
Federal Student Aid 1 US Department of Education
830 First Street NE; Room 32F1; Washington, DC 20202
Telephone: (202)-377-3483 1 Fax:
Email : shamarli.kollock@ed.gov
...!, Be Green! Please don't print this e-mail unless necessary.
"Education is the great engine of personal development. It is through education that the daughter of a peasant can become a doctor, that the son of a
mineworKer can become the head of the mine, that a child of a farm worKer can become the president of a great nation. It is what we maKe out of what we
have, not what we are given, that separates one person from another." Nelson Mandela
2
From: Kvaal, James
Sent:
To:
Tuesday, June 29,2010 10:13 AM
Lauren Asher
Lauren, thanks for the time yesterday, it was very helpful as always. I'll look into this.
From: Lauren Asher [mailto:LAsher@ticas.orgl
To: Kvaal, James
Thanks for this and making time today- so sorry you got stuck at Starbucks while I was with Leigh! Will follow up soon
on FAFSA and CCC Pell uptake. Meanwhile, here's the Corinthian quote I mentioned about IBR paperwork: -
Corinthian on IBR (emphasis and translation mine): "Peter Waller: 'Paul,let me just address that, we have been working
with the income base for payment plan since July was when it came into action. And it is an integral part now of our
programs, and as we reach out to students, contact into our new contact system, and then try and provide options for
them going forward. So, it is a tool that we have, and we expect the tools that the President that manages to get into
law will be, it's parallel tool. I will say that we'll be coaching the department and the administration on the income base
for payment plan because it is very tough bureaucratically, and there is a lot of paper work. The first job is that they
have to go into full balance [forbearance], and when they do have that system of hardship, they are in for balance
[forbearance] and then we can then go to the second stage of getting them into what's called the IBR program. So I
would suggest that there still work in progress around that, both within the department and within the sort of flow of
information on the expectation of online completion of forms et cetera. So, which is a big idea, and over the next few
years I am sure those wrinkles will get sorted out by the administration."' (Source: call transcript at
http://seekingalpha.com/article/186144-corinthian-colleges-i nc-f2q10-qtr-end-12-31-09-earnings-call -transcript?page=-
l&find=COCO )
From: Kvaal, James [mailto:James.Kvaal@ed.govl
To: Lauren Asher
Subject: FW: FAFSA & IRS Stats
From: Kollock, Shamarli
Sent: Wednesday, June 23, 2010 8:15AM
To: Martin, Phil; Kvaal, James; Arsenault, Leigh; Shireman, Bob
Cc: Brown, Michele
Subject: FAFSA & IRS Stats
Stats through June 20th. Let me know if there are any questions.
Shamarli Kollock
Student Aid Awareness & Applicant Services
Federal Student Aid 1 US Department of Education
830 First Street NE; Room 32F1; Washington. DC 20202
Telephone: (202)-377-3483 1 Fax: (202)-275-0131
Email : shamarli.kollock@ed.gov
.1, Be Green! Please don't print this e-mail unless necessary.
3
"Education is the great engine of personal development. It is through education that the daughter of a peasant can become a doctor, that the son of a
mineworKer can become the head of the mine, that a child of a farm worKer can become the president of a great nation. It is what we maKe out of what we
have, not what we are given, that separates one person from another." Nelson Mandela
4
From: Kvaal, James
Sent:
To:
Thursday, June 24, 2010 7:16PM
Madzelan, Dan
Subject: FW: Harkin's report
From: Adams, Kristen
Sent: Thursday, June 24, 2010 3:27 PM
To: Yuan, Georgia; Wanner, Sarah; Wolff, Russell; Woodward, Jennifer; Shireman, Bob; Kvaal,
James
Cc: Jenkins, Harold; Gomez, Gabriella
Subject: RE: Harkin's report
Regarding number 3, I spoke with OPE and NCES folks about that and they gave me the following
information:
I have already passed this along to Harkin's staff, so this is taken care of.
Thanks,
Kristen
From: Yuan, Georgia
5
To: Wanner, Sarah; Wolff, Russell; Woodward, Jennifer; Shireman, Bob; Kvaal, James
Cc: Jenkins, Harold; Gomez, Gabriella; Adams, Kristen
Subject: Harkin's report
Hi everyone
Here's the url for the report that Senator Harkin read from today with the charts he showed.
http : //harkin.senate.gov/documents/pdf/4c23515814dca.pdf
We should look at the following issues (not urgent, but in case the committee's staff
followc;-un)
Thanks Sally, Russ and Jennifer for going with me.
Georgia
Georgia Yuan
Deputy General Counsel
Postsecondary and Regulatory Service
LBJ 6E341
202- 401- 6399
6
From:
Sent:
To:
Cc:
Subject:
Attachments:
From: Jenkins, Harold
Kvaal, James
Monday, June 21,201010:01 PM
Jenkins, Harold
Yuan, Georgia
RE: Proprietary schools and the FSA programs
image001.jpg
To: Kvaal, James
Cc: Yuan, Georgia
Subject: Proprietary schools and the FSA programs
James-llook forward to workinq with you over the
You've probably been reading the higher education news clips on a regular basis, but I wanted also to
call to your attention the article below, particularly the fourth, fifth, and sixth paragraphs, to illustrate
the business model being followed by large trade schools.
Harold
GNEWS
How For-Profit Colleges Are Like Subprime Mortgages
Report: Both Subprime-Mortgage Business and For-Profit Colleges Are Built on Giving
Loans to People Who Can't Pay Tbem Back
By MARK GIMEIN
June 19, 2010-
7
Ashford 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 oflongevity. 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 of for-profit education, though, Ashford is less obscure: It's one of the 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 tising 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 sub prime
crash. Now Eisman has turned his attention to for-profit education. He's catalogued how federal education aid is
now funneled to for-profit 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 of the for-profit education sector. What Eisman brings to the table is a wealth of data
and a well-trained 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 subprime-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<ilmainly loans%s essentially the sole driver of the for-profit education
industry.
8
The 85 percent of revenue that Ashford gets from federal education programs (it gets another 5 percent
from military scholarships<J1like 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 worry 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 subprime 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 happen9l 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 enrollment going from 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 students91 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<J1 as much as 50 percent<f1 of the loans that go
back. "They're so profitable, " says Eisman, "they can afford it."
9
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 educat1on (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 chief lobbyist 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
10
From: O'Bergh, Jon
Sent:
To:
Thursday, June 24, 201 o 1 :23 PM
Kvaal, James
Subject:
Attachments:
RE: Proprietary schools and the FSA programs
image001.jpg
...._ __________ __.. According to NCES, in 2007, private for-profits produced 16% of all associate degrees,
compared to 78% for public IHEs and 6% for private non-profits. But of associate and bachelor combined, for-profits
produced 8%.
Jon O'Bergh
Special Assistant to the Under Secretary
202-260-8568
From: Kvaal, James
Sent: Thursday, June 24, 2010 1:00PM
To: O'Bergh, Jon
Subject: RE: Proprietary schools and the FSA programs
foo.@:
From: O'Bergh, Jon
To: Kvaal, James
Subject: RE: Proprietary schools and the FSA programs
Jon O'Bergh
Special Assistant t o the Under Secretary
202-260-8568
From: Kvaal, James
Sent: Thursday, June 24, 2010 11:28 AM
To: O'Bergh, Jon
Subject: FW: Proprietary schools and the FSA programs
11
From: Jenkins, Harold
To: Kvaal, James
Cc: Yuan, Georgia
Subject: Proprietary schools and the FSA programs
James-1 look forward to working with you over the coming

You've probably been reading the higher education news clips on a regular basis, but I wanted also to
call to your attention the article below, particularly the fourth, fifth, and sixth paragraphs, to illustrate
the business model being followed by large trade schools.
Harold
G NEWS
How For-Profit Colleges Are Like Subprime Mortgages
Repor t: Both Subprime-Mortgage Business and For-Profit Colleges Are Built on Giving
Loans to People Who Can't Pay Them Back
By MARK GIMEJN
June 19, 2010 -
Ashford University of Clinton, Iowa traces its beginnings all the way back to the end of World War I'll 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 li sts of best colleges, though Peterson's college guide
does note its "24 acre small town campus with easy access to Chicago."
In the world of for-profit education, though, Ashford is less obscure: It's one of the most incredible growth
stories of the past decade. In 2005, a startup company call ed Bridgepoint Education Inc. (BPI) spent $9 million
to buy a struggl ing 332-student religious school, the Jesuit University of the Prairi e, from the Sisters of St.
Francis. BPI renamed it Ashford. Now Ashford, together with the University of the Rockies (another tiny
12
school, the former 75-student Colorado School of Professional 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 for-profit schools that have delivered stellar profits to their owners and dismal graduation rates
for students91 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 of the for-profit education sector. What Eisman brings to the table is a wealth of data
and a well-trained 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 subprime-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 aid9lmainly loans9lis 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 scholarships9l 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 of Phoenix, 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 worry 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.
13
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 subprime 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<Jl and then became
lobbyists for the for-profit college industry.
At the end of last 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 enrollment going from 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<Jl 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<Jl as much as 50 percent<Jl 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 chief lobbyist for the Apollo Group is now a top congressional
14
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 Jot 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
15
From: Hunt-White, Tracy
Sent:
To:
Thursday, June 24, 201 o 9:09 AM
Weko, Tom
Cc: Zimbler, Linda
Subject: RE: From Today's Chronicle - Veterans Use New Gl Bill Largely at For-Profit and 2-YR
Colleges
-->Tracy
From: Tom
Sent: June 2010 2:00 PM
To: Tracy
Cc: Linda
Subject: FW: From Today's Chronicle - Veterans Use New GI Bill Largely at For-Profit and 2-YR
Colleges
Tom
From: Elise
Sent: June 2010 1:54PM
To: Tom
Subject: FW: From Today's Chronicle - Veterans Use New GI Bill Largely at For-Profit and 2-YR
Colleges
From: Bob
Sent: June 2010 8:59 AM
To: David; James
Cc: Tom; Elise
Subject: RE: From Today's Chronicle - Veterans Use New GI Bill Largely at For-Profit and 2-YR
Colleges
From: Georgia
To: Bob; David; Gabriella; James
Subject: From Today's Chronicle - Veterans Use New GI Bill Largely at For-Profit and 2-YR
Colleges
Another reason to regulate
16
From Today's Chronicle of HE
June 13J 2010
Veterans Use New GI Bill Largely at For- Profit and 2-Year Colleges Thomas Slusser for The
Chronicle By Michael Sewall
Washington
For- profit colleges and community colleges were the most popular choices of students who used
benefits from the Post-9/11 GI Bill this past academic yearJ the first in which the aid was
available. The attendance patterns were largely similar to those of students who recently
used aid under the previous version of the GI Bill.
Advocates of the Post -9/11 billJ which was enacted in 2008J had said it could improve
veterans' ability to afford four -year institutions because of its increased benefits and new
allowances for housing and textbooks. But data from the Department of Veterans Affairs show
that for - profit and community colleges continue to dominate the list of the top institutions
where veterans use their education benefits.
Among the 15 institutions that enrolled more than 1J000 students who used the new GI Bill's
benefits from October to MayJ seven were for-profits and five were community colleges. In
2007J nine of the top 15 under the previous Montgomery GI BillJ as it was calledJ were for -
profitsJ and three were community colleges.
A total of 270J666 students used the new benefits in 2009-10. Veterans and college officials
say costJ convenienceJ geographyJ and support systems were significant factors in veterans'
college decisions.
The University of PhoenixJ whose online-learning program has been particularly attractive to
veteransJ topped the listJ enrolling more than 10J000 students who used the new benefits.
Phoenix operates a military division with more than 1J000 employees who specifically assist
and advise veterans. It also awarded 50 scholarships to veterans in the 2010 fiscal yearJ
worth $4J000 eachJ and will increase the maximum amount to $7J000 for next year.
Related ContentChart: Who Enrolls the Most Students With Post -9/11 GI Benefits Lamonte w.
MillsJ a veteran who is a student at Tidewater Community CollegeJ in VirginiaJ says he
returned to the collegeJ which he attended in 2000J because of its low cost and welcoming
environment. He felt at home there in part because of the large veteran population and
because of the support veterans receiveJ from "the provost on down."
TidewaterJ which has four campuses near the large naval base in NorfolkJ enrolled 2J405
students who used Post-9/11 GI benefits in 2009-10J the fourth-highest total.
Mr. MillsJ 29J served in the Air Force on active duty from 2007 to 2009. When he heard about
the expanded GI BillJ he applied for early exit from active duty and is now a member of the
Air Force Reserve.
Graduating from college was always a goal of hisJ he saysJ and his military experience helped
him focus on a plan. Mr. Mills now has his sights set on earning a law degree.
"I was going to apply to various other colleges and universitiesJ but I was led back to TCCJ"
he says. "It feels like home. When I was gone for so longJ I wasn't certain if anyone would
remember me. But everyone did. They thanked me for serving."
Bigger Benefits
The Post -9/11 GI Bill offers benefits that weren't in the Montgomery GI BillJ an advantage
that its sponsors hoped would make four-year colleges more accessible to veterans. Under the
17
Montgomery billJ benefits are adjusted annuallyJ on the basis of average undergraduate
tuition. The new GI Bill gives veterans up to the full amount of tuition and fees at the
most-expensive public college in their states. And it provides a monthly housing allowance
and an annual stipend for textbooks.
The new bill also includes a "yellow ribbon'' programJ which seeks to help veterans attend
private collegesJ graduate schoolsJ and out-ofstate public institutions. The federal
government matches the amount of financial aid pledged by participating colleges above the
base educational benefits for tuition and fees provided in the new GI Bill. More than 700
colleges and universities participated in the program in the past academic year.
The Post -9/11 bill also makes it easier to transfer benefits to a spouse or child.
Israel De La CruzJ who is on active duty in the ArmyJ transferred his benefits to his wifeJ
Venetia. She is pursuing a bachelor of science in human -services management at the University
of Phoenix.
"I wanted to take classes online so I could stay home with my kidsJ" says Ms. De La cruz, who
lives with her husband and two children in Fort Lewis, Wash. "And we put our son's name on
the benefits, tooJ so he'll be able to use them."
The programs of seven of the top 15 colleges enrolling recipients of GI Bill aid are largely
online. And many of the 15 operate satellite campuses near military bases.
University of Maryland University College, which ranked thirdJ enrolled more than 3J000 GI
Bill recipients over the past academic year, on campuses near U.S. military bases in Europe
and AsiaJ in MarylandJ and online. It was one of 20 colleges to receive $100,000 grants last
year from the American Council on Education and the Walmart Foundation to increase programs
and services for veterans. Maryland has used the money to create an online classroom-
orientation program and a campus orientation for veterans, as well as to conduct four open
houses specifically for veterans.
"We were military-friendly before it became a marketing term," says John F. Jones Jr.J the
university's vice president for Department of Defense relations. "We've always been so proud
of having a large military component among our student body, and the new GI Bill has allowed
us to continue serving even more veterans."
Outreach by 4-Year Colleges
Although four-year public colleges are not enrolling as many veterans using GI Bill benefits
as are some for -profit and community collegesJ a number of them are also increasing efforts
to do soJ and to improve campus services for them.
Some institutionsJ such as San Diego State University and the University of Missouri at
ColumbiaJ have recently opened offices to provide veteran-specific services. Last month the
University of Utah opened the National Center for Veterans StudiesJ a joint effort of its
College of Law and College of Social and Behavioral Science that will conduct research,
provide outreach and vocational trainingJ and engage in nonpartisan advocacy for veterans.
As part of the centerJ the university also created a National Service AcademyJ which will
tailor some courses to veterans' talents and experiences. Hiram E. ChodoshJ dean of law at
Utah, says veterans' drive to serve their country could be refocused to service in other
areas, like health care and civil engineering.
"One of the ways we're trying to help veterans is by knowing we need veterans to help usJ" he
says. "They represent an incredibly untapped resource of talent and training."
18
Some public four -year universities are seeing more success than others in enrolling veterans.
Arizona State and Ohio State UniversitiesJ for exampleJ enrolled 716 and 548 studentsJ
respectivelyJ using Post-9/11 GI Bill benefits in the past academic year.
Both universities were cited by the online 2010 Guide to Military Friendly Schools as being
attractive to veterans because of their sheer size and their online programs. Both also offer
scholarships specifically for veterans. Campus officials say they have seen an increase in
the number of veterans and their family members using the Post -9/11 benefits compared with
those in the older GI Bill.
Charlene P. KamaniJ supervisor for veterans' benefits and certification at Arizona StateJ
says it enrolled about 60 percent more veterans across its campuses this past year than in
2008-9. The new lawJ she saysJ "offers them a greater ability to come here."
Further Expansion Sought
The Post-9/11 GI Bill took effect less than a year agoJ in August 2009J but a U. S. senator
already wants to expand its benefits.
Sen. Daniel K. AkakaJ a Hawaii Democrat and an Army veteranJ introduced legislation last
month that would make all members of the National Guard and Reserve programs eligible for the
new GI Bill benefits. His proposal would allow veterans to receive aid for a wider array of
educational programsJ including vocational and on-the- job trainingJ and would make it easier
for them to qualify for the housing and textbook allowances.
The bill would also base benefits on a national average of tuitionJ instead of on the highest
public-college tuition in each state.
"We are excited that there is again movement in making some legislative changes to the new GI
BillJ" says James SelbeJ assistant vice president for lifelong learning at the American
Council on Education.
While the bill's prospects are unclearJ and its cost has not been estimatedJ the council
continues to focus on ways to improve how colleges serve veterans. Following up on the $2-
million in grants that the council and Walmart issued last year to 20 collegesJ the council
will identify colleges that used the money to create the best programs and will urge other
colleges to adopt the most-effective practices.
"There's a pretty large- scale effort nationwide in building the capacity to serve veteransJ"
Mr. Selbe says . "But there's still work to do within institutions to improve the veteran
experience of transitioning from service to school."
19
From: Bergeron, David
Sent:
To:
Cc:
Sunday, June 20, 201 o 9:57 PM
Chesley, Susan; Shireman, Bob
Kvaal, James
Subject: RE: logic model
l David
-------------------------------------
From: Susan
To : David; Bob
Cc: James

Thank
Susan
From: David
To: Bob; Susan
Cc : James
Subject: RE: l ogic model
20
From: ShiremanJ Bob
Sent: SaturdayJ June 19J 2010 7:35AM
To: ChesleyJ Susan; BergeronJ David
Cc: KvaalJ James
Subject: logic model
Susan and David:
- Bob
Robert Shireman
(202) 260-0101
From: MartinJ Phil
21
To: Shireman, Bob
Subject: RE: operating margins

From: Martin, Phil
To: Shireman, Bob
Subject: operating margins
Bob,
Sorry for not getting you this sooner. See chart below for the list of operating margins for
the 13 publicly traded postsecondary institutions.
For FY 2007 - FY 2009, operating margins averaged 17%. For FY 2009 alone, operating margins
ranged from 5% to 37%, with a mean of 21%. The chart below was provided by Andrew Steinerman,
Managing Director, Business and Education Equity Research, J.P. Morgan. (Contact information
below chart.)
These operating margins are much greater than what we see for other companies currently and
historically.
This October 2009 analysis by William Hester at Hussman Funds shows (scroll halfway down)
that through fall 2009, profit margins peaked at around 10% in 2007 (also citing financial
sector for driving this), dropped to around 5%, and are projected to return to the 10% level.
Even this projected 10% level is ((far above the long-term average of about 6%. "
http://www.hussmanfunds.com/rsi/forwardearningsmargins.htm
Let me know if you need something else.
Phil
FY2007
FY2008
FY2009
22
Average
American Public Education
21%
24%
27%
24%
Apollo Group Inc. (1)
24%
24%
29%
26%
Bridgepoint Education
5%
15%
27%
16%
Capella Education Co .
13%
15%
19%
16%
Career Inc.
8%
7%
12%
9%
Corinthian Colleges Inc. (2)
3%
23
5%
9%
6%
DeVryJ Inc.
9%
15%
17%
14%
Education Management
17%
16%
16%
16%
Grand Canyon Education
4%
8%
20%
11%
ITT Educational Services
28%
32%
37%
32%
Lincoln Education
8%
9%
16%
24
11%
Strayer Education Inc.
31%
32%
34%
32%
Universal Technical Institute
7%
3%
5%
5%
Mean
14%
16%
21%
17%
[cid:image002.jpg@01CB0675 . CBF4CEF0]
Andrew Steinerman
J.P. MorganJ Managing Director
Business & Education Services Equity Research
0: 212- 622-2527
andrew.steinerman@jpmorgan.com<mailto:andrew.steinerman@jpmorgan.com>
25
From: Chesley, Susan
Sent:
To:
Cc:
Sunday, June 20, 201 o 10:55 PM
Shireman, Bob; Bergeron, David
Kvaal, James
Subject:
Thank you,
Susan
RE: logic model
From: Shireman, Bob
Sent: Sunday, June 20, 2010 10:27 PM
To: Chesley, Susan; Bergeron, David
Cc: Kvaal, James
Subject: RE: l ogic model
Susan:
-Bob
Robert Shireman
U. S. Department of Education
26
(202) 260-0101
From: Susan
To: David; Bob
Cc: James
All,
Thank
Susan
From: David
To: Bob; Susan
Cc: James
From: Bob
To: Susan; David
Cc: James
Subject: logic model
Susan and David:
27
-Bob
Robert Shireman
(202) 260-0101
From: Martin> Phil
Sent: Monday> June 07> 2010 7:28 PM
To: Shireman> Bob
Subject: RE: operating margins
28
From: Phil
To: Bob
Subject: operating margins

Sorry for not getting you this sooner. See chart below for the list of operating margins for
the 13 publicly traded postsecondary institutions.
For FY 2007 - FY operating margins averaged 17%. For FY 2009 operating margins
ranged from 5% to with a mean of 21%. The chart below was provided by Andrew
Managing Business and Education Equity J.P. Morgan. (Contact information
below chart.)
These operating margins are much greater than what we see for other companies currently and
historically.
This October 2009 analysis by William Hester at Hussman Funds shows (scroll halfway down)
that through fall profit margins peaked at around 10% in 2007 (also citing financial
sector for driving dropped to around and are projected to return to the 10% level.
Even this projected 10% level is ((far above the long-term average of about 6%. "
http://www.hussmanfunds.com/rsi/forwardearningsmargins.htm
Let me know if you need something else.
Phil
FY2007
FY2008
FY2009
Average
American Public Education
21%
24%
27%
29
24%
Apollo Group Inc. (1)
24%
24%
29%
26%
Bridgepoint Education
5%
15%
27%
16%
Capella Education Co .
13%
15%
19%
16%
Career Inc.
8%
7%
12%
9%
Corinthian Colleges Inc. (2)
3%
5%
9%
6%
Inc.
30
9%
15%
17%
14%
Education Management
17%
16%
16%
16%
Grand Canyon Education
4%
8%
20%
11%
ITT Educational Services
28%
32%
37%
32%
Lincoln Education
8%
9%
16%
11%
31%
32%
34%
31
32%
Universal Technical Institute
7%
3%
5%
5%
Mean
14%
16%
21%
17%
[cid:image002.jpg@01CB0675 . CBF4CEF0]
Andrew Steinerman
J.P. MorganJ Managing Director
Business & Education Services Equity Research
0: 212- 622-2527
andrew.steinerman@jpmorgan.com<mailto:andrew.steinerman@jpmorgan.com>
32
From:
Sent:
To:
Eger, William
Friday, June 18, 2010 4:52PM
Shireman, Bob
Subject: Chat Transcript
I'm not sure there is a Pulitzer coming in my future but here is the transcript of the chat and the follow up email, hope it
helps!
Will
~ Ammon: Hello, my name is Ammon. Thank you for your interest in the University of Phoenix. What degree
program are you interested in pursuing?
me: I'm not really sure
I just want a B.a.
Ammon: What is your general area of interest?
me: science
Ammon: The f irst step is to find out some basic information so I can better assist you. This will help me
determine the counselor who will be able to provide you with specific information and discuss the most current
list of programs offered.
Will you please verify your full name and e-mai l address and provide your phone number?
Ammon: I would be happy to ask you a few questions now via chat and then have a counselor contact you at a
more convenient time.
In what state do you currently reside?
me: MA
Ammon: What is your current zip code?
me: 02138
Ammon: Are you a U.S. Citizen?
me:ye
s
Ammon: Are you interested in learning more about taking courses online or at your local campus?
me: is there a local campus?
Ammon: Yes, there is a campus within driving distance of your zip code.
Are you interested in learning more about taking courses online or at your local campus?
me: could I learn about both or do I have to choose?
Ammon: Yes. Did you earn a high school diploma or GED within the 50 United States?
me: yep
Ammon: What year did you graduate from high school?
me: 2007
Ammon: Do you have any college or university credits beyond high school?
me: none
Ammon: Are you currently or previously affiliated with the U.S. Military?
me: no
Ammon: Is your spouse, if you are married, currently or previously affiliated with the U.S. Military?
33
me: no
Ammon: Are you a registered member of a federally recognized Native American tribe?
me: no
Ammon: It sounds like you would be a great fit for our programs. I will forward your information to a counselor
who will follow up with you via e-mail.
Thank you for your interest in the University of Phoenix. Have a great day!
Tol&lM
Subject: Good Morning

Good Morning Will,

I will be your enrollment counselor here from university of phoenix and I will be happy to answer any questions
that you have. How can I help you today?

Best Regards,

Victor Sanabia, Enrollment Counselor, Team Lead, NE Division
University of Phoenix Online 1 Axia College
3137 E. Elwood St. 1 Phoenix, AZ 85040 US
Phone: 800-545-6042 Ext: 7131338 1 Direct Phone: 602-713-1338
Fax: 602-308-26501 Email: victor.sanabia@apolloqrp.edu

Want to see what a day in the life of a University of Phoenix student would be like? click here

This message is private and confidential. If you have received it in error, please notify the sender and remove it from your system.
34
From:
Sent:
To:
Cc:
Subject:
Attachments:
Kantrowitz, Mark [Mark.Kantrowitz@Monster.com]
Monday, June 14, 201 o 11 :17 AM
Shireman, Bob; Kvaal , James
Kantrowitz, Mark
Eisman Talk at Ira Sohn Conference
Eisman-lra Sohn Conference slides.pdf
I mentioned previously that Steve an analyst with some fame for shorting subprime
is now shorting for - profit higher education. I've attached a copy of the slides
from his May 26 talk at the Ira Sohn conference.
Keep in mind that this guy is a short - seller and as such has a tendency to exaggerate. You'll
notice that the assumptions on Slide 34 misconstrue some of the aspects of the gainful
employment proposals assumption #3 uses 7.5% for the interest rate instead of 6.8%)
and most of his graphs do not start at 0% and end at 100% but use narrower ranges to magnify
the there is no normalizing of percentages for enrollment and so but
otherwise there are some good points and data.
Mark
Mark Kantrowitz
Publisher of FinAid.org and FastWeb.com
FastWeb College Gold
FinAid Page LLC
PO Box 2056
Cranberry PA 16066-1056
Tel: 1-724-538-4500
Fax: 1- 724- 538-4502
Email: mkant@fastweb.com www.fastweb.com www.finaid.org www.collegegold.com
NOTICE:
This and any contain(s) information that may be confidential or
protected by privilege from disclosure and is intended only for the individual or entity
named above. No one else may distribute or use the contents of this message
for any purpose. Its unauthorized dissemination or duplication is strictly prohibited
and may be unlawful. If you receive this message in error or you otherwise are not an
authorized please immediately delete the message and any attachments and notify
the sender.
35
Ira Sohn Conference
Presentation by Steven Eislllan
FrontPoint Partners
May 26,2010
Disclosures
The information and opinions in this document are prepared by FrontPoint Partners LLC ("FrontPoint"). This information does not
have regard to the specific investment objectives, financial situation and the particular needs of any individual who may receive
this information. Any strategy discussed in this report may not be suitable for all persons, and recipients must make their own
investment decisions using their own independent advisors as they believe necessary and based on their specific financial
situation and investment objectives. This information contains statements of fact relating to economic and market conditions
generally. Although these statements of fact have been obtained from and are based on sources that the author believes to be
reliable, we do not guarantee their accuracy and any such information might be incomplete or condensed. There is no guarantee
that the views and opinions expressed will prove to be accurate. Opinions, estimates and projections in this information constitute
the judgment of the author as of the date of this document and are subject to change without notice. FrontPoint has no obligation
to update, modify or amend this information or otherwise notify a recipient thereof in the event that any matter stated herein, or any
opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate. Any trading strategies or
investment ideas or positions discussed in this presentation may or may not be applied by FrontPoint or any of affiliates for their
investment funds or accounts. Any estimates of future returns are not intended to predict performance of any investment. Income
from investments may fluctuate. Past performance is not a guarantee of future results.
Information regarding expected market returns and market outlooks is based on the research, analysis, and opinions of the author
as of the date of this information. These conclusions are speculative in nature, are subject to change, may not come to pass, and
are not intended to predict the future of any specific investment.
Alternati ve investments are specul ative, involve a high degree of ri sk, are hi ghly illi quid, typically have higher fees than
other investments, and may engage in t he use of leverage, short sales, and derivatives, which may increase the ri sk of
investment loss.
FrontPoint does not offer or provide tax or legal advice and the topics discussed should not be taken as tax or legal advice. The
recipient should not construe the contents of this Presentation as legal, tax, or financial advice and should consult its own
professional advisors as to the legal, tax, financial, or other matters relevant to the suitability of an investment for the recipient
before entering into transactions in which the tax or legal consequences may be a significant factor.
The information contained herein has been prepared solely for informational purposes and is not an offer to buy or sell or a
solicitation of an offer to buy or sell any limited partnership interests or to participate in any trading strategy. If any offer of limited
partnership interests is made, it shall be pursuant to a definitive Offering Memorandum prepared by or on behalf of the Fund which
would contain material information not contained herein and which shall supersede this information in its entirety.
QJ
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In the last 10 years/ the for-profit education industry has grown at 5-10 times the
historical rate of traditional post-secondary education
Annual enrollment growth of Total U.S. postsecondary institutions vs. For profit institutions
I D Total industry enrollment growth II For-profit enrollment growth I
25% ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,
20%
15%
10%
5%
0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: National Center for Education Statisti cs, 2009
5
9%
8%
7%
6%
5%
4%
3%
2%
1%
Which has drastically accelerated the for-profit's share of total US post-secondary
enrollments and led to the rapid growth of for-profit institutions
In 1990 ...
< 1% of all students attended
for-profit colleges ...
For profit students as a % of total U.S. postsecondary students
n n n n n n ~
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
~ - ~ ~ - ~ ~ ~ - ~ ~ - ~ ~ - ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
I
I
< 10% of all schools
were for-profit ...
For profit institutions as a % of total U.S. postsecondary institutions
30%
25%
20%
15%
10'/,
1 1 1 1 1 I I I I I
1
I I I 1
1
1 1 1 I I I 1 1 1 1 1 I I I I I I I I I !
S% J 1 I ! I I I I I I 1 f 1 i
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
~ ~ ~ - ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ f f ~ ~ ~
In 2009 ...
almost 10% of students
attend for-profit colleges
Source: National Center for Education Statistics, 2009
6
25% of schools are
for-profit institutions
Despite being less than lOo/o of total enrollments/ for-profits now claim nearly
25% of the $89 billion of Federal Title IV student loans and grant disbursements
For-profit share of Title IV disbursements (Pell grants and Federal stafford loans), 1998-2009
2 7 % . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~
26%
25%
24%
23%
22%
21%
20%
19%
18%
17%
16%
15%
14%
13%
12%
11 %
10%
9%
8%
7%
In 2009, For-Profit schools collected $4.4 billion of the $18.2 billion
in Federal Pell Grants, or about 24% of all Pell Grant funding -
double the proportion from ten years ago.
1998 1999 2000 2001 2002 2003 2004 2005 2006
0 Pell grants ll!ll Subsidized stafford loans 0 Unsubsidized stafford loans
Source: College Board, NCLC
7
2007 2008 2009
How is this possible?! The for-profit industry has bought almost every lobbyist
and has infiltrated the highest levels of government .. . a prime example
Sally Stroup was a pivotal player in the deregulation of the for-profit industry ...
because she worked for the for-profit industry
Sally Stroup Biography:
2001 - 2002: Director of Industry and Government Affairs for the Apollo Group
(top lobbyist for APOL)
2002-2006: Assistant Secretary for Postsecondary Education, U.S. Dept of
Education (top postsecondary education position)
2006-2008: GOP Deputy Staff Director, U.S. House of Representatives
Committee on Education and Labor (largest recipient of political contributions from
for-profit education industry)
2008- Present: GOP Staff Director, U.S. House of Representatives Committee on
Education and Labor
.. . and not surprisingly, her colleagues at the Dept of Education were all driven by similar goals
Name Former DOE position Current Lobbying Firm For-profit Education client
William Hansen Deputy Secretary of Eductaion, 2001 - 2003 Chartwell Education Group APOLLO GROUP
Jonathan Vogel Deputy Counsel to the Department of ED, 2002 - 2005 Sonnenschein, Nath & Rosenthal GRAND CANYON UNIVERSITY
Lauren Maddox DOE Asst Sec for Communications, 2006 - 2008 Podesta Group CAREER EDUCATION CORP
Rebecca Campoverde DOE Asst Sec for Congressional & Legislative affairs, 2005- 2008 Kaplan, Inc. KAPLAN, INC
Victor F. Klatt Ill GOP Staff Director for House ED and Labor, 2005- 2008 Van Scoyoc Associates APOLLO GROUP
8
From 1987 through 2000, the amount of total Title IV dollars given to for-profit
schools fluctuated between $2 billion and $4 billion dollars .. .
Total Federal disbursements of Ti tle IV Stafford Loans and Pell Grants, 1987 - 2009
Dollars in billions
Total Total For profit For profit Total For profit share For profit share
Year Pell Grants Stafford Loans Pell Grants Stafford Loans For (!rofit Pell Grants Stafford Loans
1987 $3.5 $7.3 $0.9 $1.8 $2.7 25% 25%
1988 $3.8 $8.0 $1.0 $2.1 $3.1 27% 27%
1989 $4.5 $8.2 $1 .1 $2.3 $34 24% 28%
1990 $4.8 $8.3 $1 .1 $1.9 $3.0 23% 23%
1991 $4.9 $8.8 $1 .1 $1 .5 $2.6 22% 17%
1992 $5.8 $9.5 $1.2 $1 .3 $2.5 21% 14%
1993 $6.2 $9.9 $1 .1 $1 .0 $2.1 18% 10%
1994 $5.7 $14.1 $0.9 $1.4 $2.3 15% 10%
1995 $5.5 $19.9 $0.7 $2.0 $2.7 13% 10%
1996 $5.5 $22.8 $0.7 $1 .9 $2.6 13% 8%
1997 $5.8 $25.1 $0.7 $2.2 $2.9 12% 9%
1998 $6.3 $26.3 $0.8 $2.3 12% 9%
1999 $7.2 $27.2 $2.6 13% 10%
2000 $7.2 $28.4 $3.0 13% 10%
2001 $8.0
''''
$29.5 $3.4 14%
''''''''
12%
2002 $10.0 $32.1 $4.1 14% 13%
2003 $11.6 $36.5 $5.2 15% 14%
2004 $12.7 $41.6 $6.6 16% 16%
2005 $13.1 $45.7 $7.9 18% 17%
2006 $12.7 $48.0 $8.8 19% 18%
2007 $12.8 $49.4 $9.5 19% 19%
2008 $14.7 $56.8 $12.4 .21% 22%
2009 $18.2 $70.9 $17.0 24% 24%
Pel/ Grants
Total Title IV aid grew from
quadrupled from $1
under $4 billion in 2000 to over
billion to $4 billion
$21 billion in 2009
... but with the leniency shown to the industry under the Bush Administration, the
dollars that flowed to the industry exploded to over $21 billion, a 450% increase
Source: College Board
9
At the current pace of growth_, For-profit schools will claim 20o/o of enrollments_,
represent 40/o of schools and draw over 40% of all Title IV aid in 10 years
For-profit share of enrollment. schools, Pell grants and Loans, 2009- 2020
For-12rofits% share of:
Total Total Pelt Stafford
.
.
Year Enrollment Schools Grants
2007 7% 23% 19%
2008 8% 24% 21%
2009 8% 25% 24%
2010 9% 26% 25%
2011 10% 27% 26%
2012 10% 29% 27%
2013 11% 30% 28%
2014 12% 31% 30%
2015 13% 32% 31%
2016 14% 34% 32%
2017 16% 35% 33%
2018 17% 37% 35%
2019 18% 39% ::In%
2020
c
20% 40% 38%
Key Assumptions for Projections
Total post-secondary enrollment grows at 1.5% per year
For-profit enrollment grows at 10% per year (10-yr avg is 14.4%
--- -11. "
Total post-secondary institutions grow at 1.5% per year; For-profit
institutions grow at 6% per year (both long-term avg since 1990)
Avg grant and loan amounts per student grows at 5-yr hi storical avg
growth rates, by institution type
Source: College Board, US Dept of Education, industry estimates
Loans
19%
22%
24%
25%
27%
28%
30%
31%
33%
35%
36%
38%
40%
43%
Total
Title IV
19%
22%
24%
25%
27%
28%
29%
31%
32%
34%
36%
38%
40%
42%
10
Total Title IV disbursements ( ~ billions}
Non-12rofits For-12rofits
$50.2 $12.0
$56.0 $15.5
$67.6 ( $21.4 ""
$71 .9 $24.3
$76.5 $27.7
$81.2 $31 .5
$86.2 $35.8
$91.4 $40.8
$96.9 $46.4
$102.5 $52.8
$108.4 $60.1
$1 14.4 $68.5
$120.6 $77.9
:::::>
$126.9 $88.8 )
Based on current financials of For-profit
institutions, less than 30% of the
incremental $67 billion (annuaii"Ll. in
Title I V dollars will go towards
educating students ...
... nearl y $50 billion (annuai/W will go
toward non-facul ty and executive
compensation and company profits
:
:
:
:
:
I
:
:
:
:
:
:
:
:
:
:
:
:
:
:
I
-
At many major for-profit institutions, federal Title IV loan and grant dollars now
comprise close to 90/o of total revenues
Apollo Group
ITT Technical
Institute
Other,
52%
2001
Title IV,
48%
65%
Note: Title IV figures include 2008 unsubsidized Joan limit increases on a pro-forma basis
Source: Company-reported financials
11
Other,
11%
Other,
2009
Tit le IV,
89%
85%
This growth has driven even more spectacular company profitability and wealth
creation for industry executives and shareholders
ITT Technical Institute (ESI) Profitability has grown 5-fold since 2006
ESI operating margin %, Q1 06 - Q409 ESI operating profit($ millions), Q106- Q409
$165
$155
40%
$146
$135
$125
35%
$115
$105
30% $95
$85
25%
$75
$65

20%
::: [l
D
$35 0 0
$25
.s;,.'o .s;,."- .s;,.'O .s;,.<
..,o: '1-0' ..,o: "'0' ..,o: "'0' "'0' ..,o: "'0' "'0'

..,o: .,; ") I>' ..,o: "'0' I>' " "'0' " "'0' ") I>'
The top 5 executives at ESI, Cori nthian colleges (COCO) and Apollo Group (APOL)
collectively earned over $130 million from 2007-2009
To!;! 5 executives total com!;!ensation
ESI coco APOL Total
2007 $9,834,695 $4,938,982 $10,441,170 $25,214,847
2008 $8,923,791 $8,849,386 $26,766,979 $44,540,156
2009 $14,366,540 $1 1,222,377 $34,707,377 $60,296,294
3-yr total comp $33,125,026 $25,010,745 $71,915,526
Total comp = salary, bonus. stock awards, option awards, non-equity incentives
Source: Company-reported financials and proxy statements
12
Now many of the US for-profit education companies are among the most profitable
businesses in the world
Other industries of strategic importance to the U.S.
which are funded by taxpayer dollars are restricted
to lower operating margins on contracts ...
2009 Company Operating Margins
4 5 % ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~
40%
37.4%
35%
30%
25%
20%
15%
12.1%
9.9% 9.8%
10%
7.4%
5%
0%
ITT Technical Lockheed Raytheon Corp Northrup Boeing
Institute Martin Grumman
13
5-year Average Company Operating Margins, 2005-2009
3 5 % ~ - - - - ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,
30%
29.0%
25%
20% 18.4%
15%
10%
5%
0%
ITT Technical Apple
Institute Computer
19.8%
Procter &
Gamble
9.5%
Lockheed
Martin
9.1%
Home Depot
So how can Title JV-funded education companies
earn substantially more money than nearly evel}l
other major US business?
This growth however, is primarily a function of government largesse, as Title IV
has accounted for more than 100/o of the revenue growth of these companies
A(!ollo Groue (APOL} 2007
Total revenues $2,724
Year-year growth
%revenue from Title IV* 65%
Title IV revenues $1 ,770
Year-year growth
% revenue growth from Title IV
Corinthian Colleges (COCO} 2007
Total revenues $919
Year-year growth
% revenue from Title IV* 75%
Title IV revenues $691
Year-year growth
ITT Technical Institute (ESI} 2007
Total revenues $758
Year-year growth
Year-year growth
Dollars in millions
*Title IV% includes 2008 Stafford unsubsidized loan limit increases
2008
$3,141
$417
77%
$2,419
$648
155%
2008
$1 ,069
$149
81%
$866
$174
117%
2008
$870
$1 12
73%
$635
$157
141%
14
2009
$3,974
c $833
89%
$3 537
( $1,119
134%
2009
$1,308
$239
89%
$1,163
$297
124%
2009
$1,015
$1 46
85%
$863
$228
157%
More than 1 00/o of the
revenue growth of APOL,
COCO and ESI is driven by
an increase in Federal Title
IV dollars . ..
... and of this incremental
$1.1 billion in Title IV and
$833 million in revenues,
ONLY $99 million or 9o/o
was spent on educational
expenses like faculty
compensation and other
instructional costs
But how do they do it? How are for-profit schools grabbing such a growing share of
Title IV dollars?
Traditional relationship- Matching Means with Costs
Families with greater needs generally seek lower-cost
institutions to maximize the available Title IV loans and
grants, getting the most out of every dollar to reduce out-
of-pocket expenses and minimize heavy debt burdens ...
Lesser Means
(Low-Mid Income Families)
n
Low Cost Institutions
(Community College or In-State School)
Families with greater financial resources often seek higher-
cost institutions because they can afford to pay in excess of
what Title IV loans cover. These families typically are not
eligible for grants because of their higher-income status.
Greater Means
(High Income Families)
n
High Cost Institutions
(Private Colleges)
For-profit Model - Max Cost with Minimal Means
Lesser Means
n
[ High Cost Institutions ]
" - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~
The for-profit model has consciously separated the
traditional relationship between costs and means. They
seek to recruit those with the greatest financial needs and
put them in the highest-cost institutions ... and why?
This formula maximizes tl1e amount of Title IV loans and
grants their students can receive.
15
.

. .
l'""""!
Q)
"'d
0
6
What results from this combination of profit-motive and lack of quality control is
an expensive education that is highly questionable
East Say News ~
Everest College students angry over certification
...
li'!lli- .. ta
By Tomas Roman
HAYWARD CA (KGO}- Nearly three dozen Everest College students are
funous th&y hm-en'l reeeivM the medical certifications they paid fot They refused
to go to class until they get some answers
Whether they attend class or not the students have to pay $100.
Some of the students hll'ie been attending school for eight months Three weeks
ago they found out that the college does not supply them with a cenificate they
were told the)< would get in order to obtain the medical posrlions they want
The students are all studying med1cal asslstmg and the\ paid $16 000 for an
SI!Jhlmonth course They were told the credits earned stthe school do hot
transfer to any communrty or four-year college and that has many of them angry
Source: ABC News, KGO- TV San Francisco, CA. March 19, 2010
17
News Article summary
Students paid $16,000 for an eight-month
course in medical assisting at an Everest
College campus in Hayward, CA
Students recently learned that:
Credits earned at the school do not
transfer to any community or four-year
college
Degrees granted at the school are not
recognized by the American
Association for Medical Assistants
(AAMA)
Hospitals will not interview students
for potential jobs
ABC7 talked to the state Medical
Assistant's Education Review Board
and found the Hayward Campus is one
of several Everest operates in California
that the board say is not accredited to
credential medical assistants.
Even when assuming reported graduation rates (BIG ASSUMPTION), more than
50o/o of the student body still drops out every year
APOL 2006 2007 2008 2009
Beginning enrollment 278,300 282,300 313,700 362,100
+ New students 216,600 258,500 288,200 355,800
- Graduates I drop outs (212,600) ( 2 2 7 , 1 0 0 ~ (239,800) (274,900)
Ending enrollment 282,300 313,700 362,100 443,000
Graduation r ate 28% 28% 28% 28%
Assuming these graduation rates,
Graduates 61 ,390 72,338 78,484 83,440
every year 50%+ of APOL and ESI
Drop outs 151,210 154,762 161,316 191,460 students drop-out annually.
Drops % of avg total enrollment 54% 52% 48% 48%
Assume avg tenure btwn 3-4 year.s for graduates
COCO recycles its entire
ESI 2006 2007 2008 2009
II
..........._ enrollment annually.
+ New students 49,935 54,593 65,313 85,928
- Graduates I drop outs (46,024) (48,462) (56,357) (67,145)
Ending enrollment 46,896 53,027 61 ,983 80,766
Graduation rate estimate based on reported
Graduates 18,449 19,774 21 ,983 25,302
National Center of Educati on Statistics dat a;
Drop outs 27,575 28,688 34,374 41,843
figures represent average i nstitutional graduation
rat es at top 5 largest institut ions
Assume avg tenure btwn 2-3 year.s for graduates For reference, 2009 Dept of ED reported
graduati on rates for full-ti me, first ti me students at
for-profit schools is between 14-22%; t hese
coco 2006 2007 2008 2009
II I
graduati on rates have been adj usted to incl ude non
Beginning enrollment 66,114 60,964 61 ,332 69,211 fi rst-time, full-time student s, still may be largely
+ New students 92,185 90,105 100,210 117,352 overst at ed
II
1 Former academic counselors of APOL, ESI and
COCO cl aim that real graduation rates at many
Graduation rate 33% 33% 33% 33%
II I
locations are in the singl e digi ts
Graduates 20,968 20,179 21 ,540 25,624
Drop outs 76,367 69,558 70,791 74,851
Source: Company-reported financials, /PEDS data (College Navigator), APOL student ou16bmes report 2009
Default rates- historical National Cohort Default rates by institution type
Outside of the mid-90's, when the regulatory environment was more stringent,
default rates at For-profit schools are roughly 2x non-profit default rates
Exhi bit 2. National Cohon Default Rates by Institution Type {FY1991 ..
FY2008)
x-...
19S I o 19i2 a !t93 0 1m
2V-..
o 13S1 D199! 8 H'99 a::xm
om? o:ICoa
tflt

C'll '
.....
t'

P:ka- 4 Fet-PFMt
eV2o's data .s drai . Sc>trce: BMO CJpiull aro US of Educ."'lion Natonal
Sbt stics.
Source: NCES industry data and chart taken from recent BMO capital markets research report
19
We are back to late-80's levels of lending to for-profit students, a key leading indicator
for loan defaults . .. back then, fraud was commonplace and regulation was minimal
Traditional vs. For-Qrofit disbursements of Title IV Stafford Loans and Pell Grants
1
1987 - 2009
For-(2rofits tq share of: 8verage Pell Grant+ Loans
Total Total Pell Stafford Total Per Student
~
Title IV All schools Non-12rofit
1987 1% 10% 25% 25%
~
$842 $643
1988 2% 10% 27% 27% 27% $899 $670
1989 2% 10% 24% 28% 27% $933 $697
1990 2% 10% 23% 23% 23% $948 $740
1991 2% 10% 22% 17% 19% $954 $788
1992 2% 9% 21% 14% 16% $1,053 $895
1993 2% 9% 18% 10% 13% $1,120 $989
1994 2% 9% 15% 10% 12% $1,385 $1,246
1995 2% 9% 13% 10% 11 % $1,780 $1,616 $11,339
1996 2% 9% 13% 8% 9% $1,967 $1,827 $8,402
1997 2% 15% 12% 9% 9% $2, 131 $1,974 $8,910
1998 3% 16% 12% 9% 9% $2,249 $2,093 $8,317
1999 3% 17% 13% 10% 10% $2,329 $2,154 $8,152
2000 3% 18% 13% 10% 11 % $2,323 $2,130 $8,681
2001 3% 19% 14% 12% 12% $2,351 $2,139 $8,533
2002 4% 19% 14% 13% 13% $2,531 $2,278 $9,349
2003 4% 19% 15% 14% 14% $2,848 $2,543 $9,786
2004 5% 20% 16% 16% 16% $3,146 $2,783 $9,909
2005 6% 21% 18% 17% 17% $3,364 $2,947 $10,153
2006 6% 22% 19% 18% 18% $3,420 $2,968 $10,498
2007 7% 23% 19% 19% 19% $3,407 $2,944 $10,074
2008 8% 24% 21% 22% 22% $3,740 $3, 173 $10,541
2009 8% 25% 24% 24%
~
$4,525 $3,744 C $13,247
We must take note that because For-profit students receive 3-5x as much Title I V aid as traditi onal
students and are growing enrollment at 3x the pace of traditional schools, these early warning
signs must be addressed now before the impact is felt in the coming years ...
20
If history is any guide, we will return to late-80's Cohort Default rates in 1-2 years,
the worst period of recorded default rates in the history of the DOE
$16,000
$15,000
$14,000
t: $13,000
<!J
"'0
:I
~
~ $12,000
0..
~
<!J
:;::; $11,000
i=
'iij
0
1- $10,000
$9,000
$8,000
$7,000
Average Total Loans + Grants per For-profit student vs. DOE Official CDRs, 1987 - 2009
I c:::::JAvg Loans+ Grants ---Official CDR I
n
n n ~ - ~
~ ~ * ~ ~ ~ ~ * ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ *
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
~
Source: College Board, US Dept of Education
21
24%
20%
16%
Q:
0
u
'iij
12% :
:::
0
UJ
0
0
8%
4%
0%
Because of the excessive drop-out rates and high debt burdens of graduates, the credit
statistics for government loans at for-profits are deteriorating at an alarming pace
Corinthian Colleges Cohort Default Rates, 2004 - 2008

40% i I -+-2-yr rates - 3-yr rates ]
38%
36%
34%
32%
30%
28%
26%
24%
22%
20%
18%
16%
14%
12%
11%
40%
21 %
11%

2004 2005 2006 2007 2008
Source: Company-reported financials; note: 2008 2-yr rates still preliminary, 3-yr rates estimated
22
Currently, for-profit institutions provision 50 - 60% on loans they make to their
own students . .. these are students who already have Title IV loans
Companies are provisioning for more than 50o/o+ loss on loans they make to students ...
which means they expect more than 1 out of every 2 loans to go bad
But absent any regulatory threat, these companies could care less if they every loan they
made went bad because the per-student profitability of their models is so high!
Both companies would still be hugely profitable on a per-student basis even with a 1 00%
losses on every loan they made
ESI
Title IV loans, grants and pri vate loans $16,959
Internal company loan per student $2,100
Tuition per student (2009) $19,059
Provision for loan losses(%) 50%
Expected losses on internal loans ($1 ,050)
Operating profit per student $8,792
Multiple of expected losses c-8.4x
Note: OP I student equals change in operating profit over change in total enrollment
Loan loss provisions provided by companies
23
coco
ESI earns more than 8 times the
$14,443
amount it expects to lose from
$1 ,770
internal loans to students.
$16,213
Jl
COCO earns more than 4 times
58%
II
its expected loan losses.
($1 ,027)
$4,282
4.2X
Reported statistics ... Cohort Default Rates (CDRs)
Cohort Default Rates (CDRs)
CDRs are the percentage of a school's borrowers who enter repayment on a Federal Loan during a particular
federal FY (Oct 1 to Sep 30), and default prior to the end of the next FY
Effectively a 2-yr snapshot of the total students in default
CDRs are an important measure of quality- if default rates breach the federally-mandated threshold of 25%
(soon to be 30%), schools can lose eligibility to Title IV
Can easi ly be manipulated to mask true defaults
Deferrals and forbearances used en mass to carry students over the 2 year reported timeframe
Schools partner with Sallie Mae and other lenders to delay or manage down defaults through the 2 year
timeframe in exchange for guaranteed loan volumes
Schools pay down student government loans with internal money and collect directly from students
24
Reported statistics ... the 90/10 rule
The 90/10 rule
90/10 says a for-profit may become ineligible to participate in Title IV programs if it derives more than 90% of its
cash basis revenue from Title IV programs
Applies only to for-profit institutions, effectively a cap on total Title IV dollars that can flow to a company as a
percentage of revenues
Intended to create a structural boundary for growth from Title IV dollars
Can also be manipulated
Over-returning Title IV dollars to the government when students drop out and then billing students directly
Pursue alternative government entitlement programs not counted under the Title IV umbrella (military educational
loans grants)
When all else fails, raise tuition! Students will have to find alternative (non-Title IV) funding sources to close the
gap between tuition and the amount of total Title IV loans
25
Reported statistics ... completions and placements
Completions (graduation stats)
Company-reported metric that measures the number of students who complete a program (graduate) in 150% of
normal time (for example, 6 years of graduation data for a 4-year bachelors program)
Non-traditional student body doesn't graduate together, and often takes much longer than normal to complete, so
hard to understand actual graduation by class
No independent verification of graduates
Placements (employment stats)
Company-reported metric that measures the number of students who are placed in a job they were trained for
(gainful employment)
This is gainful employment?
- Trained nurses become janitors at hospitals
- Homeland security degree grads become nighttime security guards at shopping malls
And for those grads who cannot find employment. .. hire them! Most schools hire unemployed graduates
internally to boost reported placement stats
26
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 students and the government .. .
THEN
the industry has every incentive to:
- Grow at all costs
- Compensate employees based on enrollment
- Influence key regulatory bodies
- Manipulate reported statistics and other regulatory measures
ALL TO MAINTAIN ACCESS TO THE GOVERNMENT'S MONEY.
"Its about the numbers. It will always be about the numbers."
-Bill Brebaugh, head of University of Phoenix Corporate Enrollment
The entire business model of these companies is centered around growing enrollment -
it is the single most important measure of growth and profitability, period.
Boiler room tactics:
"Every 6 months we get a review that looks at how
many students we enrolled and what percentage of
them finished their first class. As long as they finish
their first class we get full credit and after that they are
not our problem .. . "
"We are under so much pressure we are forced to do
anything necessary to get people to fill out an
application . .. II
It's a boiler room - selling education to people who
don't really want it. II
- Ashford University (BPI ) former enrollment
counselor
"The EC [enrollment counselor] review matrix is all
smoke and mirrors so we could fly under the radar of
theDOE .. .
11
- APOL former enrollment counselor
28
Actual APOL compensation table snapshot
LnrllllrMittJ Ill.
tiall

S<!lti)'OI>
--As

$f01o_'<I J'8l
$26J( ttlle.O."l
$2Sk
WJk
4S...,.vt.Jli!l'tli t3tt $let 11ft0
4a 4)tlf(lll!l<:nl $)111
$$"'
$!!&. , 1 ono. O.T.
$1 $ba
... t34k *
c.1 CJWliJ\no,utt ll);i\
5'411VCil:::lenl!o W\
$3$
$6t6:pcr Z no. O.T.

r:.l ..

U7l< $3Gil
rl.l"''l'lblc<a
A
..
1)1); .WUfcr t mo. 0 T
$$ $371

53lllt
&tnte-ICI
$3!tt $311.
G:i .,..,_.,,., !<0< $411k P<" '1"0 0 T
6G o;tmlltnm( $-IOJ.
$-<l
$1.0\ :S.Jk
S4At
00
m\.ll'lt 2.--o.l.
H nroll'"'nla $4tk 'S4SI!
Source: Court documents, Hendow & Albertson vs. UOP, filed 2009
Accreditation ... the inmates running the asylum
What is Accreditation and why is it important?
Accreditation helps ensure that education
provided by institutions of higher education
meets acceptable levels of quality
The Accreditation bodies are non-governmental
(non-profit) peer-reviewing groups
Schools must earn and maintain proper
Accreditation to remain eligible to participate in
Title IV Programs
However, due to the peer-based composition of
the Accreditation boards, they cannot function
as a truly independent 3rd party review system
In many instances, for-profit institution's
representatives sit on the boards of their
own Accrediting body, inevitably influencing
the approval process and oversight of their own
institutions!
The Accrediting Council for Independent
Colleges and Schools (ACICS)
ACICS BOARD OF COMMISIONERS
Dr. Gary R. Carlson - Chair Elect
Vice President, Academic Affairs
ITT Technical Institute
Ms. Mary Hale Barry
Senior Vice President, Chief Academic Officer
Kaplan Higher Education
Ms. Jill DeAtley
Vice President of Regulatory Review
Career Education Corporation
Mr. Francis Giglio
Director of Compliance and Regulatory Services
lincoln Educational Services
Mr. David M. Luce
Assistant Vice President, Accreditation and Licensing
Corinthian Colleges, Inc.
Mr. Roger Swartzwelder
Executive Vice President, General Counsel and Chief Compl iance Officer
Education Corporation of America
Not a/116 Board members shown
We have seen this before . .. rating agencies and subprime mortgages.
Is for-profit Accreditation the new credit agency scandal?
29
Accreditation ... when you can't earn it, buy it
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
Regional Accreditation is the highest stamp of guality (Harvard is Regionally Accredited), and usually takes 5-10 years to earn
through a long peer review process of educational materials, curriculum, teachers, etc
But who wants to wait 5 years?!
Once acquired, these institutions can serve as a shell for the parent organization to funnel in thousands of students and continue
the growth cycle ...
Past examples are Bridgepoint buying Regionally-Accredited Franciscan University of the Prairies (renamed Ashford University)
and more recent examples are ITT Tech buying Daniel Webster, and Corinthian Colleges buying Heald College
Bridgepoint Education (BPI)- a perfect model ...
Timeline
MARCH 2005 - BPI acquires Regionally-Accredited
Franciscan University of the Prairies and renames
Ashford University. Ground enrollment= 312
BPI flows students through online platform ... grows
enrollment by 50,000+ students in 4 years
Mgmt expects 70,000+ students by end of 2010
99% students now online, yet school retains its
Regional Accreditation
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
312
Mar-05
30
BPI Total enrollment, 2005 -2008
31,558
-
12,623
4,471
D CJ
2006 2007 2008
70,000
r--
53,688
-
2009 2010E
Summary
The pace of the growth of the for-profit education industry and their growing claim to Federal monies
will require greater scrutiny to protect students and the integrity of Title IV lending
The primary revenue and profitability driver for the for-profit companies is unrestricted access to Title
IV loans and grants
For-profit education companies are now among the most profitable businesses in the world due to
government largesse
Regulations built around company-reported statistics are ineffective, and the Accreditation process
for for-profit schools and programs is compromised
Disaggregation of risk from reward is the fundamental cause of all problems
32
Solutions- Gainful employment
Gainful employment gets at part of the problem because it deals with debt loads, but verification is
problematic
Programs DO NOT have to be shut down for schools to remain compliant with new regulations
Companies can restructure their business to accommodate the regulation and schools would
become more affordable and student debt loads would be lower
However, a gainful employment metric would structurally reset the earnings power of companies
33
Solutions- Gainful employment analysis impact (key assumptions)
1. Cost of programs based on reported cost I credit hour and program length
2. Percent of degree financed assumes Title IV o/o revenues less 10% (transfer credits and cash)
3. Debt service payment based on 7.5% interest rate (6.8o/o government loans I 12% private) and 10-
yr repayment period
4. Starting salaries taken from applicable BLS codes, by program category and job type
5. Debt service I income ratio of 8% based on Gainful Employment proposed regulation
6. Student mix by program level and program type used to calculate total revenue impact
7. Cost cuts estimated on a per-school basis, based on disclosed cost categories and industry experts
8. EPS impacts and PIE ratios based on existing reported information, share counts, and current
street EPS estimates
9. Scenario 1: Gainful Employment with no Offsetting Cost Cuts
10. Scenario 2: Gainful Employment with 5%-15% Cost Cuts
34
Gainful employment and APOL
APOL Scenario 1 Scenario 2
Actual 2009 EPS $4.22 $4.22
2009 EPS {adjusted) $1.32 $2.12
2009 EPS impact -69% -50%
Street 2010 EPS Estimate $5.07 $5.07
EPS Impact ($2.90) ($2.10)
2010 EPS {adjusted) $2.17 $2.97
2009 EPS impact -57% -41%
Current P/ E (2010 EPS) 10.8 X 10.8 X
2010 Pro-forma P /E 25.4 X 18.5 X
Note: PIE Ratios calculated as of 5121/2010
Source: Company-reported financials, programs, tuition rates, and management conference calls. Street EPS estimates from Bloomberg. Projections based on program-
level tuition adjustments to comply with 8% debt service/income ratio and scenario 2 applies ~ 1 5 % cost cuts across education and SG&A to offset revenue declines.
35
Gainful employment and ESI
ESI Scenario 1 Scenario 2
Actual 2009 EPS $7.91 $7.91
2009 EPS (adjusted) ($0.22} $2.02
2009 EPS impact -103% -74%
EPS Impact ($8.13) ($5.89)
2010 EPS (adjusted} $2.92 $5.16
2009 EPS impact -74% -53%
Current P/ E (2010 EPS) 10.0 X 10.0 X
Pro-forma P /E 37.6 X 21.3 X
36
Gainful employment and COCO
coco Scenario 1 Scenario 2
Actual 2009 EPS $0.81 $0.81
EPS (adjusted) ($0.76} $0.17
EPS impact -194% -79%
EPS Impact ($1 .57) ($0.64)
2010 EPS (adjusted} $0.10 $1.03
2009 EPS impact -94% -38%
Current P/ E (2010 EPS) 9.0 X 9.0 X
37
Gainful employment and EDMC
EDMC Scenario 1 Scenario 2
Actual 2009 EPS $0.87 $0.87
EPS (adjusted) ($5.50} ($2.21}
EPS Impact ($6.37) ($3.08)
2010 EPS (adjusted} ($4.86} ($1.57}
2009 EPS impact -422% -204%
Current P/ E (2010 EPS) 14.6 X 14.6 X
Pro-forma PlE {4.5}x {14.0}x
38
Gainful employment and WPO (Kaplan)
WPO (Kaplan)
Actual 2009 EPS
EPS (adjusted)
EPS impact
Street 2010 EPS Estimate
EPS Impact
2010 EPS (adjusted)
2009 EPS impact
Current P/ E (2010 EPS)
Pro-forma P /E
Scenario 1
$9.78
($33.25}
-440%
Scenario 2
$9.78
($6.19}
-163%
39
If these trends continue, we believe the DOE will face nearly $275B in defaults over
the next 10 years on a half-a-trillion dollars of lending to the For-Profit Industry
Projected Cumulative Stafford Loans (in $ Billions) and Cumulative Defaulted Dollars
for For-Profit Education Students, 2007 - 2020
$ 5 5 0 ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~
$500
$450
$400
"ii)
c
0
= $350
iXl
Colt
-;; $300
c
11:1
0
....1
?: $250
(I)
;:;
~ $200
~
$150
$100
$50
D Total Stafford Loans to FP students
Elll Projected Defaulted Dollars
And because of fees associated with
default, the government collects
approximately $1.20 on every $1.00 lent. ..
... meaning For-profit students will owe
$330 Billion dollars on defaulted loans over
the next 10 years
$0 I ' I 1!1!!!!11 ' I I l!!ll!!lhl ' I I I
$498
$423
$358
$301
$251
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: College Board, National Center for Education Statistics, industry estimates
40
IRA SOHN CONFERENCE
Presentation by Steve Eisman
SUBPRIME GOES TO COLLEGE
May 26,2010
Good Afternoon. I would like to thank the Ira Sohn Foundation for the honor of speaking
before this audience. My name is Steven Eisman and I am the portfolio manager of the
FrontPoint Financial Services Fund. Until recently, I thought that there would never
again be an opportunity to be involved with an industry as socially destructive and
morally bankrupt as the subprime mortgage industry. I was wrong. The For-Profit
Education Industry has proven equal to the task.
The title of my presentation is "Subprime goes to College". The for-profit industry has
grown at an extreme and unusual rate, driven by easy access to government sponsored
debt in the form of Title IV student loans, where the credit is guaranteed by the
government. Thus, the government, the students and the taxpayer bear all the risk and the
for-profit industry reaps all the rewards. This is similar to the subprime mortgage sector
in that the subprime originators bore far less risk than the investors in their mortgage
paper.
In the past 10 years, the for-profit education industry has grown 5-10 times the historical
rate oftraditional 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 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
1
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 rough! y 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
2
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 Jet'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 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 statting 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.
3
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 cont1nues 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 MAINTAIN 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 Gl bill money and currently
have separate teams set up to specifically target military students. If a person has money available for school Ashford
finds a way to go alter them. Ashford is just the middle man. profiting off this money. like milking a cow and working the
system within the limits of whafs 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 accreditat1on --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 accredit1ng 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
4
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 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 l 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 l hope that the DOE will not backtrack on gainful
employment. Once the rule is published in the federal registrar, the industry has until
November to try to get the DOE to back down.
The idea behind the gainful employment rule is to limit student debt to a certain level.
Specifically, the suggested rule is that the debt service-to-income-ratio not exceed 8%.
The industry has gotten hysterical over this rule because it knows that to comply, it will
probably have to reduce tuition.
Before I 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.
5
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 corresponding
PIEs. Needless to say, the PIE multiples look quite a bit different under either scenario.
Apollo- In fiscal2009, 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 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, fiscal2009 and the fiscal 2010 estimate turns massively
negative. Under scenario 2, fiscal 2009 and the fiscal 2010 estimate are also massively
negative, just less massi vely 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 ofKaplan metrics is slight. Thus, analyzing the
impact from gainful employment is much more difficult and we have confined our
analysis solely to fiscal2009. 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
6
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 industty 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 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 industty.
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 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.
7
From:
Sent:
To:
Subject:
Attachments:
Kvaal, James
Monday, June 14, 2010 12:06 PM
Rowe, David
FW: Eisman Talk at Ira Sohn Conference
Eisman-lra Sohn Conference slides.pdf
From:
Sent:
To:
Cc:
Subject:
Attachments:
Campbell, Neil
Wednesday, June 02, 201 o 7:02 PM
Smith, Zakiya; Martin, Carmel
Wurtzel , Judy; Graham, William; Skelly, Thomas
for-profited presentation from hedge fund conference
Steve-Eisman-lra-Sohn-Presentation-201 O.pdf
This may not be news to any of you, but I thought it still worth sharing this presentation that was forwarded to me by a
friend who works in f inance.
It was given at a big hedge fund conference last week by Steve Eisman, a guy Michael Lewis profiled in The Big Short
about the financial crisis. Eisman was one of the first to spot the subprime crisis and made a fortune trading off that
early discovery/belief. He does not have kind things to say about for profit education.
The most disturbing number is his projection on p. 21 of what could happen to default rates based on the astronomic
loan growth of the past few years. He models {p. 40) $275 billion in cumulative defaults to the taxpayer over the next
decade extrapolating out growth trends in for profits. He also highlights how some of the companies {p. 23) are
budgeting for loan losses of over 50% on their internal loans to students- which is a 'rational' decision because those
losses are sti ll more than 4x the operating profit they earn per student.
Other disturbing statistics include p. 14 regarding University of Phoenix's parent company. 134% of their revenue growth
in 2009 was from Title IV {so non-Federal revenue declined). Title IV revenue increased $1.1 billion {overall revenue up
$833 million)- but instructional costs only increased $99 million.
-Neil
"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," Eisman said. "The for-profit
education industry has proven equal to the task."
Online coverage of the conference:
http://motherjones.com/mojo/2010/05/steve-eisman-big-short-michael -lewis
http://www.marketfolly.com/2010/05/steve-eisman-frontpoint-partners-ira.html
Neil Campbell
Office of Planning, Evaluation and Policy Development
US Department of Education
neil.campbell@ed.gov
phone: 202.401.9478
mobile: 202.215.7472
Ira Sohn Conference
Presentation by Steven Eislllan
FrontPoint Partners
May 26,2010
Disclosures
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In the last 10 years/ the for-profit education industry has grown at 5-10 times the
I D Total industry enrollment growth II For-profit enrollment growth I
25% ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,
20%
15%
10%
5%
0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: National Center for Education Statisti cs, 2009
5
9%
8%
7%
6%
5%
4%
3%
2%
1%
In 1990 ...
< 1% of all students attended
for-profit colleges ...
n n n n n n ~
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
~ - ~ ~ - ~ ~ ~ - ~ ~ - ~ ~ - ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
I
I
< 10% of all schools
were for-profit ...
30%
25%
20%
15%
10'/,
1 1 1 1 1 I I I I I
1
I I I 1
1
1 1 1 I I I 1 1 1 1 1 I I I I I I I I I !
S% J 1 I ! I I I I I I 1 f 1 i
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
~ ~ ~ - ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ f f ~ ~ ~
In 2009 ...
almost 10% of students
attend for-profit colleges
6
25% of schools are
for-profit institutions
Despite being less than lOo/o of total enrollments/ for-profits now claim nearly
25% of the $89 billion of Federal Title IV student loans and grant disbursements
For-profit share of Title IV disbursements (Pell grants and Federal stafford loans), 1998-2009
2 7 % . - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~
26%
25%
24%
23%
22%
21%
20%
19%
18%
17%
16%
15%
14%
13%
12%
11 %
10%
9%
8%
7%
1998 1999 2000 2001 2002 2003 2004 2005 2006
0 Pell grants ll!ll Subsidized stafford loans 0 Unsubsidized stafford loans
Source: College Board, NCLC
7
2007 2008 2009
and has infiltrated the highest levels of government .. . a prime example
2001 - 2002: Director of Industry and Government Affairs for the Apollo Group
Education and Labor
Jonathan Vogel Deputy Counsel to the Department of ED, 2002 - 2005 Sonnenschein, Nath & Rosenthal GRAND CANYON UNIVERSITY
Lauren Maddox DOE Asst Sec for Communications, 2006 - 2008 Podesta Group CAREER EDUCATION CORP
Rebecca Campoverde DOE Asst Sec for Congressional & Legislative affairs, 2005- 2008 Kaplan, Inc. KAPLAN, INC
Victor F. Klatt Ill GOP Staff Director for House ED and Labor, 2005- 2008 Van Scoyoc Associates APOLLO GROUP
8
From 1987 through 2000, the amount of total Title IV dollars given to for-profit
schools fluctuated between $2 billion and $4 billion dollars .. .
Total Federal disbursements of Ti tle IV Stafford Loans and Pell Grants, 1987 - 2009
Dollars in billions
1987 $3.5 $7.3 $0.9 $1.8 $2.7 25% 25%
1988 $3.8 $8.0 $1.0 $2.1 $3.1 27% 27%
1989 $4.5 $8.2 $1 .1 $2.3 $34 24% 28%
1990 $4.8 $8.3 $1 .1 $1.9 $3.0 23% 23%
1991 $4.9 $8.8 $1 .1 $1 .5 $2.6 22% 17%
1992 $5.8 $9.5 $1.2 $1 .3 $2.5 21% 14%
1993 $6.2 $9.9 $1 .1 $1 .0 $2.1 18% 10%
1994 $5.7 $14.1 $0.9 $1.4 $2.3 15% 10%
1995 $5.5 $19.9 $0.7 $2.0 $2.7 13% 10%
1996 $5.5 $22.8 $0.7 $1 .9 $2.6 13% 8%
1997 $5.8 $25.1 $0.7 $2.2 $2.9 12% 9%
1998 $6.3 $26.3 $0.8 $2.3 12% 9%
1999 $7.2 $27.2 $2.6 13% 10%
2000 $7.2 $28.4 $3.0 13% 10%
2001 $8.0
''''
$29.5 $3.4 14%
''''''''
12%
2002 $10.0 $32.1 $4.1 14% 13%
2003 $11.6 $36.5 $5.2 15% 14%
2004 $12.7 $41.6 $6.6 16% 16%
2005 $13.1 $45.7 $7.9 18% 17%
2006 $12.7 $48.0 $8.8 19% 18%
2007 $12.8 $49.4 $9.5 19% 19%
2008 $14.7 $56.8 $12.4 .21% 22%
2009 $18.2 $70.9 $17.0 24% 24%
Pel/ Grants
Total Title IV aid grew from
quadrupled from $1
under $4 billion in 2000 to over
billion to $4 billion
$21 billion in 2009
dollars that flowed to the industry exploded to over $21 billion, a 450% increase
9
At the current pace of growth_, For-profit schools will claim 20o/o of enrollments_,
represent 40/o of schools and draw over 40% of all Title IV aid in 10 years
For-profit share of enrollment. schools, Pell grants and Loans, 2009- 2020
For-12rofits% share of:
Total Total Pelt Stafford
.
.
2007 7% 23% 19%
2008 8% 24% 21%
2009 8% 25% 24%
2010 9% 26% 25%
2011 10% 27% 26%
2012 10% 29% 27%
2013 11% 30% 28%
2014 12% 31% 30%
2015 13% 32% 31%
2016 14% 34% 32%
2017 16% 35% 33%
2018 17% 37% 35%
2019 18% 39% ::In%
2020
c
20% 40% 38%
Key Assumptions for Projections
Total post-secondary enrollment grows at 1.5% per year
For-profit enrollment grows at 10% per year (10-yr avg is 14.4%
--- -11. "
Total post-secondary institutions grow at 1.5% per year; For-profit
institutions grow at 6% per year (both long-term avg since 1990)
Avg grant and loan amounts per student grows at 5-yr hi storical avg
growth rates, by institution type
Source: College Board, US Dept of Education, industry estimates
Loans
19%
22%
24%
25%
27%
28%
30%
31%
33%
35%
36%
38%
40%
43%
Total
Title IV
19%
22%
24%
25%
27%
28%
29%
31%
32%
34%
36%
38%
40%
42%
10
Total Title IV disbursements ( ~ billions}
Non-12rofits For-12rofits
$50.2 $12.0
$56.0 $15.5
$67.6 ( $21.4 ""
$71 .9 $24.3
$76.5 $27.7
$81.2 $31 .5
$86.2 $35.8
$91.4 $40.8
$96.9 $46.4
$102.5 $52.8
$108.4 $60.1
$1 14.4 $68.5
$120.6 $77.9
:::::>
$126.9 $88.8 )
Based on current financials of For-profit
institutions, less than 30% of the
incremental $67 billion (annuaii"Ll. in
Title I V dollars will go towards
educating students ...
... nearl y $50 billion (annuai/W will go
toward non-facul ty and executive
compensation and company profits
:
:
:
:
:
I
:
:
:
:
:
:
:
:
:
:
:
:
:
:
I
-
comprise close to 90/o of total revenues
Apollo Group
ITT Technical
Institute
Other,
52%
2001
Title IV,
48%
65%
Note: Title IV figures include 2008 unsubsidized Joan limit increases on a pro-forma basis
11
Other,
11%
Other,
2009
Tit le IV,
89%
85%
ITT Technical Institute (ESI) Profitability has grown 5-fold since 2006
ESI operating margin %, Q1 06 - Q409 ESI operating profit($ millions), Q106- Q409
$165
$155
40%
$146
$135
$125
35%
$115
$105
30% $95
$85
25%
$75
$65

20%
::: [l
D
$35 0 0
$25
.s;,.'o .s;,."- .s;,.'O .s;,.<
..,o: '1-0' ..,o: "'0' ..,o: "'0' "'0' ..,o: "'0' "'0'

..,o: .,; ") I>' ..,o: "'0' I>' " "'0' " "'0' ") I>'
The top 5 executives at ESI, Cori nthian colleges (COCO) and Apollo Group (APOL)
To!;! 5 executives total com!;!ensation
ESI coco APOL Total
2007 $9,834,695 $4,938,982 $10,441,170 $25,214,847
2008 $8,923,791 $8,849,386 $26,766,979 $44,540,156
2009 $14,366,540 $1 1,222,377 $34,707,377 $60,296,294
3-yr total comp $33,125,026 $25,010,745 $71,915,526
Total comp = salary, bonus. stock awards, option awards, non-equity incentives
12
4 5 % ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~
40%
37.4%
35%
30%
25%
20%
15%
12.1%
9.9% 9.8%
10%
7.4%
5%
0%
13
5-year Average Company Operating Margins, 2005-2009
3 5 % ~ - - - - ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,
30%
29.0%
25%
20% 18.4%
15%
10%
5%
0%
ITT Technical Apple
Institute Computer
19.8%
Procter &
Gamble
9.5%
Lockheed
Martin
9.1%
Home Depot
So how can Title JV-funded education companies
earn substantially more money than nearly evel}l
has accounted for more than 100/o of the revenue growth of these companies
A(!ollo Groue (APOL} 2007
Year-year growth
%revenue from Title IV* 65%
Title IV revenues $1 ,770
Year-year growth
Total revenues $919
Year-year growth
Year-year growth
ITT Technical Institute (ESI} 2007
Total revenues $758
Year-year growth
Year-year growth
Dollars in millions
2008
$3,141
$417
77%
$2,419
$648
155%
2008
$1 ,069
$149
81%
$866
$174
117%
2008
$870
$1 12
73%
$635
$157
141%
14
2009
$3,974
c $833
89%
$3 537
( $1,119
134%
2009
$1,308
$239
89%
$1,163
$297
124%
2009
$1,015
$1 46
85%
$863
$228
157%
IV dollars . ..
... and of this incremental
ONLY $99 million or 9o/o
instructional costs
But how do they do it? How are for-profit schools grabbing such a growing share of
Title IV dollars?
Traditional relationship- Matching Means with Costs
Families with greater needs generally seek lower-cost
institutions to maximize the available Title IV loans and
grants, getting the most out of every dollar to reduce out-
of-pocket expenses and minimize heavy debt burdens ...
Lesser Means
n
Low Cost Institutions
(Community College or In-State School)
Families with greater financial resources often seek higher-
cost institutions because they can afford to pay in excess of
what Title IV loans cover. These families typically are not
eligible for grants because of their higher-income status.
Greater Means
(High Income Families)
n
High Cost Institutions
(Private Colleges)
For-profit Model - Max Cost with Minimal Means
Lesser Means
n
[ High Cost Institutions ]
" - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~
The for-profit model has consciously separated the
traditional relationship between costs and means. They
seek to recruit those with the greatest financial needs and
put them in the highest-cost institutions ... and why?
This formula maximizes tl1e amount of Title IV loans and
grants their students can receive.
15
.

. .
l'""""!
Q)
"'d
0
6
What results from this combination of profit-motive and lack of quality control is
an expensive education that is highly questionable
East Say News ~
Everest College students angry over certification
...
li'!lli- .. ta
By Tomas Roman
HAYWARD CA (KGO}- Nearly three dozen Everest College students are
funous th&y hm-en'l reeeivM the medical certifications they paid fot They refused
to go to class until they get some answers
Whether they attend class or not the students have to pay $100.
Some of the students hll'ie been attending school for eight months Three weeks
ago they found out that the college does not supply them with a cenificate they
were told the)< would get in order to obtain the medical posrlions they want
The students are all studying med1cal asslstmg and the\ paid $16 000 for an
SI!Jhlmonth course They were told the credits earned stthe school do hot
transfer to any communrty or four-year college and that has many of them angry
Source: ABC News, KGO- TV San Francisco, CA. March 19, 2010
17
News Article summary
Students paid $16,000 for an eight-month
course in medical assisting at an Everest
College campus in Hayward, CA
Students recently learned that:
Credits earned at the school do not
transfer to any community or four-year
college
Degrees granted at the school are not
recognized by the American
Association for Medical Assistants
(AAMA)
Hospitals will not interview students
for potential jobs
ABC7 talked to the state Medical
Assistant's Education Review Board
and found the Hayward Campus is one
of several Everest operates in California
that the board say is not accredited to
credential medical assistants.
Even when assuming reported graduation rates (BIG ASSUMPTION), more than
50o/o of the student body still drops out every year
APOL 2006 2007 2008 2009
+ New students 216,600 258,500 288,200 355,800
- Graduates I drop outs (212,600) ( 2 2 7 , 1 0 0 ~ (239,800) (274,900)
Graduates 61 ,390 72,338 78,484 83,440
ESI 2006 2007 2008 2009
II
..........._ enrollment annually.
+ New students 49,935 54,593 65,313 85,928
Ending enrollment 46,896 53,027 61 ,983 80,766
Graduates 18,449 19,774 21 ,983 25,302
National Center of Educati on Statistics dat a;
Drop outs 27,575 28,688 34,374 41,843
figures represent average i nstitutional graduation
rat es at top 5 largest institut ions
Assume avg tenure btwn 2-3 year.s for graduates For reference, 2009 Dept of ED reported
graduati on rates for full-ti me, first ti me students at
for-profit schools is between 14-22%; t hese
coco 2006 2007 2008 2009
II I
graduati on rates have been adj usted to incl ude non
Beginning enrollment 66,114 60,964 61 ,332 69,211 fi rst-time, full-time student s, still may be largely
+ New students 92,185 90,105 100,210 117,352 overst at ed
II
COCO cl aim that real graduation rates at many
II I
locations are in the singl e digi ts
Graduates 20,968 20,179 21 ,540 25,624
Drop outs 76,367 69,558 70,791 74,851
Default rates- historical National Cohort Default rates by institution type
Outside of the mid-90's, when the regulatory environment was more stringent,
default rates at For-profit schools are roughly 2x non-profit default rates
Exhi bit 2. National Cohon Default Rates by Institution Type {FY1991 ..
FY2008)
x-...
19S I o 19i2 a !t93 0 1m
2V-..
o 13S1 D199! 8 H'99 a::xm
om? o:ICoa
tflt

C'll '
.....
t'

P:ka- 4 Fet-PFMt
eV2o's data .s drai . Sc>trce: BMO CJpiull aro US of Educ."'lion Natonal
Sbt stics.
Source: NCES industry data and chart taken from recent BMO capital markets research report
19
We are back to late-80's levels of lending to for-profit students, a key leading indicator
for loan defaults . .. back then, fraud was commonplace and regulation was minimal
Traditional vs. For-Qrofit disbursements of Title IV Stafford Loans and Pell Grants
1
1987 - 2009
For-(2rofits tq share of: 8verage Pell Grant+ Loans
Total Total Pell Stafford Total Per Student
~
Title IV All schools Non-12rofit
1987 1% 10% 25% 25%
~
$842 $643
1988 2% 10% 27% 27% 27% $899 $670
1989 2% 10% 24% 28% 27% $933 $697
1990 2% 10% 23% 23% 23% $948 $740
1991 2% 10% 22% 17% 19% $954 $788
1992 2% 9% 21% 14% 16% $1,053 $895
1993 2% 9% 18% 10% 13% $1,120 $989
1994 2% 9% 15% 10% 12% $1,385 $1,246
1995 2% 9% 13% 10% 11 % $1,780 $1,616 $11,339
1996 2% 9% 13% 8% 9% $1,967 $1,827 $8,402
1997 2% 15% 12% 9% 9% $2, 131 $1,974 $8,910
1998 3% 16% 12% 9% 9% $2,249 $2,093 $8,317
1999 3% 17% 13% 10% 10% $2,329 $2,154 $8,152
2000 3% 18% 13% 10% 11 % $2,323 $2,130 $8,681
2001 3% 19% 14% 12% 12% $2,351 $2,139 $8,533
2002 4% 19% 14% 13% 13% $2,531 $2,278 $9,349
2003 4% 19% 15% 14% 14% $2,848 $2,543 $9,786
2004 5% 20% 16% 16% 16% $3,146 $2,783 $9,909
2005 6% 21% 18% 17% 17% $3,364 $2,947 $10,153
2006 6% 22% 19% 18% 18% $3,420 $2,968 $10,498
2007 7% 23% 19% 19% 19% $3,407 $2,944 $10,074
2008 8% 24% 21% 22% 22% $3,740 $3, 173 $10,541
2009 8% 25% 24% 24%
~
$4,525 $3,744 C $13,247
We must take note that because For-profit students receive 3-5x as much Title I V aid as traditi onal
students and are growing enrollment at 3x the pace of traditional schools, these early warning
signs must be addressed now before the impact is felt in the coming years ...
20
If history is any guide, we will return to late-80's Cohort Default rates in 1-2 years,
the worst period of recorded default rates in the history of the DOE
$16,000
$15,000
$14,000
t: $13,000
<!J
"'0
:I
~
~ $12,000
0..
~
<!J
:;::; $11,000
i=
'iij
0
1- $10,000
$9,000
$8,000
$7,000
Average Total Loans + Grants per For-profit student vs. DOE Official CDRs, 1987 - 2009
I c:::::JAvg Loans+ Grants ---Official CDR I
n
n n ~ - ~
~ ~ * ~ ~ ~ ~ * ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ *
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
~
Source: College Board, US Dept of Education
21
24%
20%
16%
Q:
0
u
'iij
12% :
:::
0
UJ
0
0
8%
4%
0%
Corinthian Colleges Cohort Default Rates, 2004 - 2008

40% i I -+-2-yr rates - 3-yr rates ]
38%
36%
34%
32%
30%
28%
26%
24%
22%
20%
18%
16%
14%
12%
11%
40%
21 %
11%

2004 2005 2006 2007 2008
22
own students . .. these are students who already have Title IV loans
Companies are provisioning for more than 50o/o+ loss on loans they make to students ...
Both companies would still be hugely profitable on a per-student basis even with a 1 00%
ESI
Title IV loans, grants and pri vate loans $16,959
Internal company loan per student $2,100
23
coco
$14,443
$1 ,770
$16,213
Jl
58%
II
($1 ,027)
$4,282
4.2X
24
The 90/10 rule
loans grants)
25
26
AND
the risk for these loans is borne SOLELY BY students and the government .. .
THEN
- Grow at all costs
- Influence key regulatory bodies
-Bill Brebaugh, head of University of Phoenix Corporate Enrollment
not our problem .. . "
application . .. II
It's a boiler room - selling education to people who
don't really want it. II
- Ashford University (BPI ) former enrollment
counselor
"The EC [enrollment counselor] review matrix is all
theDOE .. .
11
28
LnrllllrMittJ Ill.
tiall

S<!lti)'OI>
--As

$f01o_'<I J'8l
$26J( ttlle.O."l
$2Sk
WJk
4S...,.vt.Jli!l'tli t3tt $let 11ft0
4a 4)tlf(lll!l<:nl $)111
$$"'
$!!&. , 1 ono. O.T.
$1 $ba
... t34k *
c.1 CJWliJ\no,utt ll);i\
5'411VCil:::lenl!o W\
$3$
$6t6:pcr Z no. O.T.

r:.l ..

U7l< $3Gil
rl.l"''l'lblc<a
A
..
1)1); .WUfcr t mo. 0 T
$$ $371

53lllt
&tnte-ICI
$3!tt $311.
G:i .,..,_.,,., !<0< $411k P<" '1"0 0 T
6G o;tmlltnm( $-IOJ.
$-<l
$1.0\ :S.Jk
S4At
00
m\.ll'lt 2.--o.l.
H nroll'"'nla $4tk 'S4SI!
Source: Court documents, Hendow & Albertson vs. UOP, filed 2009
Title IV Programs
institutions!
Ms. Mary Hale Barry
Ms. Jill DeAtley
Mr. Francis Giglio
Director of Compliance and Regulatory Services
lincoln Educational Services
Mr. David M. Luce
Assistant Vice President, Accreditation and Licensing
Not a/116 Board members shown
We have seen this before . .. rating agencies and subprime mortgages.
29
Timeline
BPI flows students through online platform ... grows
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
312
Mar-05
30
31,558
-
12,623
4,471
D CJ
2006 2007 2008
70,000
r--
53,688
-
2009 2010E
Summary
IV loans and grants
government largesse
Regulations built around company-reported statistics are ineffective, and the Accreditation process
for for-profit schools and programs is compromised
32
Solutions- Gainful employment
Gainful employment gets at part of the problem because it deals with debt loads, but verification is
problematic
Programs DO NOT have to be shut down for schools to remain compliant with new regulations
Companies can restructure their business to accommodate the regulation and schools would
become more affordable and student debt loads would be lower
However, a gainful employment metric would structurally reset the earnings power of companies
33
Solutions- Gainful employment analysis impact (key assumptions)
1. Cost of programs based on reported cost I credit hour and program length
2. Percent of degree financed assumes Title IV o/o revenues less 10% (transfer credits and cash)
3. Debt service payment based on 7.5% interest rate (6.8o/o government loans I 12% private) and 10-
yr repayment period
4. Starting salaries taken from applicable BLS codes, by program category and job type
5. Debt service I income ratio of 8% based on Gainful Employment proposed regulation
6. Student mix by program level and program type used to calculate total revenue impact
7. Cost cuts estimated on a per-school basis, based on disclosed cost categories and industry experts
8. EPS impacts and PIE ratios based on existing reported information, share counts, and current
street EPS estimates
9. Scenario 1: Gainful Employment with no Offsetting Cost Cuts
10. Scenario 2: Gainful Employment with 5%-15% Cost Cuts
34
Gainful employment and APOL
APOL Scenario 1 Scenario 2
Actual 2009 EPS $4.22 $4.22
2009 EPS {adjusted) $1.32 $2.12
2009 EPS impact -69% -50%
EPS Impact ($2.90) ($2.10)
2010 EPS {adjusted) $2.17 $2.97
2009 EPS impact -57% -41%
Current P/ E (2010 EPS) 10.8 X 10.8 X
2010 Pro-forma P /E 25.4 X 18.5 X
35
Gainful employment and ESI
ESI Scenario 1 Scenario 2
Actual 2009 EPS $7.91 $7.91
2009 EPS (adjusted) ($0.22} $2.02
2009 EPS impact -103% -74%
EPS Impact ($8.13) ($5.89)
2010 EPS (adjusted} $2.92 $5.16
2009 EPS impact -74% -53%
Current P/ E (2010 EPS) 10.0 X 10.0 X
36
Gainful employment and COCO
coco Scenario 1 Scenario 2
Actual 2009 EPS $0.81 $0.81
EPS (adjusted) ($0.76} $0.17
EPS Impact ($1 .57) ($0.64)
2010 EPS (adjusted} $0.10 $1.03
2009 EPS impact -94% -38%
Current P/ E (2010 EPS) 9.0 X 9.0 X
37
Gainful employment and EDMC
EDMC Scenario 1 Scenario 2
Actual 2009 EPS $0.87 $0.87
EPS (adjusted) ($5.50} ($2.21}
EPS Impact ($6.37) ($3.08)
2010 EPS (adjusted} ($4.86} ($1.57}
2009 EPS impact -422% -204%
Current P/ E (2010 EPS) 14.6 X 14.6 X
Pro-forma PlE {4.5}x {14.0}x
38
Gainful employment and WPO (Kaplan)
WPO (Kaplan)
Actual 2009 EPS
EPS (adjusted)
EPS impact
Street 2010 EPS Estimate
EPS Impact
2010 EPS (adjusted)
2009 EPS impact
Current P/ E (2010 EPS)
Pro-forma P /E
Scenario 1
$9.78
($33.25}
-440%
Scenario 2
$9.78
($6.19}
-163%
39
If these trends continue, we believe the DOE will face nearly $275B in defaults over
the next 10 years on a half-a-trillion dollars of lending to the For-Profit Industry
Projected Cumulative Stafford Loans (in $ Billions) and Cumulative Defaulted Dollars
for For-Profit Education Students, 2007 - 2020
$ 5 5 0 ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~
$500
$450
$400
"ii)
c
0
= $350
iXl
Colt
-;; $300
c
11:1
0
....1
?: $250
(I)
;:;
~ $200
~
$150
$100
$50
D Total Stafford Loans to FP students
Elll Projected Defaulted Dollars
And because of fees associated with
default, the government collects
approximately $1.20 on every $1.00 lent. ..
... meaning For-profit students will owe
$330 Billion dollars on defaulted loans over
the next 10 years
$0 I ' I 1!1!!!!11 ' I I l!!ll!!lhl ' I I I
$498
$423
$358
$301
$251
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Source: College Board, National Center for Education Statistics, industry estimates
40
IRA SOHN CONFERENCE
Presentation by Steve Eisman
SUBPRIME GOES TO COLLEGE
May 26,2010
Good Afternoon. I would like to thank the Ira Sohn Foundation for the honor of speaking
before this audience. My name is Steven Eisman and I am the portfolio manager of the
FrontPoint Financial Services Fund. Until recently, I thought that there would never
again be an opportunity to be involved with an industry as socially destructive and
morally bankrupt as the subprime mortgage industry. I was wrong. The For-Profit
Education Industry has proven equal to the task.
The title of my presentation is "Subprime goes to College". The for-profit industry has
grown at an extreme and unusual rate, driven by easy access to government sponsored
debt in the form of Title IV student loans, where the credit is guaranteed by the
government. Thus, the government, the students and the taxpayer bear all the risk and the
for-profit industry reaps all the rewards. This is similar to the subprime mortgage sector
in that the subprime originators bore far less risk than the investors in their mortgage
paper.
In the past 10 years, the for-profit education industry has grown 5-10 times the historical
rate oftraditional 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 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
1
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 rough! y 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
2
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 Jet'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 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 statting 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.
3
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 cont1nues 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 MAINTAIN 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 Gl bill money and currently
have separate teams set up to specifically target military students. If a person has money available for school Ashford
finds a way to go alter them. Ashford is just the middle man. profiting off this money. like milking a cow and working the
system within the limits of whafs 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 accreditat1on --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 accredit1ng 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
4
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 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 l 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 l hope that the DOE will not backtrack on gainful
employment. Once the rule is published in the federal registrar, the industry has until
November to try to get the DOE to back down.
The idea behind the gainful employment rule is to limit student debt to a certain level.
Specifically, the suggested rule is that the debt service-to-income-ratio not exceed 8%.
The industry has gotten hysterical over this rule because it knows that to comply, it will
probably have to reduce tuition.
Before I 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.
5
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 corresponding
PIEs. Needless to say, the PIE multiples look quite a bit different under either scenario.
Apollo- In fiscal2009, 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 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, fiscal2009 and the fiscal 2010 estimate turns massively
negative. Under scenario 2, fiscal 2009 and the fiscal 2010 estimate are also massively
negative, just less massi vely 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 ofKaplan metrics is slight. Thus, analyzing the
impact from gainful employment is much more difficult and we have confined our
analysis solely to fiscal2009. 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
6
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 industty 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 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 industty.
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 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.
7
From:
Sent:
To:
Shireman, Bob
Friday, May 28, 2010 9:14AM
Arsenault, Leigh
Subject: RE: Examples for Higher Ed tuition speech/tuition watch list issues
Yes.
From: Leigh
Sent: May 2010 8:41 AM
To: Bob
Good advice! Should I check with MaryEllen to see if there is a good time for her?
From: Bob
Sent: May 2010 7:35 AM
To: Leigh
Subject: Re: Examples for Higher Ed tuition speech/tuition watch list issues
you shouldn ' t be texting while you walk!
- - - - - Original Message
From: Leigh
To: Bob
Sent: Thu May 27 21:22:22 2010
Subject: Fw: Examples for Higher Ed tuition speech/tuition watch list issues
----- Original Message -----
From: David
Just thoughts as I walk home ...
To: Elise; Leigh; Zakiya; Bob
Sent: Thu May 27 21:13:52 2010
- - - - - Original Message -----
From: Elise
Thx.
To: David; Leigh; Zakiya; Bob
Sent: Thu May 27 20:33:02 2010
From: David" <David.Whitman@ed.gov>
Date: 27 May 2010 14:29:06
To: Elise<Elise.Miller@ed.gov>; Leigh<Leigh.Arsenault@ed.gov>;
Zakiya<Zakiya.Smith@ed . gov>;
Subject: RE: Examples for Higher Ed tutition speech/tuition watch list issues

D.
From: Elise
Sent: May 2010 2:00 PM
To: David; Bob; Zakiya; Jackie; Emma;
Leigh; Carmel
Cc: Martha; Peter; David; Michael
You can get some ideas for examples to use for non-profits from the NAICU website
(http://naicu.edu/special_initiatives/Affordability/). They gather examples of cost
containment initiatives from their members on an annual basis. Some 2009-10 NY examples:
Hartwick College NY)
Hartwick is launching a three-year bachelor's degree program in 2009-10. It is designed to
cut more than off the current cost of earning a Hartwick undergraduate
eliminating over in and more than in fees for room and board. This
represents a savings to students and their families of approximately 25 percent .
Yeshiva University (New NY)
Yeshiva is freezing undergraduate tuition for 2009-10.
Cornell University NY)
For Cornell University is expanding the financial aid initiative it launched in
2008-09. Last the university announced it was eliminating the loan expectation for
those with family incomes below it is also eliminating the parental
contribution as well for those families. In Cornell will reduce the parental
contribution for selected students who have financial need and whose families have annual
incomes above and begin capping need-based student loans at annually for
students who have financial need and whose families have annual incomes above
Cornell annually caps need-based student loans at for family incomes between
and
From: David
2
To: ShiremanJ Bob; SmithJ Zakiya; GranJ Jackie; VadehraJ Emma; ArsenaultJ Leigh; MartinJ
Carmel
Cc: KanterJ Martha; CunninghamJ Peter; HoffJ David; MillerJ Elise; DannenbergJ Michael
Subiect: RE: Examples for Higher Ed tutition speech[tuition watch list issues
As for good (and bad) examples of tuition cost/student debt containmentJ I'm all ears.
From: ShiremanJ Bob
Sent: ThursdayJ May 27J 2010 1:03 PM
To: WhitmanJ David; SmithJ Zakiya; GranJ Jackie; VadehraJ Emma; ArsenaultJ Leigh; MartinJ
Carmel
Cc: KanterJ Martha; CunninghamJ Peter; HoffJ David; MillerJ Elise
Subiect: Re: Examples for Higher Ed tutition speech/tuition watch list issues
From: WhitmanJ David
To: SmithJ Zakiya; GranJ Jackie; VadehraJ Emma; ArsenaultJ Leigh; ShiremanJ Bob; MartinJ
Carmel
Cc: KanterJ Martha; CunninghamJ Peter; HoffJ David
Sent: Thu May 27 11:46:42 2010
Subject: Examples for Higher Ed tutition speech/tuition watch list issues ZakiyaJ JackieJ
BobJ CarmelJ MarthaJ (Peter)J
By and largeJ colleges in NY state fare well on the tentative tuition watch lists that I saw.
The breakdown is as followsJ with all tuition/fee data from 2009-10J and all tuition/fee
increases from 2007-08 to 2009-10. HoweverJ there are some seeming geographic anomalies or
over-concentration in the list t hat may limit their usefulness- -and to which you may want to
give some thought:
3
- -Public 4-Year Institutions in Top 5% of Tuition and Fees: Not one NY State public
institution ranks among the top 5% of the most expensive public four-year institutions.
However, 22 of the 32 most expensive public four -year institutions are located in one state,
Pennsylvania. Why?
- -Top 5% of Increases in Tuitions and Fees, Public 4-Years: Again, not a single NY State
public university is on the list of the top 5% of school s with the biggest increases in
tuition and fees. However, 21 of the 32 public four -years with the biggest increases in
tuition are in California. Seven are in Georgia. Given the magnitude of California's budget
crisis, and the comparatively low cost of California's universities, can we singl e out
California schools for failing to contain tuition costs?
-- Lowest 10% of Tuition and Fees, Public 4-Years: New York State public four-year
universities don't figure among the most expensive public institutions, but NY state schools
aren't among the l east expensive institutions either. Not a single 4-year public institution
in NY State ranks among the lowest - priced schools. There is much more geographic variation in
low priced four-year school s than in high-priced ones.
-- Private Not - For-Profit 4-Year Institutions, Top 5% of Tuition and Fees: Of the 64 highest -
priced private four-year institutions, 12 institutions are l ocated in NY State, (Union
College, Columbia, Sarah Lawrence, Vassar, Colgate, Skidmore, Hobart, Bard, St. Lawrence,
Hamilton, NYU, University of Rochester, and Barnard). These colleges are disproportionatel y
former women's colleges, though not exclusivel y. NYU and Columbia might be worth citing for
doing a poor job of keeping down tuition, except that they are in ultra- pricey New York City
and neither is on the list of schools with the top 5% of increases in tuition and fees from
2008 to 2009. In fact, virtually none of the private colleges with the highest tuition are
also among the colleges with the biggest tuition jumps-primarily because schools with lower
tuition are more likel y to have a bigger proportionate tuition increase than schools that
already have high sticker prices.
- -Private Not - For-Profit 4-Year Institutions, Top 5% of Increases in Tuitions and Fees: Of
the 64 private four -years with the biggest tuition and fee increases, 11 are located in NY
State--and Wells College in NY State tops the list, with a staggering 67% increase in tuition
costs and fees from 2008-2009 . (The NY State private schools and their tuition increases are:
Wells College, 66.6 percent increase in tuition and fees; Sage College of Albany, 50.7%
increase; Yeshiva Shaarei Torah of Rockland, 33.3 percent; Rabbinical College Bobover Yeshiva
Bnei Zion, 32.5%; Dowling College, 31%; Yeshiva Gedolah Imrei Yosef D'spinka, 29%; Rabbinical
College of Ch'san Sofer New York, 27%; Yeshiva of Nitra Rabbinical College, 26%; Yeshiva
D'monsey Rabbinical College, 24%; Villa Maria College Buffalo, 22%; Rabbinical Academy
Mesivta Rabbi Chaim Berlin, 22%).
However, the list of schools with big tuition jumps in NY State is overwhelmingly dominated
by Yeshiva and Rabbinical colleges -which are also some of the lowest-priced private colleges
in NY State. There is a good deal of geographical variation by state in the most expensive
private colleges.
--Private Not-For-Profit 4-Year Institutions, Lowest 10% of Tuition and Fees: Of the 130 or
so lowest - priced four -year private colleges, 22 are in NY State-and the vast majority are
yeshivas and rabbinical training grounds. Arne may wish to get into a Talmudic dispute about
the fact that yeshivas are both inexpensive yet have rapidly rising costs. But I don't think
so. Private colleges in Puerto Rico and in the Baker College chain in Michigan account for a
significant number of the lowest-priced schools, but low-priced fou r -year schools are
distributed throughout the country.
--Private For-Profit 4-Year Institutions, Top 5% of Tuition and Fees: Only one of the 25 most
expensive for -profit four -year colleges is in NY State, the School of Visual Arts (and it's
not near the top of the list). The expensive for-profit colleges are spr ead around, though 6
4
of the 25 schools are in California. Art institutes are also disproportionately represented,
with eight or nine schools on the list of 25 institutions.
-- Private For-Profit 4-Year Institutions, Top 5% of Increases in Tuition and Fees: No for -
profit four-year college in New York State ranks among the 25 for-profit schools with the
biggest tuition increases. Again, the for-profit schools with big tuition increases are
f airly well -dispersed, though six of the schools are in Florida. Topping the list handily is
Everest University-Largo in Florida, which increased tuition and fees 99% in a single year,
from 2007- 08 to 2009-10.
--Private For-Profit 4-Year Institutions, Lowest 10% of Tuition and Fees: None of the 50
lowest - priced for -profit four -year schools are in New York State. But the list of the
inexpensive for-profits is dominated overwhelmingly by various campuses of the University of
Phoenix.
--Public Two-Year Institutions, Top 5% of Tuition and Fees: None of the 50 highest-priced
public two -year institutions is i n New York State. However, 19 of the highest - priced public
two-year schools are in Minnesota, and 7 are in New Hampshire--meaning that half of the most
expensive public two-year schools are in just two, comparatively sparsely- populated states.
Others will know why Minnesota and New Hampshire jump out. But it's not clear the list
conveys an important or accurate cost containment message about public two-year schools.
--Public Two-Year Institutions, Top 5% of Increases in Tuition and Fees: No public two-year
institution from New York State makes this list, which is dominated overwhelmingly by public
two-years in California and Georgia . However, many of the two-year public schools on the list
are exempted from HEOA tuition watch lists because their tuition and fees increased less than
$600 from 2007-08 to 2009-10 (i.e, they had "big" tuition jumps but were so cheap to begin
with that they didn't cross the $600 increase threshold). Also, close to 90 schools were not
considered for the list because they report tuition and fees for their largest program, which
vary in field of study and length, from several months to more than a year .
- -Private Not - For-Profit Two-Year Institutions, Top 5% of Tuition and Fees: One of five
schools on this list, the Academy of Dramatic Arts, is in New York State. Landmark College in
Vermont tops the list-- but Landmark provides intensive and expensive support services and
transition support for students with learning disabilities. Maybe the list is useful here,
maybe not.
- -Private Not - For-Profit Two-Year Institutions, Top 5% of Increases in Tuition and Fees: Two
of the five for-profit two-year schools with the biggest tuition jumps are in New York State,
the New York Methodist Hospital Center for Allied Health Education (where tuition and fees
jumped 53% last year) and the American Academy of Dramatic Arts (which tuition and fees
increased 49%).
--Private Not-For-Profit Two-Year Institutions, Lowest 10% of Tuition and Fees: One New York
State private, not -for -profit t wo-year institution is among the 11 lowest priced colleges in
this category, the Merce Cunningham Studio. A little more than a third of the least expensive
two-year for-profits are tribal colleges.
If you know of examples of universities and colleges in New York State, apart from this list,
that you think have done a good job of controlling tuition costs and student debt, please
flag them for me.
Otherwise, I'd be interested in your thoughts about what might make the watch lists more
useful and prevent us singling out schools based on mathematical anomalies (e.g., the
Yeshivas with big cost increases but low sticker prices) or geography (i.e., states like
California where public institutions were rocked by budgetary crises). If others don't think
the potential watch lists are a problem, that would be useful to know as well. Thanks.
5
David
6
From:
Sent:
To:
Whitman, David
Friday, May 28, 2010 10:20 AM
Miller, Elise
ThanksJ Elise.
- - - --Original Message-----
From: MillerJ Elise
Sent: FridayJ May 28J 2010 10:15 AM
To: WhitmanJ David; ArsenaultJ Leigh; SmithJ Zakiya; ShiremanJ Bob
David - - I hope to get some more examples to you by COB Tuesday.
From: WhitmanJ David
To: MillerJ Elise; ArsenaultJ Leigh; SmithJ Zakiya; ShiremanJ Bob
- - - - - Original Message -----
From: MillerJ Elise
Thx.
To: WhitmanJ David; ArsenaultJ Leigh; SmithJ Zakiya; ShiremanJ Bob
Sent: Thu May 27 20:33:02 2010
From: "WhitmanJ David" <David.Whitman@ed.gov>
Date: ThuJ 27 May 2010 14:29:06
To: MillerJ Elise<Elise.Miller@ed.gov>; ArsenaultJ Leigh<Leigh.Arsenault@ed.gov>; SmithJ
Zakiya<Zakiya.Smith@ed.gov>; ShiremanJBob<Bob.Shireman@ed.gov>
LJ.
From: MillerJ Elise
To: WhitmanJ David; ShiremanJ Bob; SmithJ Zakiya; GranJ Jackie; VadehraJ Emma; ArsenaultJ
Leigh; MartinJ Carmel
Cc: KanterJ Martha; CunninghamJ Peter; HoffJ David; DannenbergJ Michael
7
Hartwick College (Oneonta) NY)
cut more than $40J000 off the current cost of earning a Hartwick undergraduate degreeJ
eliminating over $30J000 in tuition) and more than $9J000 in fees for room and board. This
represents a savings to students and their families of approximately 25 percent.
Yeshiva University (New YorkJ NY)
Cornell University (IthacaJ NY)
For 2009-10J Cornell University is expanding the financial aid initiative it launched in
2008-09. Last yearJ the university announced it was eliminating the loan expectation for
those with family incomes below $60J000; nowJ it is also eliminating the parental
contribution as well for those families. In addition) Cornell will reduce the parental
incomes above $60J000J and begin capping need-based student loans at $7J500 annually for
students who have financial need and whose families have annual incomes above $120)000.
Already) Cornell annually caps need-based student loans at $3J000 for family incomes between
$60J000 and $120)000.
From: Whitman) David
Sent: Thursday) May 27J 2010 1:10 PM
To: Shireman) Bob; SmithJ Zakiya; GranJ Jackie; VadehraJ Emma; Arsenault) Leigh; MartinJ
Carmel
Cc: KanterJ Martha; Cunningham) Peter; HoffJ David; MillerJ Elise; Dannenberg) Michael
From: Shireman) Bob
Sent: Thursday) May 27J 2010 1:03 PM
To: Whitman) David; SmithJ Zakiya; GranJ Jackie; VadehraJ Emma; Arsenault) Leigh; MartinJ
Carmel
Cc: KanterJ Martha; Cunningham) Peter; HoffJ David; MillerJ Elise
Subject: Re: Examples for Higher Ed tutition speech/tuition watch list issues
8
From: Whitman, David
To: Smith, Zakiya; Gran, Jackie; Vadehra, Emma; Arsenault, Leigh; Shireman, Bob; Martin,
Carmel
Cc: Kanter, Martha; Cunningham, Peter; Hoff, David
Sent : Thu May 27 11:46:42 2010
Subject: Examples for Higher Ed tutition speech/tuition watch list issues Zakiya, Jackie,
Bob, Carmel, Martha, (Peter),
By and large, colleges in NY state fare well on the tentative tuition watch lists that I saw.
The breakdown is as follows, with all tuition/fee data from 2009-10, and all tuition/fee
increases from 2007-08 to 2009-10. However, there are some seeming geographic anomalies or
over-concentration in the list that may limit their usefulness--and to which you may want to
give some thought:
- -Public 4-Year Institutions in Top 5% of Tuition and Fees: Not one NY State public
However, 22 of the 32 most expensive public four-year institutions are located in one state,
Pennsylvania. Why?
public university is on the list of the top 5% of schools with the biggest increases in
tuition and fees. However, 21 of the 32 public four-years with the biggest increases in
crisis, and the comparatively low cost of California ' s universities, can we single out
--Lowest 10% of Tuition and Fees, Public 4-Years: New York State public four-year
aren't among the least expensive institutions either. Not a single 4-year public institution
in NY State ranks among the lowest-priced schools. There is much more geographic variation in
low priced four-year schools than in high-priced ones.
--Private Not-For-Profit 4-Year Institutions, Top 5% of Tuit ion and Fees: Of the 64 highest -
priced private four-year institutions, 12 institutions are located in NY State, (Union
Hamilton, NYU, University of Rochester, and Barnard). These colleges are disproportionately
former women's col leges, though not exclusively. NYU and Columbia might be worth citing for
9
doing a poor job of keeping down tuition> except that they are in ultra-pricey New York City
2008 to 2009. In fact> virtually none of the private colleges with the highest tuition are
also among the colleges with the biggest tuition jumps -primarily because schools with lower
tuition are more likely to have a bigger proportionate tuition increase than schools that
--Private Not-For-Profit 4-Year Institutions> Top 5% of Increases in Tuitions and Fees: Of
the 64 private four -years with the biggest tuition and fee increases> 11 are located in NY
State--and Wells College in NY State tops the list> with a staggering 67% increase in tuition
costs and fees from 2008-2009. (The NY State private schools and their tuition increases are:
Wells College> 66.6 percent increase in tuition and fees; Sage College of Albany> 50.7%
increase; Yeshiva Shaarei Torah of Rockland> 33.3 percent; Rabbinical College Bobover Yeshiva
Bnei Zion> 32.5%; Dowling College> 31%; Yeshiva Gedolah Imrei Yosef D'spinka> 29%; Rabbinical
College of Ch'san Sofer New York> 27%; Yeshiva of Nitra Rabbinical College> 26%; Yeshiva
D'monsey Rabbinical College> 24%; Villa Maria College Buffalo> 22%; Rabbinical Academy
Mesivta Rabbi Chaim Berlin> 22%).
However> the list of schools with big tuition jumps in NY State is overwhelmingly dominated
by Yeshiva and Rabbinical colleges-which are also some of the lowest -priced private colleges
private colleges.
--Private Not-For-Profit 4-Year Institutions> Lowest 10% of Tuition and Fees: Of the 130 or
so lowest-priced four-year private colleges> 22 are in NY State-and the vast majority are
significant number of the lowest-priced schools> but low-priced four-year schools are
distributed throughout the country .
--Private For-Profit 4-Year Institutions> Top 5% of Tuition and Fees: Only one of the 25 most
expensive for -profit four -year colleges is in NY State> the School of Visual Arts (and it's
not near the top of the list). The expensive for - profit colleges are spread around> though 6
of the 25 schools are in California. Art institutes are also disproportionately represented>
--Private For-Profit 4-Year Institutions> Top 5% of Incr eases in Tuition and Fees: No for-
profit four -year college in New York State ranks among the 25 for -profit schools with the
biggest tuition increases. Again> the for-profit schools with big tuition increases are
fairly well -dispersed> though six of the schools are in Florida. Topping the list handily is
Everest University-Largo in Florida> which increased tuition and fees 99% in a single year>
from 2007- 08 to 2009-10.
--Private For-Profit 4-Year Institutions> Lowest 10% of Tuition and Fees: None of the 50
inexpensive for -profits is dominated overwhelmingly by various campuses of the University of
Phoenix.
--Public Two-Year Institutions> Top 5% of Tuition and Fees: None of the 50 highest-priced
public two-year institutions is in New York State. However> 19 of the highest - priced public
t wo-year schools are in Minnesota> and 7 are in New Hampshire--meaning that half of the most
expensive public two-year schools are in just two> comparatively sparsely-populated states.
Others will know why Minnesota and New Hampshire jump out. But it's not clear the list
-- Public Two -Year Institutions> Top 5% of Increases in Tuition and Fees: No public two-year
institution from New York State makes this list> which is dominated overwhelmingly by public
10
two-years in California and Georgia. HoweverJ many of the two-year public schools on the list
$690 from 2097-98 to 2009-19 (i.eJ they had "big" tuition jumps but were so cheap to begin
with that they didn't cross the $609 increase threshold). AlsoJ close to 99 schools were not
considered for the list because they report tuition and fees for their largest programJ which
vary in field of study and lengthJ from several months to more than a year.
--Private Not-For-Profit Two-Year Institutions) Top 5% of Tuition and Fees: One of five
schools on this listJ the Academy of Dramatic ArtsJ is in New York State. Landmark College in
transition support for students with learning disabilities. Maybe the list is useful hereJ
maybe not.
- -Private Not - For-Profit Two-Year Institutions) Top 5% of Increases in Tuition and Fees: Two
of the five for -profit two -year schools with the biggest tuition jumps are in New York StateJ
increased 49%).
- -Private Not - For-Profit Two -Year Institutions) Lowest 19% of Tuition and Fees: One New York
State privateJ not-for-profit two-year institution is among the 11 lowest priced colleges in
this categoryJ the Merce Cunningham Studio. A little more than a third of the least expensive
If you know of examples of universities and colleges in New York StateJ apart from this listJ
that you think have done a good job of controlling tuition costs and student debtJ please
flag them for me.
OtherwiseJ I'd be interested in your thoughts about what might make the watch lists more
useful and prevent us singling out schools based on mathematical anomalies (e.g.J the
Yeshivas with big cost increases but low sticker prices) or geography (i.e.J states like
California where public institutions were rocked by budgetary crises). If others don't think
the potential watch lists are a problemJ that would be useful to know as well. Thanks.
David
11
Sent:
To:
Thursday, May 27, 2010 2:19PM
Miller, Elise
Very helpful. Many thanks.
From: Elise
Leigh; Carmel
those with family incomes below it is also eliminating the parental
contribution as well for those families. In Cornell will reduce the parental
incomes above and begin capping need-based student loans at annually for
students who have financial need and whose families have annual incomes above
Cornell annually caps need-based student loans at for family incomes between
and
From: David
To: Bob; Zakiya; Jackie; Emma; Leigh;
Carmel
Cc: Martha; Peter; David; Elise; Michael

12
From: Bob
To: David; Zakiya; Jackie; Emma; Leigh;
Carmel
Cc: Martha; Peter; David; Elise
I agree that the watch list approach as designed by Congress is not as illuminating as one
might have hoped. It.is probably too much to try to come up with an improved or different
approach by June so I think the focus should be on good (and bad) examples for the speech.
How much interest is there in having a policy or list announcement of some sort?
From: David
To: Zakiya; Jackie; Emma; Leigh; Bob;
Carmel
Cc: Martha; Peter; David
Sent: Thu May 27 11:46:42 2010
Subject: Examples for Higher Ed tutition speech/tuition watch list issues

By and colleges in NY state fare well on the tentative tuition watch lists that I saw.
The breakdown is as with all tuition/fee data from and all tuition/fee
increases from 2007-08 to 2009-10. there are some seeming geographic anomalies or
give some thought:
--Public 4-Year Institutions in Top 5% of Tuition and Fees: Not one NY State public
22 of the 32 most expensive public four-year institutions are located in one
Pennsylvania . Why?
13
- -Top 5% of Increases in Tuitions and FeesJ Public 4-Years: AgainJ not a single NY State
tuition and fees. HoweverJ 21 of the 32 public four-years with the biggest increases in
tuition are in California. Seven are in Georgia. Given the magnitude of CaliforniaJs budget
crisisJ and the comparatively low cost of CaliforniaJs universities) can we single out
--Lowest 10% of Tuition and FeesJ Public 4-Years: New York State public four-year
universities donJt figure among the most expensive public institutions) but NY state schools
arenJt among the least expensive institutions either. Not a single 4-year public institution
in NY State ranks among the lowest-priced schools. There is much more geographic variation in
low priced four -year schools than in high- priced ones.
- -Private Not - For-Profit 4-Year Institutions) Top 5% of Tuition and Fees: Of the 64 highest -
priced private four -year institutions) 12 institutions are located in NY StateJ (Union
CollegeJ ColumbiaJ Sarah LawrenceJ VassarJ ColgateJ SkidmoreJ HobartJ BardJ St. LawrenceJ
HamiltonJ NYUJ University of RochesterJ and Barnard). These colleges are disproportionately
former womenJs collegesJ though not exclusively. NYU and Columbia might be worth citing for
doing a poor job of keeping down tuitionJ except that they are in ultra-pricey New York City
2008 to 2009. In factJ virtually none of the private colleges with the highest tuition are
--Private Not-For-Profit 4-Year Institutions) Top 5% of Increases in Tuitions and Fees: Of
the 64 private four -years with the biggest tuition and fee increasesJ 11 are located in NY
State--and Wells College in NY State tops the listJ with a staggering 67% increase in tuition
costs and fees from 2008-2009. (The NY State private schools and their tuition increases are:
Wells CollegeJ 66.6 percent increase in tuition and fees; Sage College of AlbanyJ 50.7%
increase; Yeshiva Shaarei Torah of RocklandJ 33.3 percent; Rabbinical College Bobover Yeshiva
Bnei ZionJ 32.5%; Dowling CollegeJ 31%; Yeshiva Gedolah Imrei Yosef DJspinkaJ 29%; Rabbinical
College of ChJsan Sofer New YorkJ 27%; Yeshiva of Nitra Rabbinical CollegeJ 26%; Yeshiva
DJmonsey Rabbinical CollegeJ 24%; Villa Maria College BuffaloJ 22%; Rabbinical Academy
Mesivta Rabbi Chaim BerlinJ 22%).
HoweverJ the list of schools with big tuition jumps in NY State is overwhelmingly dominated
by Yeshiva and Rabbinical colleges-which are also some of the lowest-priced private colleges
private colleges.
--Private Not-For-Profit 4-Year Institutions) Lowest 10% of Tuition and Fees: Of the 130 or
so lowest-priced four-year private collegesJ 22 are in NY State-and the vast majority are
the fact that yeshivas are both inexpensive yet have rapidly rising costs. But I donJt think
significant number of the lowest-priced schoolsJ but low-priced four-year schools are
--Private For-Profit 4-Year Institutions) Top 5% of Tuition and Fees: Only one of the 25 most
expensive for -profit four -year colleges is in NY StateJ the School of Visual Arts (and itJs
not near the top of the list). The expensive for - profit colleges are spread aroundJ though 6
of the 25 schools are in California. Art institutes are also disproportionately represented)
--Private For-Profit 4-Year Institutions) Top 5% of Increases in Tuition and Fees: No for-
profit four -year college in New York State ranks among the 25 for -profit schools with the
biggest tuition increases. AgainJ the for-profit schools with big tuition increases are
14
fairly well-dispersed, though six of the schools are in Florida. Topping the list handily is
Everest University-Largo in Florida, which increased tuition and fees 99% in a single year,
from 2007-08 to 2009-10.
--Private For-Profit 4-Year Institutions, Lowest 10% of Tuition and Fees: None of the 50
lowest-priced for-profit four-year schools are in New York State. But the list of the
Phoenix.
--Public Two-Year Institutions, Top 5% of Tuition and Fees: None of the 50 highest-priced
public two-year institutions is in New York State. However, 19 of the highest-priced public
two-year schools are in Minnesota, and 7 are in New Hampshire- -meaning that half of the most
expensive public two-year schools are in just two, comparatively sparsely-populated states.
Others will know why Minnesota and New Hampshire jump out. But it,s not clear the list
- -Public Two -Year Institutions, Top 5% of Increases in Tuition and Fees: No public two-year
institution from New York State makes this list, which is dominated overwhelmingly by public
two-years in California and Georgia. However, many of the two-year public schools on the list
$600 from 2007-08 to 2009-10 (i.e, they had "big tuition jumps but were so cheap to begin
with that they didn,t cross the $600 increase threshold). Also, close to 90 schools were not
considered for the list because they report tuition and fees for their largest program, which
vary in field of study and length, from several months to more than a year.
--Private Not-For-Profit Two-Year Institutions, Top 5% of Tuition and Fees: One of five
schools on this list, the Academy of Dramatic Arts, is in New York State. Landmark College in
transition support for students with learning disabilities. Maybe the list is useful here,
maybe not.
- -Private Not - For-Profit Two-Year Institutions, Top 5% of Increases in Tuition and Fees: Two
of the five for -profit two-year schools with the biggest tuition jumps are in New York State,
increased 49%).
- -Private Not - For-Profit Two-Year Institutions, Lowest 10% of Tuition and Fees: One New York
State private, not-for-profit two-year institution is among the 11 lowest priced colleges in
this category, the Merce Cunningham Studio. A little more than a third of the least expensive
If you know of examples of universities and colleges in New York State, apart from this list,
that you think have done a good job of controlling tuition costs and student debt, please
flag them for me.
Otherwise, I,d be interested in your thoughts about what might make the watch lists more
useful and prevent us singling out schools based on mathematical anomalies (e.g., the
Yeshivas with big cost increases but low sticker prices) or geography (i.e., states like
California where public institutions were rocked by budgetary crises). If others don,t think
David
15
Sent: Thursday, May 27, 2010 3:29PM
To: Miller, Elise; Arsenault, Leigh; Smith, Zakiya; Shireman, Bob
From: Elise
Leigh; Carmel
those with fami ly incomes below it is also eliminating the parental
contribution as well for those families. I n Cornell will reduce the parental
incomes above and begin capping need- based student loans at annually for
st udents who have financial need and whose families have annual incomes above
Cornell annually caps need-based student l oans at f or family incomes between
and
From: David
To: Bob; Zakiya; Jackie; Emma; Leigh;
Carmel
Cc: Martha; Peter; David; Elise; Michael
16
From: Bob
To: David; Zakiya; Jackie; Emma; Leigh;
Carmel
Cc: Martha; Peter; David; Elise
From: David
To: Zakiya; Jackie; Emma; Leigh; Bob;
Carmel
Cc: Martha; Peter; David
Sent: Thu May 27 11:46:42 2010

By and colleges in NY state fare well on the tentative tuition watch lists that I saw.
The breakdown is as with all tuition/fee data from and all tuition/fee
increases from 2007-08 to 2009-10. there are some seeming geographic anomalies or
give some thought:
--Public 4-Year Institutions in Top 5% of Tuition and Fees: Not one NY State public
institution ranks among the top 5% of the most expensive public four -year institutions.
22 of the 32 most expensive public four-year institutions are located in one
Pennsylvania. Why?
17
tuition and fees. However, 21 of the 32 public four -years with the biggest increases in
crisis, and the comparatively low cost of California's universities, can we single out
- -Lowest 10% of Tuition and Fees, Public 4-Years: New York State public four-year
aren't among the least expensive institutions either. Not a single 4-year public institution
in NY State ranks among the lowest - priced schools. There is much more geographic variation in
low priced four-year schools than in high-priced ones.
-- Private Not - For-Profit 4-Year Institutions, Top 5% of Tuition and Fees: Of the 64 highest -
priced private four-year institutions, 12 institutions are located in NY State, (Union
Hamilton, NYU, University of Rochester, and Barnard). These colleges are disproportionately
former women's colleges, though not exclusively. NYU and Columbia might be worth citing for
doing a poor job of keeping down tuition, except that they are in ultra- pricey New York City
2008 to 2009. In fact, virtually none of the private colleges with the highest tuition are
- -Private Not - For-Profit 4-Year Institutions, Top 5% of Increases in Tuitions and Fees: Of
the 64 private four-years with the biggest tuition and fee increases, 11 are located in NY
State--and Wells College in NY State tops the list, with a staggering 67% increase in tuition
costs and fees from 2008-2009 . (The NY State private schools and their tuition increases are:
Wells College, 66.6 percent increase in tuition and fees; Sage College of Albany, 50.7%
increase; Yeshiva Shaarei Torah of Rockland, 33.3 percent; Rabbinical College Bobover Yeshiva
Bnei Zion, 32.5%; Dowling College, 31%; Yeshiva Gedolah Imrei Yosef D'spinka, 29%; Rabbinical
College of Ch'san Sofer New York, 27%; Yeshiva of Nitra Rabbinical College, 26%; Yeshiva
D'monsey Rabbinical College, 24%; Villa Maria College Buffalo, 22%; Rabbinical Academy
Mesivta Rabbi Chaim Berlin, 22%).
However, the list of schools with big tuition jumps in NY State is overwhelmingly dominated
by Yeshiva and Rabbinical colleges-which are also some of the lowest-priced private colleges
private colleges.
--Private Not-For-Profit 4-Year Institutions, Lowest 10% of Tuition and Fees: Of the 130 or
so lowest - priced four -year private colleges, 22 are in NY State-and the vast majority are
significant number of the lowest-priced schools, but low-priced fou r -year schools are
-- Private For-Profit 4-Year Institutions, Top 5% of Tuition and Fees: Only one of the 25 most
expensive for -profit four -year colleges is in NY State, the School of Visual Arts (and it's
not near the top of the list). The expensive for-profit colleges are spr ead around, though 6
of the 25 schools are in California. Art institutes are also disproportionately represented,
-- Private For-Profit 4-Year Institutions, Top 5% of Increases in Tuition and Fees: No for -
profit four-year college in New York State ranks among the 25 for-pr ofit schools with the
18
biggest tuition increases. AgainJ the for-profit schools with big tuition increases are
fairly well-dispersedJ though six of the schools are in Florida. Topping the list handily is
Everest University-Largo in FloridaJ which increased tuition and fees 99% in a single yearJ
from 2007- 08 to 2009-10.
--Private For-Profit 4-Year InstitutionsJ Lowest 10% of Tuition and Fees: None of the 50
Phoenix.
--Public Two-Year InstitutionsJ Top 5% of Tuition and Fees: None of the 50 highest-priced
public two -year institutions is in New York State. HoweverJ 19 of the highest - priced public
two-year schools are in MinnesotaJ and 7 are in New Hampshire--meaning that half of the most
expensive public two-year schools are in just twoJ comparatively sparsely- populated states.
Others will know why Minnesota and New Hampshire jump out. But itJs not clear the list
--Public Two-Year InstitutionsJ Top 5% of Increases in Tuition and Fees: No public two-year
institution from New York State makes this listJ which is dominated overwhelmingly by public
two-years in California and Georgia . However J many of the two-year public schools on the list
$600 from 2007-08 to 2009-10 (i.eJ they had "big tuition jumps but were so cheap to begin
with that they didnJt cross the $600 increase threshold). AlsoJ close to 90 schools were not
considered for the list because they report tuition and fees for their largest programJ which
vary in field of study and lengthJ from several months to more than a year .
- -Private Not - For-Profit Two-Year InstitutionsJ Top 5% of Tuition and Fees: One of five
schools on this listJ the Academy of Dramatic ArtsJ is in New York State. Landmark College in
transition support for students with learning disabilities. Maybe the list is useful hereJ
maybe not.
- -Private Not - For-Profit Two-Year InstitutionsJ Top 5% of Increases in Tuition and Fees: Two
of the five for-profit two-year schools with the biggest tuition jumps are in New York StateJ
increased 49%).
--Private Not-For-Profit Two-Year InstitutionsJ Lowest 10% of Tuition and Fees: One New York
State privateJ not -for -profit two -year institution is among the 11 lowest priced colleges in
this categoryJ the Merce Cunningham Studio. A little more than a third of the least expensive
If you know of examples of universities and colleges in New York StateJ apart from this listJ
that you think have done a good job of controlling tuition costs and student debtJ please
flag them for me.
OtherwiseJ IJd be interested in your thoughts about what might make the watch lists more
useful and prevent us singling out schools based on mathematical anomalies (e.g.J the
Yeshivas with big cost increases but low sticker prices) or geography (i . e. J states like
California where public institutions were rocked by budgetary crises). If others donJt think
the potential watch lists are a problemJ that would be useful to know as well. Thanks.
David
19
Sent: Thursday, May 27, 2010 4:24PM
To: Martin, Carmel; Shireman, Bob; Smith, Zakiya; Gran, Jackie; Vadehra, Emma; Arsenault,
Leigh
Cc: Kanter, Martha; Cunningham, Peter; Hoff, David; Miller, Elise
That sounds like a good idea to me
From: Martin/ Carmel
Sent: Thursday/ May 27
1
2010 4:22 PM
To: Whitman, David; Shireman/ Bob; Smith/ Zakiya; Gran/ Jackie; Vadehra/ Emma; Arsenault/ Leigh
Cc: Kanter
1
Martha; Cunningham, Peter; Hoff
1
David; Miller, Elise
From: Whitman/ David
To: Shireman
1
Bob; Smith
1
Zakiya; Gran
1
Jackie; Vadehra/ Emma; Arsenault
1
Leigh; Martin
1
Carmel
Cc: Kanter
1
1
David; Miller
1
Elise
Sent: Thu May 27 15:12:34 2010
From: Shireman/ Bob
Sent: Thursday/ May 27
1
2010 1:03PM
To: Whitman/ David; Smith, Zakiya; Gran, Jackie; Vadehra, Emma; Arsenault
1
Leigh; Martin
1
Carmel
Cc: Kanter
1
Martha; Cunningham/ Peter; Hoff
1
David; Miller, Elise
From: Whitman/ David
To: Smith/ Zakiya; Gran/ Jackie; Vadehra/ Emma; Arsenault/ Leigh; Shireman/ Bob; Martin/ Carmel
Cc: Kanter
1
1
David
Sent: Thu May 27 11:46:42 2010
Zakiya, Jackie, Bob, Carmel, Martha, (Peter),
20
By and large, colleges in NY state fare well on the tentative tuition watch lists t hat I saw. The breakdown is as follows,
with all tuition/fee data from 2009-10, and all tuition/fee increases from 2007-08 to 2009-10. However, t here are some
seeming geographic anomalies or over-concentration in the list that may limit t heir usefulness--and to which you may
want to give some thought:
--Public 4-Year Institutions in Top 5% of Tuition and Fees: Not one NY State public institution ranks among the top 5% of
the most expensive public four-year institutions. However, 22 of the 32 most expensive public four-year institutions are
located in one state, Pennsylvania. Why?
--Top 5% of Increases in Tuitions and Fees, Public 4-Years: Again, not a single NY State public university is on the list of
the top 5% of schools with the biggest increases in tuition and fees. However, 21 of the 32 public four-years with the
biggest increases in tuition are in California. Seven are in Georgia. Given the magnitude of California' s budget crisis, and
the comparatively low cost of California's universities, can we single out California schools for failing to contain tuition
costs?
--Lowest 10% of Tuition and Fees, Public 4-Years: New York State public four-year universities don't figure among the
most expensive public institutions, but NY state schools aren't among the least expensive institutions either. Not a
single 4-year public institution in NY State ranks among the lowest-priced schools. There is much more geographic
variation in low priced four-year schools than in high-priced ones.
--Private Not-For-Profit 4-Year Institutions, Top 5% of Tuition and Fees: Of the 64 highest-priced private four-year
institutions, 12 institutions are located in NY State, (Union College, Columbia, Sarah Lawrence, Vassar, Colgate,
Skidmore, Hobart, Bard, St. Lawrence, Hamilton, NYU, University of Rochester, and Barnard). These colleges are
disproportionately former women's colleges, though not exclusively. NYU and Columbia might be worth citing for doing
a poor job of keeping down tuition, except that they are in ultra-pricey New York City and neither is on the list of schools
with the top 5% of increases in tuition and fees from 2008 to 2009. In fact, virtually none of the private colleges with the
highest tuition are also among the colleges with the biggest tuition jumps-primarily because schools with lower tuition
are more likely to have a bigger proportionate tuition increase than schools that already have high sticker prices.
--Private Not-For-Profit 4-Year Institutions, Top 5% of Increases in Tuitions and Fees: Of the 64 private four-years with
the biggest tuition and fee increases, 11 are located in NY State--and Wells College in NY State tops the list, with a
staggering 67% increase in tuition costs and fees from 2008-2009. (The NY State private schools and their tuition
increases are: Wells College, 66.6 percent increase in tuition and fees; Sage College of Albany, 50.7% increase; Yeshiva
Shaarei Torah of Rockland, 33.3 percent; Rabbinical College Bobover Yeshiva Bnei Zion, 32.5%; Dowling College, 31%;
Yeshiva Gedolah lmrei Yosef D'spinka, 29%; Rabbinical College of Ch' san Soter New York, 27%; Yeshiva of Nitra
Rabbinical College, 26%; Yeshiva D' monsey Rabbinical College, 24%; Villa Maria College Buffalo, 22%; Rabbinical
Academy Mesivta Rabbi Chaim Berlin, 22%).
However, the list of schools with big tuition jumps in NY State is overwhelmingly dominated by Yeshiva and Rabbinical
colleges-which are also some of the lowest-priced private colleges in NY State. There is a good deal of geographical
variation by state in the most expensive private colleges.
21
--Private Not-For-Profit 4-Year Institutions, Lowest 10% of Tuition and Fees: Of the 130 or so lowest-priced four-year
private colleges, 22 are in NY State-and the vast majority are yeshivas and rabbinical training grounds. Arne may wish
to get into a Talmudic dispute about the fact that yeshivas are both inexpensive yet have rapidly rising costs. But I don't
think so. Private colleges in Puerto Rico and in the Baker College chai n in Michigan account for a significant number of
the lowest-priced schools, but low-priced four-year schools are distributed throughout the country.
--Private For-Profit 4-Year Institutions. Top 5% of Tuition and Fees: Only one of the 25 most expensive for-profit four-
year colleges is in NY State, the School of Visual Arts (and it's not near the top of the list). The expensive for-profit
colleges are spread around, though 6 of the 25 schools are in California. Art institutes are also disproportionately
represented, with eight or nine schools on the list of 25 institutions.
--Private For-Profit 4-Year Institutions, Top 5% of Increases in Tuition and Fees: No for-profit four-year college in New
York State ranks among the 25 for-profit schools with the biggest tuition increases. Again, the for-profit schools with big
tuition increases are fairly well-dispersed, though six of the schools are in Florida. Topping the list handily is Everest
University-Largo in Florida, which increased tuition and fees 99% in a single year, from 2007-08 to 2009-10.
--Private For-Profit 4-Year Institutions, Lowest 10% of Tuition and Fees: None of the 50 lowest-priced for-profit four-year
schools are in New York State. But the list of the inexpensive for-profits is dominated overwhelmingly by various
campuses of the University of Phoenix.
--Public Two-Year Institutions, Top 5% of Tuition and Fees: None of the 50 highest-priced public two-year institutions is
in New York State. However, 19 of the highest-priced public two-year schools are in Minnesota, and 7 are in New
Hampshire--meaning that half of the most expensive public two-year schools are in just two, comparatively sparsely-
populated states. Others will know why Minnesota and New Hampshire jump out. But it's not clear the list conveys an
important or accurate cost containment message about public two-year schools.
--Public Two-Year Institutions, Top 5% of Increases in Tuition and Fees: No public two-year institution from New York
State makes this list, which is dominated overwhelmingly by public two-years in California and Georgia. However, many
of the two-year public schools on the list are exempted from HEOA tuition watch lists because their tuition and fees
increased less than $600 from 2007-08 to 2009-10 (i.e, they had "big" tuition jumps but were so cheap to begin with
that they didn't cross the $600 increase threshold). Also, close to 90 schools were not considered for the list because
they report tuition and fees for their largest program, which vary in field of study and length, from several months to
more than a year.
--Private Not-For-Profit Two-Year Institutions, Top 5% of Tuition and Fees: One of five schools on this list, the Academy
of Dramatic Arts, is in New York State. Landmark College in Vermont tops the list-- but Landmark provides intensive and
expensive support services and transition support for students with learning disabilities. Maybe the list is useful here,
maybe not.
--Private Not-For-Profit Two-Year Institutions, Top 5% of Increases in Tuition and Fees: Two of the five for-profit two-
year schools with the biggest tuition jumps are i n New York State, the New York Methodist Hospital Center for Allied
Health Education (where tuition and fees jumped 53% last year) and the American Academy of Dramatic Arts (which
tuition and fees increased 49%).
--Private Not-For-Profit Two-Year Institutions. Lowest 10% of Tuition and Fees: One New York State private, not-for-
profit two-year institution is among the 111owest priced colleges in this category, the Merce Cunningham Studio. A little
more than a third of the least expensive two-year for-profits are tribal colleges.
If you know of examples of universities and colleges in New York State, apart from this list, that you think have done a
good job of controlling tuition costs and student debt, please flag them for me.
22
Otherwise, I'd be interested in your thoughts about what might make the watch lists more useful and prevent us
singling out schools based on mathematical anomalies (e.g., the Yeshivas with big cost increases but low sticker prices)
or geography (i.e., states like California where public institutions were rocked by budgetary crises). If others don't think
David
23
From:
Sent:
Friday, May 21, 2010 1:05 PM
To: Kantrowitz, Mark
Subject:
Attachments:
Deutsche Bank analysis of impact of regulations on P/E ratios at for-profit colleges
0900b8c0819bf505.pdf
The attached PDF file contains an interesting analysis by Deutsche Bank of the key drivers of price to earnings ratios at
for-profit colleges. I am forwarding this with permission from Deutsche Bank. If you have questions about the analysis,
please contact Paul Ginocchio at 415-617-4207 or paul.ginocchio@db.com.
They demonstrate how the stock market is pricing in the impact of compliance with statutory and regulatory
requirements such as cohort default rates and the 90/10 rule. It's pretty neat to see this quantified as a measure of
perceived risk to the colleges, where the stock market penalizes the stock price of a for-profit college based on its
exposure to regulatory risk. (This might be spun as meaning that there's no need for further regulation, but my read is
that when the US Department of Education or Congress introduces new rules, the stock market will reprice the
companies according to their exposure to the new rules.} This gives the management of these companies a strong
financial incentive to maximize compliance with federal rules.
The top driver of price to earnings ratios seems to be cohort default rates. See the graph at the bottom of page 2 of the
PDF, which shows that price to earnings ratios at the publicly traded for-profit colleges are negatively correlated with
cohort default rates with a strong correlation of 0.74 (scale 0 to 1}. There's a weaker correlation with 90/10, with 0.27
correlation with exposure to Title IV funds.
There is, however, a strange 0.44 correlation with exposure to programs less than a Bachelor's degree, where more
exposure to Bachelor's degree programs means a larger P/E ratio. My analysis shows that Bachelor's degree programs
are at greater risk from gainful employment, not less (i.e., just because someone goes to school for 4 years instead of 2
years doesn't mean double the income}. I'm not sure what's going on here. Perhaps the market is assuming that there'll
be some kind of a waiver for Bachelor's degree programs?
Mark Kantrowitz
Publisher of FinAid.org and FastWeb.com
Sent: Monday, May 17, 2010 10:04 AM
Subject: DB Education Services: Key drivers of CY10 PEs; CDRs dominate
DB Education Services: Key drivers of CY10 PEs; CDRs dominate
Regulatory issues driving share prices, followed by counter-cyclicality fears
We updated our industry valuation analysis and found the key drivers of CY1 DE PEs. While the drivers are not a surprise,
their correlation was. CDRs are the biggest drivers of PEs, followed by degree mix and Title IV revenue exposure. Not
surprisingly, current enrollment growth rates are not a driver of PEs, but recent cyclical acceleration is. With counter
cyclicality somewhat priced into the stocks, and regulations the key driver, we continue to feel comfortable with our Buys
on Apollo Group, Corinthian and ITT Educational Services.
CDRs are the key driver of CY10 PEs
24
With cal1 0 results now over, we re-looked at industry valuation to see what the market is most focused on. Enrollment
growth is not a driver of PE multiples (R2 of only 5%) . Regulatory factors were three key drivers: 2007 draft 3-yr CDRs
were 74% negatively correlated, certificate/associate exposure was 45% neg. correlated, while Title IV exposure was 27%
neg. correlated. The one fundamental driver of PEs we found was cyclical acceleration (as measured by the change in
enrollment growth from 2008 to 3009) . CY1 0 PEs are 32% negatively correlated to this measure of cyclical acceleration.
Also in this note we looked at enrollment trends by company, advertising cost trends, and CDR trends.
Regulatory issues priced in, as is some level of counter cyclicality
The high correlation between the regulatory factors and PEs, and the fact that counter cyclicality is correlated to PEs,
suggest to us that these issues are largely priced into stocks. That is why we continue to feel comfortable with our Buys
on the more regulatory driven stocks, and stocks with a higher relative exposure to associate's degrees and below (APOL,
COCO, and ESI).
Macro environment for enrollment starting to be less positive
We have found a very high correlation between total US unemployment duration and enrollment growth (87%). The April
employment report showed overall unemployment duration edging slightly higher, although the YoY growth of
unemployment duration has stabilized. We assume going forward that its growth will likely trend lower. Two things were
negative for the market funded schools in the report: 1) A number of the total unemployed have re-entered the job market,
driving up the unemployment rate, but reducing the pool of potential new students. 2) The number of people unemployed
for 5-14 weeks is trending down, a segment of total unemployment duration and one that is typically a leading indicator of
the unemployment rate. Total unemployment duration is still trending up, so the number of long-term unemployed is still
increasing, a key lead pool.
Valuations near all-time lows
With the sector near all time low PEs, there is significant regulatory and counter-cyclicality risk priced in. Thus we are
positive on APOL, COCO and ESI. We rely on relative valuation and DCF valuations to arrive at our price targets, see
page 7 and 8 for full detail. Key risks for our Buys include tougher than expected regulatory language in the NPRM, higher
2009 CDRs than expected, a stronger than expected recovery in job growth, and other adverse regulatory changes.
AA41/451 05319/0900b8c0819bf505.pdf
Regards,
Paul Ginocchio
Office:+1-415-617 -4207
For additional Deutsche Bank research, visit our web site: http://gm.db.com/eguities
(See attachedfile: 0900b8c08J9bf505.pd./)
This communi cati on may contain confi dential and/or privi leged information.
communication. Any unauthorized copying, discl osure or distribution of the
material in this communi cation i s strictly forbi dden .
contained in this communication should not be regarded as such .
25
NOTICE:
distribute or use the contents of this message for any purpose. Its unauthorized use, dissemination or duplication
26
From:
Sent:
To:
Cc:
Subject:
Attachments:
Friday, May 21, 2010 11 :14 AM
Shireman, Bob
Kantrowitz, Mark
Interesting DB memo on drivers of PIE ratios at for-profit colleges
0900b8c0819bf505.pdf
The i nteresting bits are in the attached PDF. In effect, they demonstrate how the stock market is pricing in the impact of
regulatory measures such as CDRs and the 90/10 rule. Pretty neat to see this quantified as a measure of perceived risk
to the colleges.
The top driver of price to earnings ratios seems to be cohort default rates. See the graph at the bottom of page 2, which
shows that price to earnings ratios at the publicly traded for-profit colleges are negatively correlated with cohort default
rates with a strong correlation of 0.74 (scale 0 to 1). There's a weaker correlation with 90/10, with 0.27 correlation with
exposure to Title IV funds.
There is, however, a strange 0.44 correlation with exposure to programs less than a Bachelor's degree, where less
exposure to Bachelor's degree programs means a lower P/E ratio. My analysis shows that Bachelor' s degree programs
years doesn' t mean double the income). Not sure what's going on here. Perhaps the market is assuming that there'll be
some kind of a waiver for Bachelor's degree programs?
Mark
Subject: DB Education Services: Key drivers of CYlO PEs; CDRs dominate
DB Education Services: Key drivers of CY10 PEs; CDRs dominate
We updated our industry valuation analysis and found the key drivers of CY1 OE PEs. While the drivers are not a surprise,
CDRs are the key driver of CY1 0 PEs
With cal1 0 results now over, we re-looked at industry valuation to see what the market is most focused on. Enrollment
enrollment growth from 2008 to 3009) . CY1 0 PEs are 32% negatively correlated to this measure of cyclical acceleration.
27
COCO, and ESI).
for 5-14 weeks is trending down, a segment of total unemployment duration and one that is typically a leading indicator of
AA41/451 05319/0900b8c0819bf505.pdf
Regards,
Paul Ginocchio
Office:+1-415-617 -4207
(See attached file: 0900b8c0819bj505.pd./)
This communicati on may contain confi dential and/or pri vi leged information.
If you are not t he i ntended recipient (or have r ecei ved this communi cati on
in error) pl ease notify the sender i mmediately and destroy t hi s
communication. Any unauthori zed copying, discl osure or distribut ion of the
ma teri a l i n this communi cati on i s s t r i ctly forbidden .
Deutsche Bank does not render legal or tax advice , and the i nformati on
contai ned in thi s communicat ion should not be regarded as such .
NOTICE:
28
17 May 2010
DB Education Services
Key drivers of CY1 0 PEs; CDRs
dominate
Paul Ginocchio, CFA
Research Analyst
(+1 ) 415617-4207
Adrienne Colby
Associate Analyst
() 212 25().0948
We updated our industry valuation analysis and found t he key drivers of CY1 OE
PEs. While t he drivers are not a surprise, their correlation was. CDRs are t he
biggest drivers of PEs, followed by degree mix and Tit le IV revenue exposure. Not
surprisingly, current enrol lment growth rates are not a driver of PEs, but recent
cyclical acceleration is. With counter cycl icality somewhat priced into the stocks,
and regulations the key driver, we continue to feel comfortable wit h our Buys on
Apollo Group, Corinthian and ITI Educational SeNices.
CDRs are the key driver of CY10 PEs
Wit h cal1 0 results now over, we re-looked at industry valuat ion to see what the
market is most focused on. Enroll ment growth is not a driver of PE multiples (R
2
of
only 5%). Regulatory factors were t hree key drivers: 2007 draft 3-yr CDRs were
7 4 o/o negatively correlated, certificate/associate exposure was 45% neg.
correlated, whil e Tit le IV exposure was 27% neg. correlated. The one f undamental
driver of PEs we found was cyclical accelerat ion (as measured by the change in
enrol lment growth from 2008 to 3009). CY10 PEs are 32% negatively correlated
to t his measure of cyclical acceleration. Also in t his note we looked at enrollment
t rends by company, advertising cost t rends, and CDR trends.
The high correlation between t he regulatory factors and PEs, and t he fact t hat
counter cyclicality is correlated to PEs, suggest to us t hat t hese issues are largely
priced into stocks. That is why we continue to feel comfortable with our Buys on
t he more regulatory driven stocks, and stocks with a higher relat ive exposure to
associate's degrees and below (APOL, COCO, and ESI) .
We have found a very high correlation between total US unemployment durat ion
and enrollment growth (87%). The Apri l employment report showed overall
unemployment durat ion edging slightly higher, alt hough the YoY growth of
unemployment durat ion has stabilized. We assume going forward that its growth
will likely t rend lower. Two t hings were negative for t he market f unded schools in
t he report: 1) A number of t he total unemployed have re-entered t he job market,
driving up t he unemployment rat e, but reducing the pool of potential new
students. 2) The number of people unemployed for 5-14 weeks is t rendi ng down,
a segment of t otal unemployment durat ion and one t hat is typically a leadi ng
indicator of t he unemployment rate. Total unemployment duration is still t rending
up, so t he number of long-term unemployed is still increasing, a key lead pool.
With t he sector near all time low PEs, there is significant regulatory and counter-
cyclicality risk priced in. Thus we are positive on APOL, COCO and ESI. We rely on
relative valuation and DCF valuations to arrive at our price targets, see page 7 and
8 f or f ull detail. Key risks for our Buys include tougher t han expected regulat ory
language in t he NPRM, higher 2009 CDRs than expected, a stronger t han
expected recovery in job growth, and other adverse regulatory changes.
Deutsche Bank
Industry Update
Table of contents
Key drivers of PEs . . .. Page 2
Relative Valuation . .. . .. Page 5
Enrollment Outlook .. . Page 9
Advertising spend. . . Page 13
Regulatory Agenda . Page 15
Cohort Default Rates (CORs) ........................ ... Page 16
Buy
Buy
Buy
Apollo Group (APOL.OQ),US052.78 Buy
2009A 2010E 201 1E
EPS (USO) 3.81 4.96 5.54
P/ E !xl 17.9 10.6 9.5
EV/EBITDA (x) 8.2 5.1 4.1
American Publi c Ed. Inc (APEI.OQ),US044.94 Hold
2009A 2010E 2011E
EPS (USD) 127 1.74 2.50
P/ E !xl 28.6 25.8 18.0
EV/EBITOA (x) 13.5 12.3 8.3
Corinthi an Colleges Inc (COCO.OQ),US014.11 Buy
2009A 2010E 2011E
EPS (USD) 0.82 1.63 2.04
P/E !xl 19.4 8.7 6.9
EV/EBITDA (x) 7.0 4. 1 2.7
OeVry (OV.N),U$059.16 Hold
2009A 2010E 201 1E
EPS (USD) 2.30 3.78 5.12
P/ E !xl 22.2 15.7 11.6
EV/EBITDA (x) 12.2 8.3 5.7
ITT Educati on Servi ces (ESI. N),U$0102.51 Buy
2009A 2010E 2011E
EPS(USD) 7.98 11.04 11.71
P/ E !xl 12.9 9.3 8.8
EV/EBITDA (x) 7.3 5.1 4.6
MICA(P) 007/05/2010
17 May 2010 Business Services & Education DB Education Services
Deutsche Bank l/l
Page 2
Key drivers of multiples
Key drivers of CY 2010 multiples: regulatory and operational
We looked at f ive key operat ional met rics to see which ones drove CY1 0 consensus PE
multiples and found some relat ively interest ing takeaways. We found three regulatory drivers
of CY1 OE consensus PEs, includi ng:
2007 draft 3-year Cohort Default Rates (CDRs), which were 74% negatively correlated;
Enroll ment exposure to certificate/diploma and associate's degrees, which were 45%
negatively correlated; and
Title IV revenue exposure, which was 27% negat ively correlated.
We also f ound one operational met ric t hat was correlated to CY1 0 consensus PEs:
Also negat ively correlated was t he cyclical acceleration in enrollment seen over t he last
year, while
Current enrollment growth was not correlated to CY1 0 PEs.
We also ran a multi-variant regression using all of t he above operational met rics and found
t hat only '07 3-yr CDRs to be statistically signif icant, li kely due to t he interdependence of all
t he variables used in our regression.
2007 Draft 3-yr CDRs are the biggest driver of CY1 0 PEs
The biggest driver of CY1 0 consensus PEs is cohort default rates (CORs). The correlat ion (R
2
)
is 74%, and it seems to be the key driver of stock prices currently for the entire sector. We
used draft 2007 3-year CDRs (shown in the CDR section of t his report) as the driver, since
t he DoE is switching to 3-year CDRs in 2014. We were surprised at how important CDRs are.
This makes sense as if a company or campus breaches t he 30% threshold f or 3-years, it
loses access to Title IV f unds, which is basically a death sentence for a campus (OPE 10).
Figure 1: Draft 2007 CDRs (3-year) versus CV 2010 Consensus P/E ratios
30
APE I
25
CPLA STRA
UJ
a..
<II
20
<II
c:
<II
UTI
<II
c:
15
0
UJ
EDMC
0
...-
>-
10
u
APOL
5
0% 5% 10% 15%
Sou1co US Depl ofEducauon. Comparryd:sra andDeutscheBankesrttrJ.atss
20%
y = -64.761x + 25.955
R
2
= 0.7401
coco
25% 30% 35%
Deutsche Bank l/l
2"d key driver is exposure to Diploma/Certificate and Associate's
We found that the next biggest driver (45% correlation) of CY1 0 consensus PEs is enrollment
exposure to diploma's, certificates, and associate's degrees. We used the latest available
dat a for each schools, which was typically FYE09. The higher the exposure to lower level
degrees, the lower the PE.
As APOL's exposure to associate's degrees declines, its PE multiple should rise
If Apollo can increase its exposure to bachelor's and decrease its associate exposure. that
should be good for its multiple. Using the regression equation below, if Apollo were to
decrease its associate's exposure by 10 points over the next year, all else being equal, their
PE multiple would rise by 1 .1 points. That is equivalent to an increase of over 11% to the
share price as consensus CY1 0 EPS for Apollo Group is $5.35, so this would increase its
share price by nearly $6. We estimate Apollo could reduce its exposure to associate's
degrees by 8 points over the next two years.
Figure 2: Degree Mix versus CY 2010 Consensus P/E ratios
30
APE I
25
STRA
20
y = -10.964x + 20.941 UTI
w
Cl.
R
2
= 0.4453
15
::J
c:
(I) BPI
Ill
c:
10
0
APOL
0
.....
~
(.)
5
Enrollment exposure to less than a Bachelor's Degree
0% 20% 40% 60% 80% 100%
3 rd driver is the cyclical acceleration in enrollment
We measured the cyclicality of the education companies by how much enrollment
accelerated from 2008 to 3009. While this is not a perfect proxy, it turns out to be a pretty
good one. The more a company's enrollment accelerated during the great recession, the
lower their current PE. The cyclical acceleration drove about 32% of the variation in the CY1 0
consensus PEs.
Page 3
Deutsche Bank l/l
Page4
Figure 3: Cyclical Acceleration versus CY2010 Consensus P/E ratios
------------------391-r---------------------------------
UJ
tJ)
:::1
tJ)
STRA CPLA
,-+--------- ,.._., ------------
y = -44.428x + 19.878
R
2
= 0.3193
UTI

c:
0
u
0
.,....
>-
u
LINC
coco
Enrollment acceleration from cai2Q08 to cai3Q09
-15% -10% -5% 0% 5% 10% 15% 20% 25%
Source Campa flY data arr:i Deursch8 Bank esttm.ites
4th driver of PEs is exposure to Title IV funds
The final variable that drives PEs is exposure to Title IV funds: the higher the exposure the
lower t he multiple. Title IV exposure drives about 27% of the variability in CY1 0 consensus PE
multiples. Maybe one of t he reasons that it is not a larger driver is due to t he 90/10 rule
already being temporari ly changed, exclusions to t he rule were provided t hrough 2011. The
market may not be as focused on t he 90/10 rule as t he market could be assuming it will be
changed again going forward.
Figure 4: FY09 Title IV Revenue exposure vs CY2010 Consensus P/E ratios
30
STRA
25 1----------------- ,_.... -ef'lt:A-------
20
y = -18.417x + 29.895
R
2
= 0.2726
15 - 8
c: EDMC )
10
5
65%
0
u
0
.,....
70% 75%
LOPE
UTI
BPI -
CECO
APOL
LINC
ESI COCO
FY09 Exposure to Title IV Funds
80% 85% 90%
We used t he cash calculat ion for Title IV f unds using t he old calculation met hod using the
latest data available, typically FY09, and not t he revised method, with its exclusions, as
provided in t he 2008 HEOA.
17 May 2010 Business Services & Educati on DB Educati on Services
Deutsche Bank l/l
Enrollment growth is not a driver of CY1 0 consensus PEs
What is interesting, and not altogether surprising, is t hat current enrollment growth rates
have almost t o correlati on t o share prices, so growth does not really matter to the group right
now.Regulations are much more important and the fear of counter cyclical ity.
That said, we believe t he high-growth companies like Strayer, Capella, American Public
Educat ion, and Grand Canyon, need to continue to deliver t heir current growth much more so
t han t he regul atory driven stocks like Corinthian, Apollo, and Career.
Figure 5: CY1010 Organic Enrollment Growth versus CY 2010 Consensus P/E ratios
30
25
20
UJ
c.
15
Ill
Ill
c:
Q)
Ill
c:
10
0
v
0
.....
--
A POl
APE I
STRA ,.- CPLA
LOPE
UTI . -------

EDMC
CECO
ESI
LINC
y = 12.567x + 12.31
R
2
= 0.0533
coco
BPI
>-
(.)
Cai1Q10 Organic Enrollment Growth
5
0% 10% 20% 30% 40% 50% 60%
SoorC6: Company dita and Deurscts 88nY
Data table for all our scatter plots
Below we show t he data we used in all of t he above scatter plots.
Figure 6: Operational data used in the previous scatter plots
Consensus 2007 3-yr Exposure to Exposure to Cyclical cai1Q10
Ticker CY10E PE (x! CDR Cert./Assoc. Title IV Funds Acceleration Enroll Growth
Apollo Group APOL 10.4 16% 45% 86% 11% 15%
ITT Education ESI 9.6 24% 85% 84% 14% 27%
DeVrl DV 15.0 16% 26% 73% 11% 24%
Corinthian Colleges coco 8.3 30% 95% 89% 13% 18%
American Public Ed. APE I 25.6 3% 16% 19% -13% 42%
Stral er STRA 25.0 13% 15% 80% 5% 21%
Capella CPLA 24.8 6% 1% 81% 9% 32%
Grand Canyon LOPE 20.3 3% 0% 83% - 7% 37%
BPI 13.0 17% 13% 85% na 57%
Career Education CECO 11.6 20% 67% 80% 15% 23%
Lincoln Education LINC 9.9 26% 99% 81% 11% 32%
Education M!il nt Core. EDMC 14.5 14% 38% 70% 5% 23%
Universal Technical UTI 18.5 14% 100% 78% 21% 19%
Souf'C6 Comp8ny data. US Dept of Educarioo. and Deutsche Bank estimates
Note: We estimat ed Strayer's FY09 exposure to Title IV funds as it was not available. We
used the '08 act ual and increased it at the peer group average. For Grand Canyon's cyclical
acceleration, we used 3008 t o 3009, as 2008 was not readily avai lable.
Deutsche Bank l/l
Page 6
Multi-variate regression
We ran a multi-variate regression with all of the above 5 variables and only one variable was
statistically significant: 2007 3-year CDRs, which as we said before explains 74% of the
variance in CY1 0 consensus PEs. None of the other variables were statistically significant (p-
values of 0.41 or worse) . The 2007 3-year CDR variable was statistically significant at the
90% level (p value at .1 0) in the multi-variate regression, while it was statistically significant at
the 99% confidence level in a uni-variate regression. It seems the 2007 3-year CDR is the
dominate variable, cancelling out all others, likely due to the interdependence of all of the
variables.
Deutsche Bank l/l
Valuation
Relative valuation scatter plots
Wit h cal1 0 10 results now complete, we updated our valuat ion analysis for all of t he publically
t raded pure plays. We used CY1 0 and CY11 consensus expectations to come up with t rading
multiples for all of the public US post-secondary education providers.
EV per student versus CV10 EBIT per student
EV per student versus CY1 0 EBIT per student is now much less correlated, at 39%, versus
when we initiated on t he sector in April 2009 at 84%. This suggests t hat regulatory overhang
is now much more important today and then- which is reasonable.
Figure 7: EV per Student versus CV10E EBIT per Student($)
70,000
60,000
STRA y = 5.3646x + 9483.1
R
2
= 0.3931
50,000
ESI
40,000
30,000
20,000
10,000
APEI COCO
0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000
SoorC6: Company d.ita and Deutsche Bank estrmares
CV10 consensus EBIT margin versus CV10 EV/sales
Again, back in April 2009, CY margin was 73% correlated to CY EV/sales. Today CY margi n is
only a 42% driver of valuation.
Page 7
Deutsche Bank l/l
Figure 8: EV/CY10E Sales versus CY10E EBIT Margin
600%
500%
coco
10% 20%
BPI
APOL
30%
ESI
40% 50% 60%

Source Campa flY data arr:i Deursch8 Bank esttm.ites
Consensus expectations for the Market Funded Education industry
Figure 9: Market Funded education relative multiples
Company FYE
BS as of Share Price Shares ols Cash&Mk Total Debt fN CY09 CY10E Consensus CY10E Consensus CY11 E
CYOend 5/14/2010 !mil.) Sec. !mil.) (mil.) EPS EPS FN/ESIIDA PE EV/EBilDA PE
APOL Aug 01 $ 54.61 155.2 s 661 $ 176 $ 7.989 s 4. 15 s 5.35 5.3x 10.2x 4.8x 9.0x
ESI Dec 01 105.32 35.5 $ 322 $ 150 3.567 7.91 11.05 5.4x 9.5x 4.8x 8.4x
DV Jun 01 60.31 72.4 $ 502 $ 3.864 2.97 4.07 7.5x 14.8x 6.5x 12.1x
coco Jun 0 1 14. 72 88.8 s 78 s 136 1,365 1.38 1.83 4.1x 8.0x 3.7x 7.0x
APE I Dec 01 45.28 19.0 s 88 s 774 1.27 1.75 12.5x 25.9x 9.2x 19.0x
STRA Dec 01 239.46 13.7 s 144 s 3,144 7.60 9.67 13.3x 24.8x 11.0x 20.2x
CPLA Dec 01 90.30 17.1 s 191 s 1.349 2.51 3.64 12.x 24.8x 9.7x 19.4x
LOPE Dec 01 25.01 46.3 s 88 s 25 1,086 0.60 1.24 9.9x 20.2x 7.5x 15.0x
BPI Dec 01 25.09 60.5 $ 222 s 1,295 1.26 1.91 6.3x 13. 1x 4.8x 10.3x
CECO Dec 01 30.60 83.1 $ 422 $ 2.121 1.68 2.70 5.0x 11.3x 4.3x 9.4x
LINC Dec 01 24.91 26.3 s 34 s 37 659 1.82 2.52 4.4x 9.9x 4.0x 8. 7x
EDMC Jun 01 21.95 143.9 s 473 $ 1. 542 4. 229 0.81 1.51 7.0x 14.5x 5.7x 10.9x
Ull Sept 0 1 23.55 24.5 s 92 s 485 0.77 128 6.4x 18.4x 5.3x 14.7x
Sourcs. Company data. CapJtaiiO and OeurschB Bant' est1mites
Page 8
DCF Valuation
We also use a DCF valuation to help determine our price targets.
We have used explicit 10- year f orecasts followed by a t erminal value using a mid-cycle EBIT
margi n. We have used a 3.5% long-term growth rate in our terminal value, in line wit h t he
real long-term growth of t he US economy. In our WACC we have used a beta of 1.0, risk f ree
rate of 4%, a 7% risk premium to account t or the greater regulatory oversight of t he sector
due to its reliance on government funds, and no debt in t he capital structure.
Our DCF valuat ion suggests t he following share prices: APOL $84, ITI $130, DV $70, COCO
$24 and $44 tor APEI.
Based on relative valuation and our DCF analysis, we derived our $80 tor Apollo Group, a
$125 target tor ITI, a $70 for DeVry, a $24 target t or Cori nthian and a $44 price t arget tor
APEI.
Deutsche Bank l/l
Stable enrollment outlook
Is counter-cyclicality is rearing its ugly head?
There is some slight di sagreement between the market funded education executives
whether the US's improvi ng job prospects is having any current negative impact on new
enrol lment trends. Four schools beli eve it is, based on comments from their recent cal1 0
conference calls, versus five who are not yet seeing it or not expecting any impact .
We bel ieve that unemployment duration is signifi cantly correlated to enroll ment growth (see
commentary lat er in thi s section), and that there wil l be a slowdown in enrol lment growth,
but we do not see the industry going negative.
Those schools with 1) exposure to associates and certificates , and 2) who saw significant
enrol lment acceleration in cai2H08 and cal 1 H09; we beli eve they could see a few quarters of
YoY declines in new enrollment . Whether it is enough to make total enrol lment go negative,
or revenue t o go negative (offsetting the low single digit growth in tuition) is hard to predict.
We have general ly forecast f lat revenues in cal2011 for ITI, Corinthian and Apoll o.
Figure 10: Cai1Q Conference Call comments on Counter Cyclicality
Company Statement Company Statement
UTI "we expect there's going to be some impact, but we don't DV "Our US Education business was slow due to improving
see it in the near future" job prospects"
STRA "And so over the ten years that we've been here, there LINC "So under the assumption that demand will continue there
really hasn't been any correlation with the economic cycle (in HC), which we believe it will, we think that will go along
or employment" way in offsetting the change in the economy that we all
know will come"
CECO "We haven't seen any material impact to date from the CPLA ''we do expect ( ... ) a slight slowdown in that bachelor's
countercyclical trends" growth due to the economic recovery"
LOPE "70% of our students are in education and healthcare ( . . ) coco "our eyes are wide open to the fact that there will be
We don't see those areas being counter-cyclical at all" certain programs where demand will come off slightly in a
sort ofpost-cydical way"
BPI "And we continue to see ( ... ) strong growth, strong
demand, and we don't see any change in kind of student
behavior comparatively to the past 4 or 5 years"
EDMC "We are not seeing any signs of counter cyclicality"
Source. Col'l'Jpany conferen,ecall$ and OS edrtlng
New Enrollment & Enrollment trends by Company
Below we look at organic new enrollment and organic enroll ment trends by company.
Overall , average new enroll ment has only decelerat ed from 28% in cal3009 to 24% in
cal 1 0 10, f airly immat eri al consideri ng the more difficult comparisons.
The average does cover up some f airly significant deceleration at Corinthian, ITI, and Apol lo,
and t o a lesser degree at Strayer, whil e DeVry actually accelerated.
Thus, enroll ment at market-funded schools has remai ned very healthy from CY 2H08 through
CY 1010, although the rat e of increase has begun to moderat e due t o tougher comps,
particularly in 2H09. Whil e growth rates are expect ed to ease further in 2010, a combinati on
of t ougher 30 comps and an improving labor market may be somewhat offset by easier 40
comps and stubborn unemployment rates.
Page 9
Deutsche Bank l/l
Figure 11: Actual and estimated new enrollment & enrollment growth by company
Cf4Q10 Cf1Q10
New enrollment Cf10)9A Cf20)9A Cf30)9A guidance Cf40)9A guidance CY1Q10A Cf2Q10E Cf2010E
AFQ_ 23% 23% 23% 14% 9% NA NA
DV* 15% 17% 15% 19% 24% NA NA
ES 37% 33% 27% 31% 22% NA NA
OXD 20% 27% 22% 10-12% 11% 6-8%++ 7%+-+ 5-7%+ 11-12"/a++
CBX)# 7% 27% 19% 18% 32% NA NA
SfR1. 20% 26% 28% 20% 16% 16% NA
CR..A NA NA NA NA NA NA NA
La: NA NA NA NA NA NA NA
AR3 40% 27% 41% 37% 38% 26% NA NA
UNC 35% 33% 35% 25% 18-.20% 19% 8-10% 13-15%
U1l 20% 32% 15% low-mid teens 16% 22% NA lcm-rrid teens
VVPO NA NA NA NA 13% NA NA
BPI 42% 12% 55% 49% 45% NA NA
Avg. 25.9% 25.7% 28.0% 24.1% 23.9%
Cf4Q10 Cf1Q10
Total enrollment Cf1Q09A Cf20)9A Cf3Q09A guidance Cf40)9A guidance Cf1Q10A Cf2Q10E Cf2010E
AFQ_ 20% 22% 22% 18% 15% NA NA
DV* * 16% 13% 19% 21% 22% NA NA
ES 21% 26% 29% 30% 29% NA NA
OXD 18% 24% 26% 22% 18%+ NA NA
CHX) 7% 11% 15% 18% 23% NA 15%
SfR1. 22% 22% 24% 22% 21% NA .20%
CR..A 20% 23% 28% 25.5%-26.5% 26% 30-32"/o 32% 28-30% .26.5-.28.5%
La: 62% 67% 56% 46% 53% 34-37% 37% 32-36% .25-30%
AR3 50% 49% 44% 39%" 41% 36-38%" 39% 34-36%" 35-38%
0
UNC 22% 29% 28% 27% 25% NA NA
U1l 5% 14% 14% 17% 19% NA lcm-rrid teens
VVPO 27% 31% 28% 31% 25% NA NA
BPI 115% 101% 800/o 66-73% 70% 57% NA 41-45%
Avg. ex BPI & La: 20.9% 24.1% 25.2% 24.9% 25.0%
#Cont inuing S:arts ++ R'o forma, induding Heald
* DeVry & R>ss " Total net course regiS: rations
** DeVry, Keller & R>ss
Source. C<>mpany ddt nd Deursche B<lnl'
Unemployment duration suggests stable 20 enrollment growth
Our analysis of unemployment durat ion and enrol lment growth suggest t he two are highly
correlated. Our outlook f or f or-profit enroll ment growth reflects our analysis of the average
unemployment duration versus the average quarterly enrollment growth rate of t he market
funded schools. Although nominal average duration of unemployment (see below) continued
to edge up in April (33.0 weeks vs 31.2 in March). growth may have peaked in November at
+52.9% vs 51.8% in January and 51.4% in April.
Deutsche Bank l/l
Figure 12: Enrollment vs unemployment duration
30% 60%
50"A.
25%
40%
20%
30%
15% 20%
10%
10%
0%
5%
-10%
- avg enrollment growth (LHS)
--change in unemployment duration
0 % + - - - - - - - - - - - , - - - - - - - - - - - ~ - - - - - - - - - - - , - - - - - - - - - - ~ - - - - - - - - - - ~ ~ -20%
Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 J an-10
Sooroo 06Ulsche Bank Company mformJtlon.. dOO BLS
The results of our regression analysis of the two series in Figure 3 above, (R squared: 87%)
proj ect stable average total enrollment growth into early CY 2010 for market funded schools
of 24.2%, vs 23.7% in CY1 010, due to April's sl ight uptick in unemployment duration.
Figure 13: Actual and projected average enrollment growth
30%
25%
20%
15%
10%
5%
--
y = 0.2767x + 0.1002
R'=0.8693
First quarter data from the publicly traded for-profits suggest enrollment is not decelerating
as rapidly as expected. The April BLS Employment report indicated that the labor market is
recovering although not as swiftly as the market expected, which is positive for student
enrollment. The negative in the most recent employment report was the increase in the
overall unemployment rate, driven by people re-enteri ng the job market. People re-entering
the job market is a slight negative for the market funded schools.
Page 11
Deutsche Bank l/l
Page 12
Figure 14: Unemployment vs for-profit enrollment growth
16%
- l essthlln aHSdploma 1.ne11ploynert
25%
--Tob!llllEmploynEI'lt
- Avg errollmMt gov.ch,RHS
14%
20"M
12%
15%
10"M
10%
8%
5%
4% 0%
(!; :g :g :g :g
l!l l!l l!l l!l
[:; [:; [:;
...
~ ~ ~ ~ 8 8 8 8 S!
~
.!.
c 0..
~
:;; c 0..
~ ~
c 0..
~
.!.
c 0..
~
.!.
c 0..
~
.!.
.,
::>
.,
::>
"'
::>
.,
.,
::>
"'
;
::>
.,
" 0 ::;; ..., U) 0 ::;; ..., U) 0 ::; ..., U) 0 ::;; ..., U) ..., U) 0 ::;
Source Deutsche Sank. BLS. comp.any mft>rmar;o(l
The unemployment rat e f or those with less than a high school degree has started t o ease but
remai ns near peak levels. We found this unemployment rate most correlated to market
f unded enroll ment growth. It is suggesting a leveling out of enroll ment growth.
Our current calendar 2010 outlook continues to reflect a 20+bps easier average new
enrol lment comp but a 320bps harder total enroll ment comp vs 10 but stil l reflect s stable
growth expectations due to near peak unemployment rat es and peak unemployment
durat ion.
Deutsche Bank l/l
Advertising spend
Rising old media cost s
Market funded schools are now talking about advertising rate increases. which makes sense
as some media companies are now reporting YaY revenue increases. DB's Entertainment &
Media analyst, Doug Mitchelson, expects Cable and Spot 1V ad rates to be up 20% in 20
and approx. 21 o/o in 2H 1 0.
Figure 15: Calendar 1010 conference call comments on advertising rate trends.
O:lmp<11y Advertisingoomments- NB3AliVEON 1R3'JI:S O:lmp<11y Advertisingoomments- POSliVEON 1R3\II:S
ITT 'Advertising expenditures, increased approximately 6% in the first LOPE 'we continue to see advertising as the percent of revenue
decline ... in general, we have not seen a significant change in
advertising oosts over the last year."
quarter of 201 0 ... we now believe that our advertising expenditures
will increase approximately 15% to 20% in each of the remaining
"quarters of 2010 compared to the same period in 2009 .. ."
<XXX> 'we've seen TVYoY costs going up at about 10% to 15% in [cal101 APOL Comments on ad rate trends? 'Nothing that would stand out at
this point in the quarter from prior quarters.' YoY. And in [cai 2Q). we're expecting them to go up YoY about 15% to
20%. So getting back by the end of this fiscal year to about the
"previous level[pre-recession)."
"
CPLA 'we don't use mass media. TV. newspapers, etc ... that environment,
which is tendmg to have the hi gher advertising rates and projecting
higher advertising rates, doesn't affect us as much. In our other
channels. it's not to say we don't expect some price increases
included in our assumptions and in our forecasts is a slight increase in
our advertising spend.
BJMC 'So if you look at tradi tional sources. radio, TV and the like ... we
really haven't seen a bi g impact on that yet from a pricing
standpoint. Obviously, it's a nominal amount for us to begin
with but we really have not seen a lot of pressure though we
do anticipate over time that obviously, those expenses would
increase as the economy continues to improve ... But so far, we
really haven't seen it in any significant way.'
un
"
'As we look forward to [cal20& 30), I anticipate our marketing and ad CECO 'we're not re-experiencing any meaningful rate changes either
costs will be hi gher than last year due to higher advertising costs
overall . ..local advertising does tend to be more expensive ... our
advertising costs for the full year [are expected) to approximate 7% to
8% of net revenues ... as other companies have reported, we are
seeing the same thing specifically with television advertising, the
traditional 30-60 second spot. We are seeing that across the country,
and I'd describe it as kind of a return to pre-2009 conditions."
in the TV or print year-<>ver-year ... TV spend represents
approximately 1 5% of media spending ... Again I step back and
say we're not seeing significant increases. We have
experienced a change in the quality of bonus inventory that
we're seeing in TV. but overall bonus inventory's about the
same as it was last year. Print is not a primary channel and for
most of our brand as well other than Health, and Health
acoounts for about 75% of our total print budget. So net-net,
we're not seeing significant upwards or downwards in our
,., business.'
DeVry We don't have anything to report in terms of the change in
[terms of spot advertismg rates). so I just don't have any
color. .. on that one."
Source. Company conference call comments and DB 9d'Jtmg
Advertising Spend as a percent of Revenue
The typical market funded education company spends 10% (range of 6% to 16%) of
revenues on advertising. A number of companies do not disclose their ad spend, while most
only do it on an annual basis. Schools with a lower than average referral rate tend to have ad
expenses at the higher end of the peer group range.
For those companies that spend most of their ad dollars online (for example Apollo, Grand
Canyon, and Capella), remember that the cost per lead did not really decline during the
recession. These companies never benefited from media cost deflation so are not really
seeing an increase today in ad rates, or cost per lead.
For those companies with a larger exposure to Spot 1V and cable, they will be seeing an
increase in advertising rates. Below is a table of ad exposure by media for the first 9 months
Page 13
Deutsche Bank l/l
of 2008, t he last t ime we purchased t he data f rom TNS Media Int ell igence. This data my not
represent current ad mix as media mix may have changed significantly in t he last two years.
For example Corinthian has continued to shift away from local (spot ) to nat ional advertising.
Figure 16: Advertising spend by medium (first 9months of 2008, the last time we purchased the data)
R rst 9m of 2008 Internet NetworklV Sfndiarted 1V OUtdoor C:!ble lV Other
ApolloQoup 78% 1% 15% 0% 0% 2'/o 2'/o (Nat'l newspaper)
Arneican PublicEi:iuartion 1% 41% a>!o a>!o 57% a>!o a>!o
C:!pella 98% a>!o a>!o a>!o a>!o a>!o 2'/o(Bto B)
career Ei:iuartion 17% 41% 3% 3% 3% 27% 2'/o (Network! Fli o)
O>rinthian O>lleges a>!o 58% 1% 22% 1% 18% a>!o
DaVry 34% 14% 1% 12'/o 2% 24% 5% (Local Fli 0)
B:tv1C

12'/o 65% a>!o a>!o 2'/o 5% 6% (Magazines)
Qand canyon 21% a>!o a>!o a>!o a>!o a>!o 76% (Local Fli 0)
ITTEi:iuarti on a>!o 45% a>!o CJ>/o a>!o 52% 1V)
Kaplan Hgher 8:i 0NPQ) 4a>/o 45% a>!o a>!o 3% a>!o 6% (Magazines)
Uncoln Ei:iuartion a>!o 93% a>!o a>!o 1% 1% 4% (Newspapers)
S:rayer 16% 54% a>!o a>!o 13% a>!o 14%(l.ocal Flio)
un 1% 4% a>!o 3% a>!o 86% 5% (Magazines)
Aver?.(Je 24% 35% 2'/o 3% 6% 17%
Source TNS Med11 lnreA'Jgettee. DeiASche Sarrt
Page 14
Note: We have a more detailed analysis of 9m 2008 ad spend by company by medi um,
including 2003 to 2007 data, in our Apri l 20, 2009 Educat ion indust ry initiat ion: Don't drop
out, one more year until graduation.
Below is the "average" market funded cost struct ure (as a percent of revenue), based on
individual company data.
Figure 17: Costs as a percent of revenue, average cal2009
EBIT Margin
22%
G&A net of bad
debt
12%
Instructional costs,
net of D&A, bad
debt & rent
31%
SoorC6: Company dita and Deurscts 88nY
D&Aof PP&E
3%
Advertising
Expense
10%
Sales & Marketing
ex Advertising
14%
4%
Rent Expense
4%
Deutsche Bank l/l
Regulatory agenda
Notice of Proposed Rule Making (NPRM)
The next big regulat ory event is t he publi cation of t he NPRM. There is no regulation dictat ing
t he t iming of its release by t he Department of Education (DoE), but based on our contacts we
believe t he not ice should come out somet ime in late May or early June.
Once t he NPRM is publi shed, t here is a mandatory 30 day public comment period, which
we understand could be extended to 60 days, before the not ice is f inalized. Our contacts
suggest there is a good possibility for significant changes to Gainful Employment duri ng
t he public comment period, even complete alternative met hods to the existing language.
The turn-around t ime for f inal language for the Federal Regist er, post t he public
comment period, is also not specif ied. Nov 1 (201 0) is the date by which legislation must
be in the Federal Register to be implemented in t he following July (2011 ).
Gainful Employment is the key issue in this Negotiated Rulemaking (NegReg) session
Under t he current proposal, each program at any school el igible for Title IV fundi ng must be
"prepari ng st udents for gainful employment". This potential regulat ion states median debt
levels for students graduat ing t he program must not exceed 8% of graduates' annual income
and must be repayable over 10 years. Income assessment will be calibrated using t he 25
1
h
percent ile of salaries in t he relevant f ields as identified by t he program's SOC codes.
Other potential regulatory issues beyond NegReg
Additional GAO report on Incentive Compensation
Following t he GAO report published in February 2010, a second report is expected to
address Dept of Educat ion's enforcement of Incentive Compensation regulation (may be
superseded by NegReg)
Potential changes to ability to discharge student loans in bankruptcy
House subcommittee hearing on 9/23/09 may be followed by draft legislat ion
Possible follow-up to Congressional inquiry into student eligibility
Relat ively positive hearing covered GAO report f indings on the For Prof it s
No timeli ne for next steps but f urther hearings may be held in 2H201 0
DoE could be working to make Accreditors and state regulators more proactive
The Inspector General of t he Department of Educat ion in December sent a "shot across
t he bow" of the HLC (Higher Learning Commission), questioni ng their accredit ing
process. Also, Deputy Undersecretary Robert Shireman also recent ly call ed for State
Regulators to be active in their monit oring of t he market f unded schools and to do t heir
jobs. There seems to be some movement by t he Federal Government t o increase t he
oversight of t he market f unded schools by the Accrediting Bodies and the States, and to
not leave t he job just to t he Federal Government, in their view.
Page 15
Deutsche Bank l/l
Page 16
2007 3-Year Draft CDRs
Cohort default rates measure t he percent of a school' s students whose loans ent ered
repayment in a particular federal f iscal year and the student defaulted before t he end of the
following f iscal year. Beginning in September 2011, the Department of Educat ion will start
reporting official t hree-year cohort default rates (defaults measured over the two fiscal years
followi ng t he initial year of repayment) alt hough schools will not be evaluated based on t hree
year CDRs until September 2014.
Schools that breach t he 25% threshold for two years in a row or 40% for any one year, risk
losing Tit le IV program eligibility. This t hreshold moves to 30% under t he three year
measurement period.
Draft 2007 3-year Cohort Default Rates
Unofficial t hree year CDRs were f irst published on December 14, 2009. Expectations that
rates will nearly double once t he t hird year is included reflect the industry's lack of
management and counseli ng of st udents into the t hird year of loan repayment. There are also
some exemptions for schools that enroll a significant amount of low income students.
Schools wit h CDRs above 15% in 2007 have more work to do when it comes to monitori ng
and managing CDRs, assuming no exemptions.
17 May 2010 Business Services & Educati on DB Education Services
Deutsche Bank l/l
OV 2007 2006 2005 coco 2007 2006 2005 ESI 2007 2006 2005
3-yr 15.8% 15.0% 12.3% 3-yr 30.2% 27.7% 23.7% 3-yr 24.1% 20.5% 21.1%
2-yr 7.8% 7.3% 5.9% 2-yr 15.3% 13.0% 10.5% 2-yr 11 .6% 9.6% 9.3%
3-yr 21.1% 22.8% 17.6% 3-yr 31.1% 28.5% 24.1% Number w/3-yr >40% 0 0 0
2-yr 7.3% 7.5% 4.9% 2-yr 15.7% 13.3% 10.4% Number w/3-yr >30% 1 0 0
Increase 190% 202"-" 264% Incr ease 99% 113% 132"-" Number w/3-yr >25% 11 3 3
OeVry University Number of OPE IDs 35 35 35 APOL 2007 2006 2005
3-yr 171% 171% 13.3% Number w/3-yr >40% 1 1 0 u Phoenix
2-yr 9.0% 9.0% 0.066 Number w/3-yr >30% 21 14 4 3-yr 15.9% 10.3% 11.4%
lnaease 90% 90% 102% Number wl3-yr >25% 28 27 17 2-yr 9.3% 7.2% 7.3%
2-yr 2.9% 1.8% 0.5% 2-yr 15.3% 13.5% 14.2% 3-yr 26.5% 36.9% 28.7%
Increase 43% 35% 152%
3-yr 4.7% 2.9% 2.9% Number w/3-yr >40% 0 0 0 3-yr 3.3%
2-yr 2.7% 1.4% 1.7% Number wl3-yr >30% 2-yr 0.0%
Increase 74% 107% 71% Number wl3-yr >25% Increase nm
Ross Heald 2007 2006 2005
3-yr 0.5% 0.3% 0.3% 3-yr 20.8% 19.6% 19.0%
2-yr 0.2% 0.2% 0. 1% 2-yr 10.7% 9.4% 9.2%
3-yr 24 4% 23.8% 26.3% Number w/3-yr >40% 0 0 0 Ashford University
2-yr 10.2% 9.6% 10.3% Number w/3-yr >30% 0 0 0 3-yr 17.4% 6.1% 8.8%
lnaease 139% 148% 155% Number w/3-yr >25% 1 1 0 2-yr 13.3% 4.1% 4.1%
Increase 31% 49% 115%
CPLA 2007 2006 2005 STRA 2007 2006 2005
3-yr 5.5% 3.7% 4.4% 3-yr 13.0% 10.5% 9.3% 3-yr 0.0% 0.0% 5.5%
2-yr 2.5% 1.5% 2.3% 2-yr 6.0% 3.8% 3.9% 2-yr 0.0% 0.0% 0.0%
UTI 2007 2006 2005 LOPE 2007 2006 2005 WPO 2007 2006 2005
Universal Tech Institute Grand Canyon U Kaplan
3-yr 13.8% 16.1% 13.8% 3-yr 2.9% 2.7% 3.0% 3-yr 25.7% 19.9% 16.2%
2-yr 6.6% 7.2% 5.5% 2-yr 1.4% 1.6% 1.8% 2-yr 15.0% 11.4% 8.4%
CECO 2007 2006 2005 UNC 2007 2006 2005 EDMC 2007 2006 2005
3-yr 19.6% 19.0% 21.0% 3-yr 26.2% 24.9% 21.6% 3-yr 14.4% 11.1% 11 .4%
2-yr 8.5% 8.2% 10.7% 2-yr 13.8% 12.3% 8.8% 2-yr 7.9% 5.2% 4.8%
SooretJ. US OrJpt of EducattOO and Deutsche &I'll' ca.rcfllatms
Deutsche Bank l/l
2007 2-year Cohort Default Rates
For Universities with more t han one OPE ID, each OPE ID has its own CDR and breaking
t hresholds only applies t o t hat OPE ID and no other. In Figure 19, we list t he range (maximum
and minimum) of cohort default rates f or schools with multiple OPEIDs.
Figure 19: 2007 Cohort default rates (2-year), by company
PUblic Oxnpany <l:lhort Default Rrte
2005 Max Min 2006 Max Min 2007 Max Min
America1 A.Jblic Education NA NA 0%
.Apollo G-oup
University of Rloenix 7.3% 7.2% 9.3%
We& ern International University 11.4% 27.4% 18.5%
B'idgepoint Education 4.1% 0.0% 4.1% 0.0% 13.3% 0.0%
University 2.3% 1.5% 2.5%
Ca'eer Education 22.0% 3.2% 14.3% 1.7% 14.2% 0.3%
CorinthiCll Colleges 17.6% 3.1% 18.8% 5.8% 22.3% 6.9%
DeVry 10.3% 0.0% 9.6% 0.1% 10.2% 0.0%
Education MCllagement 14.1% 0.0% 11.3% 1.:20A> 14.4% 0.0%
G-Clld Ccnyon University 1.8% 1.6% 1.4%
ITT Educationa 12.6% 5.9% 12.8% 5.5% 15.2% 9.3%
17.0% 1.2% 19.:20A> 2.1% 22.8% 7.9%
Uncoln Education 14.6% 2.0% 19.3% 5.3% 22.9% 0.0%
Nationa America1 University 7.5% 7.3% 8.2%
Srayer University 3.9% 3.8% 6.0%
U1l 7.0% 4.7% 8.0% 6.5% 6.8% 6.2%
US Dept of Education. Deutsche Bani:.
Draft 2008 CDRs by type of institution
The Department of Education released draft two-year 2008 cohort default rates in February
201 0 directly to instit utions. Only aggregate data are made public and were published on
May 2, 2010. Official rates are released in September.
Figure 20: Cohort default rates by institution type, 2006 (final) -2008 (draft)
2006 2007 2008 DRAFT
Borrower 11 of Borrower #of #of Borrowers Borrower #of II of Borrowers
#of Default Borrowers #of Default Borrowers Entered #of Default Borrowers Entered
Institution Type Schools Rate Defaulted Repa ment Schools Rate Defaulted Repayment Schools Rate Defaulted Repayment
Public 1,646 4.7% 94,627 1,988,185 1,614 5.9% 102,919 1,721,629 1,619 6.2% 107,390 1,720,899
Less than 2 yrs 153 6.4% 529 8,178 144 7.5% 595 7,832 145 6.9% 546 7,833
2-3yrs 878 8.4% 44,439 523,749 846 9.9% 48,287 483,721 850 10.3% 50,379 487,744
4yrs(+) 615 3.4% 49,659 1,456,258 624 4.3% 54,037 1,230,076 624 4.6% 56,465 1,225,322
Private 1,748 2.5% 26,735 1,055,567 1,718 3.7% 29,558 778,296 1,707 4.1% 31,411 762,386
Less than 2 yrs 56 10.0% 359 3,589 46 12.6% 449 3,538 44 14.3% 546 3,794
2-3yrs 190 6.1% 1,122 18,278 188 8.1% 1,204 14,798 184 8.2% 1,239 15,079
4yrs(+) 1,502 2.4% 25,254 1,033,700 1,484 3.6% 27,905 759,960 1,479 3.9% 29,626 743,513
Proprietary! 1,988 9.7% 82,995 855,523 1 2,008 11.0% 92,731 838,328 1 2,093 11.9% 106,019 886,743 1
Less than 2 yrs 1,008 10.9% 15,426 140,302 1,039 12.0% 15,603 129,627 1,086 12.5% 15,392 122,768
2-3yrs 728 11.1% 29,976 267,869 702 12.5% 33,030 262,640 730 12.9% 35,776 275,850
4 yrs(+) 252 8.4% 37,593 447,352 267 9.8% 44,098 446,061 277 11.2% 54,851 488,125
Foreign 466 1.2% 150 12,359 435 2.2% 163 7,276 419 2.2% 177 7,880
Unclassified 0.0% 6 1 0.0% 5 1 0.0% 4
Total 5,849 5.2% 204,507 3,911,640 5,776 6.7% 225,371 3,345,534 5,839 7.2% 244,997 3,377,913
Source US Depl of EducJtlon. Detllsche Bant.
Although cohort default rates continue to move up across all types of institutions and degree
programs, t he average 1-1.5% YoY increases by school type were more moderate than many
expected. Market funded default rates increased from 9.7% to 11%, whi le Public moved
f rom 4.7% to 5.9%, Private increased from 2.5% to 3.7% and Foreign jumped f rom 1.2% to
2.2%. We note t he 6.7% nat ional 2007 rate was 20bps below the draft rate publi shed in
March.
Deutsche Bank l/l
Draft 2008 CDRs by Market Funded institution
Individual institutional draft rates are not publicly disclosed although some schools elected to
publish their draft rates.
Figure 21: Draft 2008 CDRs (2year)
Ticker
Cohort Default Rates
2008 draft 2007
EDMC
CECO
COCO*
ESI
STRA
LINC
UTI
CPLA
LOPE
BPI
Ashford
U of Rockies
*Includes Heald
Sou! co Company Dovrsche
7.5%
10.0%
19.2%
3.6-15.5%
6.0%
14.7%
4.7-5.1%
3.3%
3.5%
13.3%
2.8%
8.1%
8.9%
15.2%
9.3-15.2%
6.0%
13.6%
6.2-6.8%
2.5%
2.9%
13.3%
0.0%
Page 19
Deutsche Bank l/l
Appendix 1
Apollo Group APOL.OQ 52.78 (USD) 14 May 10 1, 2,7,15
Corinthian Colleges Inc COCO.OO 14.11 (USD) 14 May 10 2,6,8
ITI Education SeNices ESI.N 102.51 (USD) 14 May 10 8
* Prices are sourced from local exchanges via Reuters. Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.
Disclosures marked with an asterisk may also be requi red by at least one jurisdiction in addition to t he United Stat es. See
1. Wit hin t he past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this
company, for which it received fees.
2. Deutsche Bank and/ or its affiliat e(s) makes a market in securities issued by this company.
6. Deutsche Bank and/or its affiliate(s) owns one percent or more of any class of common equity securities of thi s company
calculat ed under computat ional met hods requi red by US law.
7. Deutsche Bank and/or its affiliate(s) has received compensation f rom t his company for t he provision of invest ment
banki ng or f inancial advisory seNices withi n t he past year.
8. Deutsche Bank and/or its affi liat e(s) expects to receive, or intends to seek, compensation for invest ment banki ng seNices
15. This company has been a cli ent of Deutsche Bank Securities Inc. within the past year, duri ng which t ime it received non-
investment banking securit ies-related seNices.
Please also refer to disclosures in the " Important Disclosures Required by US Regulators" and t he Explanatory Notes.
1. Wit hin t he past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this
company, for which it received fees.
2. Deutsche Bank and/or its affiliat e(s) makes a market in securities issued by this company.
6. Deutsche Bank and/or its affiliat e(s) owns one percent or more of any class of common equity securities of this company
calculat ed under computat ional methods requi red by US law.
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banki ng or f inancial advisory seNices withi n t he past year.
website at http:Ugm .db .com/qer/disclosure/DisclosureDirectory.eqsr.
The views expressed in this report accurately reflect t he personal views of the undersigned lead analyst about t he subject
issuers and the securit ies of t hose issuers. In addition, t he undersigned lead analyst has not and will not receive any
compensation t or providi ng a specific recommendat ion or view in this report. Paul Ginocchi o
Historical recommendations and target price: Apollo Group (APOL.OQ)
(as of 5!14!2010)
100.00
90. 00
''''''''''''''''''''''''''''''''''''''''''
BO.OO
70. 00
. ~ 60. 00
It
. ~ 50.00
:::l
0
Q) 40. 00
(/)
30. 00
20. 00
10.00
0 .00
May 07 Aug 07 Nov 07 Feb 08 May 08 Aug 08 Nov08 Feb 09 May 09 Aug 09 Nov 09 Feb 10
Date
1. 4/20/2009: Buy. Target Pnce Change USD80.00
(as of 5/14/2010}
25.00
~
ct
'1::
c:
:::l
0
Q)
(/)
20. 00
15.00
10. 00
5.00
0.00
May 07 Aug 07 Nov 07 Feb OB May OB Aug OB Nov 08 Feb 09 May 09 Aug 09 Nov 09 Feb 1 0
Date
Deutsche Bank l/l
Strong Buy
Buy
Market Perform
Underperform
Not Rated
Suspended Rating
Buy
Hold
Sell
Not Rated
Suspended Rating
as of September 9. 2002
Strong Buy
Buy
Market Perform
Underperform
Not Rated
Suspended Rating
Buy
Hold
Sell
Not Rated
Suspended Rating
'New Recommendation Structure
1. 1 0/26/2009: Buy. Target Price Change USD27.00 2. 515/2010: Buy. Target Price Change USD24.00
(as of 5!14!2010)
140.00
120.00
100.00
. ~
a: 80.00
>-
~
::J
0 60.00
Q)
(/)
40.00
20.00
0.00
MayO? Aug 07 Nov07 Feb 08 May 08 Aug 08 Nov08 Feb 09 May 09 Aug 09 Nov09 Feb 10
Date
1. 4/20/2009: Buy, Target Price Change USD125.00
Deutsche Bank l/l
Previous Reoommendations
Strong Buy
Buy
Market Perform
Underperform
Not Rated
Suspended Ratmg
Buy
Hold
Sell
Not Rated
Suspended Rating
Equ1ty rat mg key Equ1ty ratmg d1spers1on and bank1ng relat1onsh1ps
holder return (TSR = percentage change in share price
f rom current price to projected target price plus pro-
jected dividend yield), we recommend t hat investors
buy the stock.
holder return, we recommend that investors sell the
stock
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 t otal return (including dividends) of
10% or more over a 12-month period
Hold: Expected total return (i ncl uding dividends)
Sell: Expected total return (including dividends) of-
Deutsche Bank l/l
"Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review t his information bef ore investing.
or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be f ound at the SOLAR li nk at
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From:
Sent:
To:
Subject:
Attachments:
Shireman, Bob
Friday, May 21, 2010 11 :58 AM
Martin, Phil
FW: Interesting DB memo on drivers of PIE ratios at for-profit colleges
0900b8c0819bf505.pdf
Sent: Friday, May 21, 2010 11:14 AM
To: Shireman, Bob
Subject: Interesting DB memo on drivers of P/E ratios at for-profit colleges
The interesting bits are in the attached PDF. In effect, they demonstrate how the stock market is pricing in the impact of
regulatory measures such as CDRs and the 90/10 rule. Pretty neat to see this quantified as a measure of perceived risk
to the colleges.
The top driver of price to earnings ratios seems to be cohort default rates. See the graph at the bottom of page 2, which
shows that price to earnings ratios at the publicly traded for-profit colleges are negatively correlated with cohort default
rates with a strong correlation of 0.74 (scale 0 to 1). There's a weaker correlation with 90/10, with 0.27 correlation with
exposure to Title IV funds.
There is, however, a strange 0.44 correlation with exposure to programs less than a Bachelor's degree, where less
exposure to Bachelor's degree programs means a lower P/E ratio. My analysis shows that Bachelor's degree programs
years doesn't mean double the income). Not sure what's going on here. Perhaps the market is assuming that there'll be
some kind of a waiver for Bachelor's degree programs?
Mark
Subject: DB Education Services: Key drivers of CY10 PEs; CDRs dominate
DB Education Services : Key drivers of CY10 PEs; CDRs dominate
We updated our industry valuation analysis and found the key drivers of CY1 OE PEs. While the drivers are not a surprise,
CDRs are the key driver of CY1 0 PEs
With cal1 Q results now over, we re-looked at industry valuation to see what the market is most focused on. Enrollment
enrollment growth from 2008 to 3009) . CY10 PEs are 32% negatively correlated to this measure of cyclical acceleration.
COCO, and ESI).
for 5-14 weeks is t rending down, a segment of total unemployment duration and one that is typically a leading indicator of
any trouble viewing the link, copy and paste the link in a browser. http://pull.db-qmresearch.com/p/139-
AA41/451 05319/0900b8c0819bf505.pdf
Regards,
Paul Ginocchio
Office:+1-415-617-4207
(See attached file: 0900b8c0819bf505.pdj)
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2
3
From:
Sent:
To:
Subject:
Shireman, Bob
Thursday, May 13, 2010 10:38 PM
Gregory Cappelli
RE: UoP ad!
I now have a meeting at 9:30. Can you ring me around 9-9:15?
Robert Shireman
(202) 260-0101
From: Gregory Cappelli (greg.cappelli@apollogrp.edu]
Sent: Thursday, May 13, 2010 11:33 AM
To: Shireman, Bob
Subject: Re: UoP ad!
Yes, works for me. How does 9:30am est work for you? Should I call your office?
From: Shireman, Bob
To: Gregory Cappelli
Sent: Thu May 13 05:17:24 2010
Subject: RE: UoP ad!
Tomorrow morning? Before 10 Eastern?
From: Gregory Cappelli rmailto:greg.cappelli@aoollogrp.edul
Sent: Tuesday, May 11, 2010 11:59 AM
To: Shireman, Bob
Subject: RE: UoP ad!
Bob,
Thanks for your note. I' d be glad to try and find the PDF of this and send it to you. let me know your availability for a call
if you have 15 minutes to catch up this week. You'd be proud of the things we're doing at the University of Phoenix on
many fronts. I would very much like to host you to one of our campuses when your schedule permits this
spring/summer.
Best regards,
Greg
Gregory W Cappelli
Co-Chief Executive Officer
Apollo Group. Inc.
227 W. Monroe, Suite 3600
Chicago, l l 60606
312-660-2020 (office)
312-343-8778 (cell )
greg.cam?elli@apollogrR.edu
From: Shireman, Bob [mailto:Bob.Shireman@ed.govl
To: Gregory Cappelli
Subject: UoP ad!
Greg:
I just saw the ad in Politico featuring my fine quote. Is there an image/pdf you can send me?
And if you can send me one signed by the Co-CEOs, I'll send you one signed by me!
-Bob
Robert Shireman, Deputy Undersecretary
400 Maryland Ave., S.W.
Room 7E310
Washington, D.C. 20202
(202) 260-0101
Fax: 202-205-0063
bob.shireman@ed.gov
2
From: Miller, Elise
Sent:
To:
Wednesday, May 12, 2010 5:40PM
Shireman, Bob
Subject: FW: 4-year for-profit tuition
From: Weko, Tom
Sent: Tuesday, May 11, 2010 8:00PM
To: Miller, Elise
Subject: Fw: 4-year for-profit tuition
From: Lutz Berkner <lberkner@mprinc.com>
To: Weko, Tom; cwei@mprinc.com <cwei@mprinc.com>; 'Jennie H.Woo' <jwoo@mprinc.com>
Cc: 'Laura Horn' <lhorn@mprinc.com>; Hunt-White, Tracy; 'John A. Riccobono' <jar@rti.org>; 'Dudley, Kristin M.'
<marvill@rti.org>
Sent: Tue May 11 18:46:55 2010
Subject: RE: 4-year for-profrt tuition
Tom,
There appear to be two issues. One is weights. The unweighted for-profit f ull -time average tuition i n NPSAS:08 is about
$15,700, much closer to t he I PEDS average. The weighted average was about $11,000. Was the I PEDS average weighted
by full -time enrollments?
The second is the University of Phoenix On-line Campus {UNITID=372213) . Of our 2700 FT undergrads at 4-year for-
prof its (unweighted), 250 are in thi s on-line school, supposedly full -t ime. The weighted FT UG number for the UPhx on-
line campus is 208,000, which is nearly one-half of the total FT for-profit 4-yr students (440,000). UPhx reports that t he
tuition paid by t hese st udent s was an average of $6,500. That drags down the weighted sector medi an tuition to $7,400,
while the unweighted median is $16,000.
Looki ng at the original CADE data, ALL of the students at the UPhx on-line campus were reported to be enrolled FT for
10 months. All the student budgets were reported to be between $31K-$33K. But the reported tuition ranged from
about $2,000 to $18,000. So average living costs were being estimated at over $20,000 on-line at home! What's going
on here? Which numbers should we have believed?
Lutz Berkner
Senior Research Associate
MPR Associates, Inc.
2150 Shattuck Ave., Suite 800
Berkeley, CA 94704
Phone: 510-849-4942
Fax: 510-849-0794
www.mprinc.com
3
From: Weko, Tom fmailto:Tom.Weko@ed.govl
To: 'cwei@mprinc.com'; Lutz Berkner
Cc: Laura Horn; Hunt-White, Tracy
Subject: 4-year for-profit tuition
Chris/Lutz:
Tom
From: Miller, Elise
To: Weko, Tom
Sent: Mon May 10 18:34:33 2010
Subject: 4-year for-profit tuition and inst grants
NPSAS 2003-04 average tuition and fees paid by students: 11,355
NPSAS 2007-08 average tuition and fees paid by students: 10,933
I PEDS 2003-04 average tuition: $13,063
I PEDS 2007-08 average tuition: $14,908
Elise Miller
Program Director
Postsecondary Institutional Studies Program
1990 K Street, NW
Room 8113A
4
Elise. M i ller@ed. gov
(202) 502-7318
(202) 219-7079 (Fax)
5
From: Kanter, Martha
Sent:
To:
Tuesday, May 04, 201 o 12:56 AM
Joanne Weiss
Subject: RE: Checking In
From: Joanne Weiss
To: Martha
Cc: Joanne
Subject: FW: Checking In
Another concer ned f riend in the for-profit higher education space. How should we reply?
Joanne
From: William [ma ilto:whughson@devry.edu]
April 2010 10:57 PM
To:
Subject: Checking In
Joanne
Hope well with you and that enjoying your new job!
The article about Bob remarks to state education is quite
concerning to me . Why does Bob think we serve our students poorly? No one seems to think
that or increasing market share means that they are corrupt or serving their
customers poorly. In quite to the I think that most of us assume the reason
is that they are doing a better job of appealing to consumers who have completely free choice
as to whose products to purchase. The fact that our Pell grants are growing reflects the
same underlying reality: that students have f ree and that they are choosing us.
Why? For the same reason that they are choosing Ford and Apple products: we provide a great
in fo rmats which recognize the complex realities of our combined
with outstanding student services - including career services.
I have spent a great deal of my first seven months with DeVry touring the 29 campuses which
report to me. At each I stress the importance of providing outstanding education and
outstanding student service. I also emphasize the importance of adhering strictly to our
regulatory compliance guidelines. I spend hours speaking with faculty and
administration . About half of the hundreds of students I have spoken with told me that they
chose DeVry because a friend or family member recommended us . What better
evidence could there be that we are serving our students well?
Our "competition" - primarily public institutions - just serve their students all that
well. All of us wish they because that would be better for society. But they
It seems to me that ED ought to be more concerned with helping public institutions to provide
6
good education and service to their students than with getting mad at us because we do. The
situation seems very comparable to the public schools and the teachersJ unions who get mad at
Aspire. Rather than waste their time getting mad at AspireJ they ought to spend their time
and resources figuring out how to provide better education themselves. If they did a good
job in the first placeJ Aspire would never have come to be. The same is true of private-
sector post-secondary education.
I would very much value your insights into thisJ because it is very concerning to me and my
colleagues.
Thanks!
Bill Hughson
PresidentJ Healthcare Group
DeVry Inc.
3005 Highland Parkway
Downers GroveJ IL 60515
Direct: 630-515-3138
Mobile: 331-645- 3906
Our Purpose: Empowering our students to achieve their educational and career goals.
From: Jamie Morley [mailto:jmorley@useducationcorp.com]
Sent: FridayJ April 30J 2010 2:35 AM
To: MontgomeryXJ George; HughsonJ William; Thomas Bloom; Jeff Akens
Subject: FW: Inside Higher Ed: Shireman's contempt for accreditors
This was forwarded from ACICSJ regulatory department. I highlighted the reference to DeVry.
Jamie
Jamie MorleyJ Ph.D.
Vice PresidentJ Academic Affairs
U.S. Education
1001 Menaul Blvd. NE
AlbuquerqueJ NM 87107
505-353-3931 phone/fax
505-514-6901 blackberry
jmorley@useducationcorp.com<mailto:jmorley@useducationcorp.com>
This message and/or any attachments contain confidentialJ non-public information. This
message should not be forwarded except to those persons with a need to know such information
for legitimate purposes. If you are not the intended recipientsJ please notify sender and
delete this message from your system.
From: Anthony Bieda [mailto:ABieda@acics.org]
Sent: ThursdayJ April 29J 2010 7:25AM
To: Directors
Cc: Commissioners
Subject: Inside Higher Ed: Shireman's contempt for accreditors
FYI. Looks like we have some additional outreach to do with folks in high places.
Anthony S. Bieda
ACICS Director of External Affairs
750 1st Street NEJ Suite 980
7
WashingtonJ DC 20002
202.336.6781
202.905.6845 (cell)
"Empowering Workforce Education: 2010 ACICS Leadership Conference & Meeting"
June 8th and 9th - Palazzo ResortJ Las Vegas Comparing Higher Ed to Wall Street April 29J
2010
Whenever worried leaders of for-profit colleges have implied in recent months that the U.S.
Education Department is gunning for the institutionsJ officials of the federal agency have
discouraged such talkJ<http://www.insidehighered.com/news/2009/06/16/cca> offering evenhanded
rhetoric about treating all sectors the same in their push for increased accountability.
The words have provided little reassurance to the collegesJ since they haven't always seemed
to square with the aggressive approach<http://www.insidehighered.com/news/2010/04/21/gainful>
the Obama administration is taking in rewriting federal rules governing vocational and other
programs.
On WednesdayJ in a speech to state regulators who oversee for-profit collegesJ the chief
architect of the Education Department's strategyJ Robert ShiremanJ offered a much more
critical assessment of the private sector institutions than he has in his public comments to
dateJ 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 individuallyJ one by oneJ 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 themselvesJ
they may be most noteworthy for his indictment of accreditationJ higher education's system of
institutional peer review. In Shireman's narrative before the annual
meeting<http://www.nasasps.org/conference/registration-materials> of the National Association
of State Administrators and Supervisors of Private SchoolsJ 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 controlJ 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 sectorJ and the states and the
federal government don't necessarily have all the tools they need to do it eitherJ Shireman
saidJ according to the notes of several in the audience. ThatJ he suggestedJ is why the
Education Department must toughen its rules in the way it is now proposing.
Shireman could not be reached for commentJ and an Education Department spokesman said its
officials did not wish to comment on this article.
To several people in the audienceJ 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<http://www.insidehighered.com/news/2009/04/21/shireman>. 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
institutionsJ whose students are disproportionately needy and disproportionately go into
heavy debt<http://www.insidehighered.com/news/2010/04/27/debt> to finance their educations.
But with Wall Street analysts hanging on his every
word<http://www.insidehighered.com/news/2009/06/01/qt#200115> looking for snippets that might
threaten the publicly traded companies' stock pricesJ Shireman has often seemed to go out of
his way to avoid singling the institutions out for criticism.
8
A typical quotation, from last summer:<http://www.insidehighered.com/news/2009/06/16/cca>
"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. " ... If 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 increase, Shireman said. ITT?
Strayer? 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 several in 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,
9
suggesting that the ratings agencies lacked the "firepower'' to regulate the financial
markets.
In case anyone missed Shireman drove his point pointing out that higher education
accrediting agencies are made up of (and financially supported by) their member and
see it as their mission both to help the institutions "improve" and also to in what
is essentially a subcontract from the federal that they are of sufficient
quality. They are unlike the ratings but they are run by the
institutions they in ways that the credit agencies aren't.
The peer review nature of higher education accreditation has an inherent conflict of interest
similar to the ratings Shireman said. Given he it is crucial for
state and federal as the other two parts of the to step up their role in
regulating higher education.
But do state regulators think they have the "firepower" to keep tabs on the growing and
complex private market college sector? Shireman asked the state officials in the room. The
response was underwhelming. "I don't think we feel we have the firepower we Shireman
referring to the federal government's own according to members of the audience.
The bottom line of Shireman's he was that "federal and state governments cannot
rely on accreditors to assure that consumers and taxpayers are protected to full extent that
they need to be. All three legs" of the three-legged stool of higher education quality
assurance need to be operating he said.
Shireman went from there into a review of the department's proposed new approaches to
ensuring integrity in the financial aid 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 and of higher education than Shireman has delivered
before. But David who heads the Wisconsin Educational Approval Board and just finished
a term as president of the national group of state 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 three-legged not just and why we all need to work
said Dies. "He was pointing out some limitations of but I didn't
really see it" as highly critical of accreditors or for-profit colleges.
-Doug Lederman<mailto:doug.lederman@insidehighered.com>
Comments on Comparing Higher Ed to Wall Street
*
*
Accreditation agencies are set up to be corrupt
Posted by Steven D. Aird on April 2010 at 7:45am EDT
Shireman is correct about the accreditation agencies. Even accreditation agencies
for public institutions are mired in a gigantic conflict of interest. They receive money from
the schools they accredit. They are run by former administrators of various institutions.
They control access to federal funds; they are anything but and they
are beyond the reach of the Freedom of Information Act. The federal government needs to
change this immediately. Everything that these agencies do or fail to do should be
discoverable.
* Shireman not immune to inherent conflicts of interest
* Posted by Glen S. McGhee at Florida Higher Education Accountability Project on
April 2010 at 8:45am EDT
Shireman picks easy but misses the looming meltdown caused by further
aggravating credential inflation.
10
The entire push for accessibilty will only succeed in creating even worse credential
inflation than what we now have.
No one -- not even Shireman -- has the courage and foresight to begin a discussion on rampant
credentialism and overschooling in the context of what it takes to create conflicts of
interest in accreditation and the institutional field itself, as well as credential markets.
This is the worst conflict of interest, one which not even Shireman is immune to.
My concern is not so much for the taxpayer, but for those students that lose out in what
amounts to a massive gamble that the bubble won't burst before they graduate.
Safeguarding Stimulus vs. Judging Quality
*
*
Posted by Trace Urdan , Research Analyst at Signal Hill on April 29, 2010 at 8:45am EDT
The conflation of the need to safeguard Stimulus dollars with the accrediting
agencies' job of judging academic quality is clever but ultimately just a rhetorical device
designed to provide cover for the fact that the administration has no actual data to support
the need for new "gainful employment" regulations. So instead of defending the regulations on
the basis of a identifiable problem regarding graduate employment, now it turns out the rules
have been designed for Stimulus protection.
If the new rules are designed to protect Stimulus dollars by tying those dollars to outcomes,
why is the focus on the cost of the programs and not the quality of the employment? And why
is the Pell spending at traditional schools not being safeguarded by the new measures. The
logic of the rules seems to be that it hardly matters how effective a program is if it is
priced low enough.
The fact is that there is already a rigorous oversight regime for protecting Pell dollars and
it is no less effective based on the amount of dollars flowing through the system. Oversight
for program integrity -- are the students' eligible? and are they actively enrolled in a
properly-accredited program? -- rests squarely with the Department of Education, not with the
accrediting agencies. Furthermore the Department has enormous authority to come down hard on
any institution guilty of fraud or malfeasance and has shown no reluctance to use that power
in the past.
Congress has vested the accrediting agencies with the responsibility not for judging the
integrity of the Title IV program but for ensuring a sufficient level of academic quality.
The accrediting agencies may or may not be out-manned in this task and they may or may not be
conflicted. But they are no less out-manned or conflicted in judging the quality and purpose
of traditional publicly-funded and not -for - profit colleges and universities. In terms of the
association with ratings agencies, the comparison is an unfair one. Ratings agencies are for-
profit companies with an interest in growth. Accrediting agencies are sleepy not -for - profit
firms whose fundamental work is accomplished by academic professionals and college presidents
who often are just as biased against for-profit schools as Mr. Shireman seems to be.
Mr. Shireman is a politically-appointed lobbyist and former Congressional staffer who managed
to slip into a created position that has turned out to be the most important role in the
Obama administration relative to post - secondary education, without facing Senate
confirmation. But as bright and well-intentioned as he may be, he is no more equipped to
judge academic effectiveness than I am. And if he is decided to second-guess the working
academic professionals who actually provide the oversight over academic institutions, at some
point he will have to answer to Congress.
* Transparent, searchable, accountable
* Posted by Robert Albrecht , Professor/English and Humanities at Alfred State College on
April 29, 2010 at 9:00am EDT
Steven D. Aird is half right: all accreditation processes and records for all
institutions should be transparent and searchable; the outcome will be accountability.
11
But the charge that accreditation agencies are set up to be corrupt is misleading)
inaccurate) and finally) I believe) without evidence. I cannot speak for all regional
commissions) but I do know that the Middle States Commission on Higher Education is not only
far from corrupt) but that it functions with great integrity and careful allegiance to its
documents. Peer review) while deliberate and painstaking and time consuming) finally involves
some three dozen institutions in most accreditation decisions -- comprehensive by any
standards. Further) its accreditation actions are available to the public through its web
site.
Robert Shireman is right to assert that accreditation agencies see as one of their
obligations to "help" institutions in trouble. And he is right that the agencies are not
currently fully set up to fulfill a more rigorous regulatory role. However) good regulations
and peer evaluation should have "helping" as a common purpose. The demands of regional
accreditors for specific evidence) data collected over timeJ and attention to planning and
assessment) on one handJ and the requirements of wise regulations from any government bodyJ
on the otherJ need not conflict. Clearly regional accreditors must look inward -- quickly --
to promote greater transparency and accountability) and indeed this will change their role
and relationship with member institutions. But "corrupt"? Show us the data.
[cid:image001.png@01CAE77D.DBCE0240]<http://www .insidehighered.com/layout/set/print/news/2010
/04/29/shireman>
[cid:image002.gif@01CAE77D.DBCE0240]
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@ Copyright 2010 Inside Higher Ed
12
From:
Sent:
To:
Kanter, Martha
Tuesday, May 04, 201 o 12:14 PM
Joanne Weiss
Subject : Re: Checking In
Martha Kanter
Under Secretary
"The future belongs to those who beli eve in the beauty of their dreams!"
--Eleanor Roosevelt
On May 3, 2010, at 7:02PM, "Joanne Weiss"f'!!l @gourdinfamil y.com> wrote:
Another concerned friend in the for-profit higher education space. How should we reply?
Joanne
From: Hughson, Wi ll iam [mailto:whughson@devry.edu]
Sent: Friday, April 30, 2010 10:57 PM
Tof!l trugourdinfamily.com
Subject: Checking In
Hi, Joanne
Hope all ' s well with you and that you' re enjoying your new job!
The article below, about Bob Shireman' s remarks to state education regulators, is quite
concerning to me. Why does Bob think we serve our students poorly? No one seems to think
that Ford' s or Apple' s increasing market share means that they are corrupt or serving their
customers poorly. In fact, quite to the contrary, I think that most of us assume the reason is that
they are doing a better job of appealing to consumers who have completely free choice as to
whose products to purchase. The fact that our Pell grants are growing reflects the same
underlying reality: that students have free choice, and that they are choosing us. Why? For the
13
same reason that they are choosing Ford and Apple products: we provide a great education, in
formats which recognize the complex realities of our students' lives, combined with outstanding
student services- including career services.
I have spent a great deal of my first seven months with DeVry touring the 29 campuses which
report to me. At each campus, I stress the importance of providing outstanding education and
outstanding student service. I also emphasize the importance of adhering strictly to our
regulatory compliance guidelines. I spend hours speaking with students, faculty and
administration. About half of the hundreds of students I have spoken with told me that they
chose DeVry because a boss, colleague, friend or family member recommended us. What better
evidence could there be that we are serving our students well?
Our "competition"- primarily public institutions - just don' t serve their students all that well.
AJl of us wish they would, because that would be better for society. But they don' t. It seems to
me that ED ought to be more concerned with helping public institutions to provide good
education and service to their students than with getting mad at us because we do. The situation
seems very comparable to the public schools and the teachers' unions who get mad at Aspire.
Rather than waste their time getting mad at Aspire, they ought to spend their time and resources
figuring out how to provide better education themsel ves. If they did a good job in the first place,
Aspire would never have come to be. The same is true of private-sector post-secondary
education.
I would very much value your insights into this, because it is very concerning to me and my
colleagues.
Thanks!
Bill .Hughson
President, Healthcare Group
DeVxy Inc.
3005 Highland Parkway
Downers Grove, rr.. 60515
Direct: 630-515-3138
Mobile: 331-645-3906
14
Our Pwpose: Empowering our students to achieve their educational and career goals.
From: Jamie Morley [mailto:jmorley@useducationcorp.com]
Sent : Friday, April 30, 2010 2:35 AM
To: MontgomeryX, George; Hughson, William; Thomas Bloom; Jeff Akens
Subject: FW: Inside Higher Ed: Shireman's contempt for accreditors
This was forwarded from ACICS' regulatory department. I highlighted the reference to DeVry.
]a:mie
Jamie Morley, Ph.D.
U.S. Education
1001 Menaul Blvd. NE
Albuquerque, NM 87107
505-353-3931 phone/fax
505-514-6901 blackberry
jmorley@useducationcorp.com
This message and/or any attachments contain confidential, non-public information. This message should not be forwarded except to those
persons with a need to know such information for legitimate purposes. If you are not the intended recipients, please notify sender and delete
this message from your system.
From: Anthony Bieda [mailto:ABieda@acics.org]
Sent: Thursday, April 29, 2010 7:25AM
To: Directors
Cc: Commissioners
Subject: Inside Higher Ed: Shireman's contempt for accreditors
FYI. Looks like we have some additional outreach to do with folks in high places.
15
Anthony S. Bieda
ACICS Director of External Affairs
750 1st Street NE, Suite 980
202.336.6781
202.905.6845 (cell)
"Empowering Workforce Education: 2010 ACICS Leadership Conference & Meeting"
June 8th and 9th- Palazzo Resort, Las Vegas
Comparing Higher Ed to Wall Street
April 29, 2010
Whenever worried leaders of for-profit coll eges 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 li ttle reassurance to the colleges, since they haven't always seemed to
square with the aggressive approach the Obama administration is taking in rewri ting 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 pri vate sector institutions than he has in hjs 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.
Wrule 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 Admirustrators and Supervisors ofPrivate Schools, the accrediting agencies
are to the for-profit colleges what the Wall Street ratings agencies were to the misbehaving
fi nancial fi rms: 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.
16
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 auctience. 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
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 educat1on 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. " ... 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 ofPell 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 increase, Shireman said. ITT? Strayer?
17
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).
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 fi x the "flawed" regulatory process that allowed Goldman Sachs
and other purveyors of sub prime mortgages to engage in misbehavior that helped devastate the
economy.
instruments-- "a clear, inherent conflict of interest," Shireman said, according to the accounts of
several in the room.
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. They
are nonprofit, unlike the ratings agencies, but they are run by the institutions they regulate, in
ways that the credit agencies aren't.
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. "I don't think we feel we have the firepower we need," Shireman
said, referring to the federal government's own powers, according to members of the audience.
The bottom line of Shireman's talk, he said, was that "federal and state governments cannot rely
on accreditors to assure that consumers and taxpayers are protected to full extent that they need
to be. All three legs" ofthe three-legged stool of higher education quality assurance need to be
operating effectively, he said.
Shireman went from there into a review of the department's proposed new approaches to
ensuring integrity in the financial aid programs, 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
18
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 three-legged 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
Comments on Comparing Higher Ed to Wall Street
Accreditation agencies are set up to be corrupt
Posted by Steven D. Aird on April 29, 2010 at 7:45am EDT
Shireman is correct about the accreditation agencies. Even accreditation agencies for
public institutions are mired in a gigantic conflict of interest. They receive money from
the schools they accredit. They are run by former administrators of various institutions.
They control access to federal funds; however, they are anything but transparent, and
they are beyond the reach of the Freedom of Information Act. The federal government
needs to change this immediately. Everything that these agencies do or fail to do should
be discoverable.
Shireman not immune to inherent conflicts of interest
Posted by Glen S. McGhee , Dir. , at Florida Higher Education Accountability Project on
April29, 2010 at 8:45am EDT
Shireman picks easy targets, but misses the looming meltdown caused by further
aggravating credential inflation.
The entire push for accessibilty will only succeed in creating even worse credential
inflation than what we now have.
No one-- not even Shireman -- has the courage and foresight to begin a discussion on
rampant credentialism and overschooling in the context of what it takes to create conflicts
of interest in accreditation and the institutional field itself, as well as credential markets.
This is the worst conflict of interest, one which not even Shireman is immune to.
My concern is not so much for the taxpayer, but for those students that lose out in what
amounts to a massive gamble that the bubble won't burst before they graduate.
Safeguarding Stimulus vs. Judging Quality
Posted by Trace Urdan , Research Analyst at Signal Hill on April29, 2010 at 8:45am
EDT
The contlation of the need to safeguard Stimulus dollars with the accrediting agencies'
job of judging academic quality is clever but ultimately just a rhetorical device designed
to provide cover for the fact that the administration has no actual data to support the need
for new "gainful employment" regulations. So instead of defending the regulations on the
basis of a identifiable problem regarding graduate employment, now it turns out the rules
have been designed for Stimulus protection.
19
If the new rules are designed to protect Stimulus dollars by tying those dollars to
outcomes, why is the focus on the cost of the programs and not the quality of the
employment? And why is the Pell spending at traditional schools not being safeguarded
by the new measures. The logic of the rules seems to be that it hardly matters how
effective a program is if it is priced low enough.
The fact is that there is already a rigorous oversight regime for protecting Pell dollars and
it is no less effective based on the amount of dollars flowing through the system.
Oversight for program integrity --are the students' eligible? and are they actively enrolled
in a properly-accredited program?-- rests squarely with the Department of Education, not
with the accrediting agencies. Furthermore the Department has enormous authority to
come down hard on any institution guilty of fraud or malfeasance and has shown no
reluctance to use that power in the past.
Congress has vested the accrediting agencies with the responsibility not for judging the
integrity of the Title IV program but for ensuring a sufficient level of academic quality.
The accrediting agencies may or may not be out-manned in this task and they may or may
not be conflicted. But they are no less out-manned or conflicted in judging the quality and
purpose of traditional publicly-funded and not-for-profit colleges and universities. In
terms of the association with ratings agencies, the comparison is an unfair one. Ratings
agencies are for-profit companies with an interest in growth. Accrediting agencies are
sleepy not-for-profit firms whose .fundamenta1 work is accomplished by academic
professionals and college presidents who often are just as biased against for-profit
schools as Mr. Shireman seems to be.
Mr. Shireman is a politically-appointed lobbyist and former Congressional staffer who
managed to slip into a created position that has turned out to be the most important role in
the Obama administration relative to post-secondary education, without facing Senate
confirmation. But as bright and well-intentioned as he may be, he is no more equipped to
judge academic effectiveness than I am. And if he is decided to second-guess the working
academic professionals who actually provide the oversight over academic institutions, at
some point he will have to answer to Congress.
Transparent, searchable, accountable
Posted by Robert Albrecht , Professor/English and Humanities at Alfred State College on
April29, 2010 at 9:00am EDT
Steven D. Aird is half right: all accreditation processes and records for all institutions
should be transparent and searchable; the outcome will be accountability.
But the charge that accreditation agencies are set up to be corrupt is misleading,
inaccurate, and finally, I believe, without evidence. I cannot speak for all regional
commissions, but I do know that the Middle States Commission on Higher Education is
not only far from corrupt, but that it functions with great integrity and careful allegiance
to its documents. Peer review, while deliberate and painstaking and time consuming,
finally involves some three dozen institutions in most accreditation decisions--
comprehensive by any standards. Further, its accreditation actions are available to the
public through its web site.
Robert Shireman is right to assert that accreditation agencies see as one of their
obligations to "help" institutions in trouble. And he is right that the agencies are not
20
currently fully set up to fulfill a more rigorous regulatory role. However, good
regulations and peer evaluation should have "helping" as a common purpose. The
demands of regional accreditors for specific evidence, data collected over time, and
attention to planning and assessment, on one hand, and the requirements of wise
regulations from any government body, on the other, need not conflict. Clearly regional
accreditors must look inward-- quickly-- to promote greater transparency and
accountability, and indeed this will change their role and relationship with member
institutions. But "corrupt"? Show us the data.
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21
From:
Sent:
To:
Subject:
"Homeless Circuit
Dannenberg, Michael
Monday, May 03, 2010 6:00PM
Young, Kathryn
RE: USICH memo
In Cleveland, Chancellor and Phoenix were both hitting the homeless shelters last year. Byron Thompson, who joined
Phoenix in 2009 as a recruiter, soon made presentations at Y Haven, Salvation Army Harbor Light and Transitional
Housing, all of which serve the city's homeless.
Thompson, 29, says the recruiting served a social purpose: "I feel the homeless are a real population that can't be
ignored." Borrowing by the homeless to pay tuition "is no different from a middle-class student who has to take out a
loan," he says. He also hoped to boost his pay. "The month I signed up two or three women from Transitional Housing
was a good month," he admits. (Phoenix recruiters in Cleveland had a quota of five students a month, according to a
former employee.)
Legal Settlement
Thompson, who left Phoenix in January, acknowledges that his bosses didn't endorse his efforts to recruit the
homeless. Apollo Group agreed last December to pay $78.5 million to settle a federal lawsuit in California alleging that
compensation for Phoenix recruiters violated restrictions on incentive pay. The company, which admitted no
wrongdoing, says it's changing its compensation model.
While Thompson says he was "welcomed with open arms" at the shelters, some staff members were wary. "The
question in my mind about Phoenix was, 'Why are they doing this?"' says Bruce Shagovac, a counselor at Y Haven.
"There's got to be some payoff for them."
One homeless woman whom Thompson steered to Phoenix was Marisol Lugo. Lugo ran away f rom her Chicago home
at age 12, became a heroin addict, and lived on the streets for 22 years, eating out of restaurant trash bins and
sleeping in parks and abandoned cars. After detox, she moved in 2008 to Transitional Housing, obtained a high school
equivalency degree, and got to know Thompson. "He gave me wonderful words of encouragement," says Lugo.
With federal grants and loans covering the $10,000- plus annual tuition, she began pursuing a two-year business
degree online at Phoenix last August. She soon ran into academic difficulties, failing a course in critical thinking.
Retaining Information
"Sometimes, having used so much drugs, I have trouble retaining information," says Lugo, who now has her own
apartment and a maintenance job at the shelter. According to Phoenix, she left the school in November. She says she
is still registered and there is a payment dispute.
From: Young, Kathryn
Sent: Monday, May 03, 2010 5:53PM
To: Dannenberg, Michael
Subject: RE: USICH memo
32
Thanks -I'll send along to him. I' m scared to read this article.
From: Dannenberg, Michael
Sent: Monday, May 03, 2010 5:51 PM
To: Young, Kathryn
Subject: RE: USICH memo
The Patty Murray homeless agenda lives on. It's ok. It's a good agenda. I think the point of contact here should be Bob
Shireman. He'll farm it out to the relevant person(s), and it'll have more juice coming from him. Note below re:
homeless and proprietary school recruiting. Yup. It's bad.
Homeless Dropouts Lured to For-Profit Colleges
By Daniel Golden
April 30 (Bloomberg)-- Benson Rollins wants a college degree. The unemployed high school dropout who attends
Alcoholics Anonymous and has been homeless for 10 months is being courted by the University of Phoenix. Two of its
recruiters got themselves invited to a Cleveland shelter last October and pitched the advantages of going to the
country's largest for-profit college to 70 destitute men.
Their visit spurred the 23-year-old Rollins to fill out an online form expressing interest. Phoenix salespeople then
barraged him with phone calls and e-mails, urging a tour of its Cleveland campus. "If higher education is important to
you for professional growth, and to achieve your academic goals, why wait any longer? Classes start soon and space is
limited," one Phoenix employee e-mailed him on April 15. "I'll be happy to walk you through the entire application
process."
Rollins's experience is increasingly common. The boom in for-profit education, driven by a political consensus that all
Americans need more than a high school diploma, has intensified efforts to recruit the homeless, Bloomberg Business
Week magazine reports in its May 3 issue. Such disadvantaged students are desirable because they qualify for federal
grants and loans, which are largely responsible for the prosperity of for-profit colleges. Federal aid to students at for-
profit colleges jumped to $26.5 billion in 2009 from $4.6 billion in 2000. Publicly traded higher education companies
derive three-fourths of their revenue from federal funds, with Phoenix at 86 percent, up from just 48 percent in 2001
and approaching the 90 percent limit set by federal law.
Biweekly Stipend
The privately held Drake College of Business, which trains people to be medical and dental assistants, relied on
taxpayers for 87 percent of its revenue in 2007. Almost 5 percent of the student body at its Newark, New Jersey, branch
is homeless, says Jean Aoun, director of admissions and student services there. Late in 2008, it began offering a $350
biweekly stipend to students who show up for 80 percent of classes and maintain a "C" average.
"It's basically known in the community: If you' re homeless, and you need some money, go to Drake," says Carmella
Hutson, a case manager at the Goodwill Rescue Mission in Newark, where about 20 clients have enrolled at Drake in the
past two years. "It would put money in my pocket, help me buy a car," adds Jerome Nickens, 45, who lived at the
mission when he talked to a Drake representative but decided not to enroll.
Formal Investigation
After Bloomberg Business Week called the Accrediting Council for Independent Colleges & Schools to inquire about the
stipends, the council opened an investigation into the college's recruitment practices. The inquiry could lead to revoking
Drake's accreditation, leaving it ineligible for federal aid.
33
Chancellor University in Cleveland, which counts Jack Welch as an investor and features a weekly video for students by
the former General Electric Co. chief executive, explicitly focused recruiting efforts on local shelters after it realized that
Phoenix, owned by Apollo Group Inc., was doing so. Chancellor has stopped pursuing the homeless, and Phoenix says
any recruiting by its employees in Cleveland shelters was unauthorized. Phoenix's business code prohibits recruiting at
shelters, and any employee violating the ban could face termination, Apollo says.
Phoenix wants to ensure that "only students who have a reasonable chance to succeed enroll in our programs," Apollo
spokesman Manny Rivera said in an e-mail.
Welfare Population
Other schools see nothing wrong with reaching out to the disadvantaged. "We don't exclusively target the homeless,"
says Ziad Fadel, chief executive of Drake, which also sends recruiters to welfare and employment agencies. "We are in a
community that is low-income and happens to have a lot of people on welfare."
The every-other-Friday payment encourages Drake students to stay in school and graduate, he says. The stipend, which
about three-fourths of Drake's 1,200 students receive, is not "a gimmick to just get students in the front door," Fadel
says. He adds that a sample analysis of 30 graduates placed by Drake's career services office found "some very
substantial improvements in income."
While many caseworkers for the homeless are gratified by the attention, some see only exploitation. The companies
"are preying upon people who are already vulnerable and can't make it through a university," says Sara Cohen, a case
manager at Shelter Now in Meriden, Conn. "It's evil."
More ... http://www.bloomberg.com/apps/news?pid=20601087&sid=aA2 FIVDs2Sk
From: Young, Kathryn
Sent: Monday, May 03, 2010 1:47PM
To: Dannenberg, Michael
Subject: USICH memo
Hi Michael,
I am going to be circulating a memo on the education of homeless children and youth that will go to the US Interagency
Council on Homeless ness on behalf of the Department of Education tomorrow. Our office has been tasked with putting
the memo together and running it through other relevant ED offices. Since OPE and FSA have some components that
help homeless students reduce barriers to college, I' m hoping your offices can take a look at the memo.
The interagency council is convening the Secretaries of several major agencies on Wednesday, and the memo is meant
to provide background on ED's programs and outline how ED is committed to interoffice and interagency collaboration.
Who are the best people to send the memo to this afternoon for review in OPE and FSA? It will be on a fast track to get
through exec sec by tomorrow.
Thanks for any direction you can provide!
-Kathryn
Kathryn Young
Office of Elementary and Secondary Education
(202) 453-6712
34
(202) 205-0303 (fax)
35
From:
Sent:
To:
Arsenault, Leigh
Friday, April30, 2010 2:40PM
Dannenberg, Michael
Subject: transcripts on default rates at CEC and Corinthian
Importance: High
Information on Career Education Corp. and Corinthian Colleges internal student lending programs and anticipated
default rates
Career Education President and CEO Gary McCullough stated in the May 2009 investor call that "we continue to accrue
bad debt under internal payment plans with the 48% rate that we talked about."
Cite: http: II seeki nga I ph a. com/ a rticle/136209-ca reer-ed ucatio n-corpor ation-g 1-2009-ea rn i ngs-ca II-transcript? page=-1
An August 2009 AP article stated that Career Education anticipates that half of their loans will not be collected.
Cite: http://www.fastweb.com/student-news/articles/1469-for-profit-colleges-boost-lending
Corinthian Colleges
Corinthian Colleges Executive Vice President and Chief Financial Officer Ken Ord stated in their February 2010 investor
call that they continue to anticipate a 56% to 58% default rate on an estimated $150 million in internal student lending.
Cite: http://seekingalpha.com/article/186144-corinthian-colleges-inc-f2g10-gtr-end-12-31-09-earnings-call-
transcript?source=yahoo&page=-1
This default rate of 56% to 58% is the same as Corinthian Colleges stated they had in August 2009 on their internal
student lending.
Cite: http://seekingalpha.com/article/158257-corinthian-colleges-inc-f4g09-gtr-end-06-30-09-earnings-call-
transcript?page=-1
36
From:
Sent:
To:
Cc:
Shireman, Bob
Friday, April30, 2010 10:36 AM
Hamilton, Justin
Arsenault, Leigh
Subject: RE: (BN) Homeless Dropouts From High School Lured by For-Profit
I can't think of any other besides Propublica and Dow/WSJ. But Leigh is checking my
calendar.
From: Justin
Sent: April 2010 10:31 AM
To: Bob
Subject: Re: (BN) Homeless Dropouts From High School Lured by For-Profit
As far as I can there is this and the dowjones pro-public. Any other yet-to-
run pieces on for-profit/neg-reg?
what did you and Arne say to Frontline?
Justin Hamilton
Press Secretary
c: 202- 591-6734
----- Original Message
From: Bob
To: Justin; Peter
Sent: Fri Apr 30 09:26:58 2010
Subject: FW: (BN) Homeless Dropouts From High School Lured by For-Profit
Homeless Dropouts From High School Lured by For -Profit Colleges 2010-04- 30 04:01:00.4 GMT
By Daniel Golden
April 30 (Bloomberg) -- Benson Rollins wants a college degree. The unemployed high
school dropout who attends Alcoholics Anonymous and has been homeless for 10 months is being
courted by the University of Phoenix. Two of its recruiters got themselves invited to a
Cleveland shelter last October and pitched the advantages of going to the largest
for-profit college to 70 destitute men.
Their visit spurred the 23-year-old Rollins to fill out an online form expressing
interest. Phoenix salespeople then barraged him with phone calls and urging a tour
of its Cleveland campus. crif higher education is important to you for professional
and to achieve your academic why wait any longer? Classes start soon and space is
one Phoenix employee e-mailed him on April 15. be happy to walk you through
the entire application process.
experience is increasingly common. The boom in for-profit driven by
a political consensus that all Americans need more than a high school has
intensified efforts to recruit the Bloomberg Businessweek magazine reports in its
May 3 issue. Such disadvantaged students are desirable because they qualify for federal
grants and which are largely responsible for the prosperity of for-profit colleges.
Federal aid to students at for - profit colleges jumped to $26.5 billion in 2009 from $4.6
37
billion in 2000. Publicly traded higher education companies derive three-fourths of their
revenue from federal fundsJ with Phoenix at 86 percentJ up from just 48 percent in 2001 and
approaching the 90 percent limit set by federal law.
Biweekly Stipend
The privately held Drake College of BusinessJ which trains people to be medical and
dental assistants) relied on taxpayers for 87 percent of its revenue in 2007. Almost 5
percent of the student body at its NewarkJ New JerseyJ branch is homelessJ says Jean AounJ
director of admissions and student services there.
Late in 2008J it began offering a $350 biweekly stipend to students who show up for 80
percent of classes and maintain a "c average.
"ItJs basically known in the community: If youJre homelessJ and you need some moneyJ go
to DrakeJ says Carmella HutsonJ a case manager at the Goodwill Rescue Mission in NewarkJ
where about 20 clients have enrolled at Drake in the past two years. "It would put money in
my pocketJ help me buy a carJ
adds Jerome NickensJ 45J who lived at the mission when he talked to a Drake representative
but decided not to enroll.
After Bloomberg Businessweek called the Accrediting Council for Independent Colleges &
Schools to inquire about the stipendsJ the council opened an investigation into the collegeJs
recruitment practices. The inquiry could lead to revoking DrakeJs accreditation) leaving it
ineligible for federal aid.
Chancellor University in Cleveland) which counts Jack Welch as an investor and features
a weekly video for students by the former General Electric Co. chief executive) explicitly
focused recruiting efforts on local shelters after it realized that PhoenixJ owned by Apollo
Group Inc.J was doing so. Chancellor has stopped pursuing the homelessJ and Phoenix says any
recruiting by its employees in Cleveland shelters was unauthorized. PhoenixJs business code
prohibits recruiting at sheltersJ and any employee violating the ban could face termination)
Apollo says.
Phoenix wants to ensure that "only students who have a reasonable chance to succeed
enroll in our programsJ Apollo spokesman Manny Rivera said in an e-mail.
Welfare Population
Other schools see nothing wrong with reaching out to the disadvantaged. "We donJt
exclusively target the homelessJ
says Ziad FadelJ chief executive of DrakeJ which also sends recruiters to welfare and
employment agencies. "We are in a community that is low-income and happens to have a lot of
people on welfare."
The every-other-Friday payment encourages Drake students to stay in school and graduateJ
he says. The stipendJ which about three-fourths of DrakeJs 1J200 students receiveJ is not "a
gimmick to just get students in the front doorJ Fadel says. He adds that a sample analysis
of 30 graduates placed by DrakeJs career services office found "some very substantial
improvements in income.
While many caseworkers for the homeless are gratified by the attention) some see only
exploitation . The companies "are preying upon people who are already vulnerable and canJt
make it through a university) says Sara CohenJ a case manager at Shelter Now in MeridenJ
Conn. "ItJs evil."
The current state of for-profit education has an element of deja vu. Twenty years ago
the sector had grown wild and unrulyJ as fly-by-night trade schools siphoned off students
from welfare and unemployment linesJ ostensibly to train them as truck drivers or
38
hairdressers. Often these enterprises provided little or no schooling; their aim was the
federal student aid. Default rates on student loans skyrocketed to 22 percent before Congress
enacted tough regulations in 1992. Among them were limits on default rates for individual
colleges as well as a cap on the percentage of their revenue that they could receive from the
government. The schools were also forbidden to pay recruiters based on how many students they
enrolled.
The reforms injected discipline into the industry and brought down default rates. Then,
a decade later, the Bush administration relaxed the ban on incentive compensation for
recruiters, opening the door for the aggressive wooing of the homeless.
((Targeting vulnerable populations who are not likely to benefit is one example of
overzealous recruiting that can be driven by paying based on enrollment numbers," says Robert
Shireman, Deputy Under Secretary of the U.S. Education Department, which is pushing to
tighten the rules.
Unleashing Potential
The Bush Administration also sought to unleash online education,s potential. Phoenix now
boasts 458,600 students, with more than 200,000 in its two-year online program. Enrollment in
for-profit colleges grew to 1.8 million in 2008 from 673,000 in 2000. Revenue rose to an
estimated $29.2 billion this year from
$9 billion in 2000, says Jeffrey Silber, an analyst for BMO Capital Markets in New York.
Operating margins averaged 21 percent in 2009; schools typically charge $10,000 to $20,000 a
year, well above comparable programs at community colleges.
The industry is now fully mainstream. Goldman Sachs Group Inc. owns 38 percent of the
for-profit Education Management Corp. in Pittsburgh, which has 136,000 students in programs
ranging from fashion to culinary arts, and former President Bill Clinton took a position as
honorary chancellor of Laureate International Universities, owned by Baltimore- based Laureate
Education Inc. Investors are flocking to the industry, drawn by the stability of government
funding and the profit potential of online classes. But some of the unsavory practices that
spurred Congress to act are springing back to life, with a new wrinkle or two.
Homeless Circuit
In Cleveland, Chancellor and Phoenix were both hitting the homeless shelters last year.
Byron Thompson, who joined Phoenix in 2009 as a recruiter, soon made presentations at Y
Haven, Salvation Army Harbor Light and Transitional Housing, all of which serve the city,s
homeless.
Thompson, 29, says the recruiting served a social purpose:
((I feel the homeless are a real population that can,t be ignored." Borrowing by the homeless
to pay tuition ((is no different from a middle- class student who has to take out a loan," he
says. He also hoped to boost his pay. ((The month I signed up two or three women from
Transitional Housing was a good month," he admits. (Phoenix recruiters in Cleveland had a
quota of five students a month, according to a former employee.)
Legal Settlement
Thompson, who left Phoenix in January, acknowledges that his bosses didn,t endorse his
efforts to recruit the homeless.
Apollo Group agreed last December to pay $78.5 million to settle a federal lawsuit in
California alleging that compensation for Phoenix recruiters violated restrictions on
incentive pay. The company, which admitted no wrongdoing, says it,s changing its compensation
model.
While Thompson says he was ((welcomed with open arms" at the shelters, some staff members
were wary. ((The question in my mind about Phoenix was, ~ w h y are they doing this?,, says Bruce
Shagovac, a counselor at Y Haven . ((There,s got to be some payoff for them."
One homeless woman whom Thompson steered to Phoenix was Marisol Lugo. Lugo ran away from
her Chicago home at age 12, became a heroin addict, and lived on the streets for 22 years,
39
eating out of restaurant trash bins and sleeping in parks and abandoned cars. After detoxJ
she moved in 2008 to Transitional HousingJ obtained a high school equivalency degreeJ and got
to know Thompson. "He gave me wonderful words of encouragementJ
says Lugo.
With federal grants and loans covering the $10J000-plus annual tuitionJ she began
pursuing a two-year business degree online at Phoenix last August. She soon ran into academic
difficultiesJ failing a course in critical thinking.
"SometimesJ having used so much drugsJ I have trouble retaining informationJ says LugoJ
who now has her own apartment and a maintenance job at the shelter. According to PhoenixJ she
left the school in November. She says she is still registered and there is a payment dispute.
PhoenixJs forays into shelters were noted by a new Cleveland rival. In 2008J investors
bought nonprofit Myers UniversityJ which was under court receivershipJ and renamed it
Chancellor. A year later Welch acquired a stake in it; the university named its new masterJs
degree program in business administration after himJ and Welch helped develop the curriculum.
At a faculty function last AugustJ Darius NavranJ dean of ChancellorJs School of
Professional StudiesJ sought out Jeffrey Perkins Jr.J an adjunct professor of public
administrationJ and asked how Chancellor could boost its enrollment of about 400.
Nontraditional Students
"If we donJt tap into that populationJ Phoenix willJ
Perkins says he told NavranJ meaning the homeless. The dean agreed.
ChancellorJs small classes and low student-to-faculty ratio are suited to nontraditional
students such as the homelessJ Perkins says. He e-mailed managers of Cleveland social service
agencies in SeptemberJ inviting them to a lunch at Chancellor to "discuss our new plans to
recruit the economically disadvantaged and at-risk groups. Many of them are targeted for on-
site recruitment at local transitional housingJ halfway housesJ and other human service
facilities.
Sixteen human services managers showed up for the lunch.
Two days laterJ in a memo to NavranJ Perkins predicted that the program would produce a
minimum of at least 10 enrollees by spring term.
cHeavy-HandedJ
In the ensuing weeksJ Perkins and other Chancellor officials gave presentations at a
dozen social service programs.
Their pitch was "very heavy-handedJ says Phillip HinesJ housing coordinator for the
Community WomenJs Shelter. "It was beating the drumJ eGo to Chancellor. This is what we
offer.
Financial aidJ financial aidJ financial aid.J
AfterwardJ Hines saysJ Chancellor hounded him with phone calls and e-mails to "get these
women rolling. ChancellorJs initiative reaped only one or two students and was discontinued.
It "had all the best intentionsJ CEO Bob Barker said in an e- mailJ "but the time and effort
generated very little interest.
In one viewJ the rise of for-profit colleges represents a laudable merger of public
interest and the private sector. With public colleges beset by budget cutsJ for-profit
colleges offer an opportunity for people who are down and out to get ahead.
Students with no assets or collateral can tap federal grants and loans on the theory that
degrees will lead to well-paying jobs that enable borrowers to repay.
Tuition Hikes
The trouble is the cost. Education companies charge high prices that require students to
take on debt. Chancellor charges $9J750 a year -- about four times the $2J400 tab at nearby
~
Cuyahoga Community College. Poor students can pay CuyahogaJs tuition with federal grants and
donJt have to take out loans.
Student advisers from Cuyahoga make the rounds at Cleveland area sheltersJ helping the
homeless choose colleges and fill out applications.
And for-profit tuitions are rising fast. Drake hiked its tuition from $4J000 in 2007-
2008 to $15J700 this yearJ which Fadel attributes to new equipment and additional staff.
Borrowers who earned bachelorJs degrees from for-profit colleges in 2007-2008 had a median
debt of $32J653J well above the
$22J375 and $17J700 for graduates of four -year private nonprofit and public collegesJ
respectively.
Such burdens can be difficult for homeless people who are more likely to suffer from
mental illness and substance abuse than the general population. Bad credit doesnJt go away
easily.
In the Cleveland sheltersJ you can still find people with trade school debts from 20 years
ago. Those who donJt repay their student loans may forfeit their chances for public housing
and are also ineligible for federal financial aid to return to college.
Default Consequences
((If the homeless have a bad student loanJ they canJt find a place to liveJ they canJt go
back to schoolJ and in this economy thereJs not a lot of workJ" said Ardretta JonesJ a case
manager at Tacoma Rescue Mission in TacomaJ WashingtonJ ((That leaves a person with no
options."
Because they donJt have to repay their educational loans until they leave schoolJ some
homeless students spend beyond their means. Kim RoseJ a recovering crack cocaine addict and
ex- offender in RaleighJ North CarolinaJ began pursuing an online bachelorJs degree in
business last November at Capella Education Co.Js Capella UniversityJ based in Minneapolis.
At the time she was staying in a drug-free program with Internet access.
Big Splurge
RoseJ 38J receives almost $4J000 each academic quarter in federal grants and loans for
tuition and living expenses. She splurged last ChristmasJ spending $700 of her financial aid
on presents for her seven-year-old sonJ who has lived with his grandmother. rei got him
everything he wantedJ" Rose said in a telephone interview. aGamesJ toys. HeJs a guitar freakJ
I got him a guitar. To make up for me not being there."
In FebruaryJ Rose moved into a shelter where the only computer was broken. As a resultJ
she has struggled to keep upJ dropping an English composition course. Rose isnJt typical of
Capella studentsJ most of whom are midcareer professionals seeking graduate degreesJ says
university spokeswoman Irene
Silber: awe would not intentionally recruit someone who is in a life crisisJ much less one as
significant as homelessness."
Given the troubled pasts of some homeless studentsJ even a college education hardly
assures a well-paying job. Brenda TorchiaJ another recovering crack cocaine addict in Raleigh
who has served several prison terms for drug offensesJ was in a shelter and looking online
for work when she saw an ad that asked if she wanted to further her education. She answered
yes and was directed to the website of a for -profit school called ECPI College of Technology
based in Virginia BeachJ Virginia.
Placement Test
Torchia appliedJ passed a placement testJ and started ECPIJs medical administration
program on March 1. The 40-year- old mother of four is borrowing about half of the $23J000
tab from the federal governmentJ with grants and scholarships paying the rest. ECPI officials
are aware of her background and ((guarantee me a job in the field/' Torchia says. ((My school
is veryJ very supportive of me. I guess God opened up their hearts to receive me for whom I
am."
41
Torchia>s history would be a red flag for health-care employers because hospitals and
clinics have drugs on site> says Susan Eget> communications director of the American Academy
of Medical Administrators. While ECPI doesn>t promise jobs> President Mark Dreyfus says>
medical administration offers Torchia>s best chance because not all employers check
backgrounds and she could process records in a back office where drugs aren>t accessible.
In the end> Benson Rollins didn>t succumb to Phoenix>s hard sell. He is taking a class
for his high school equivalency degree and hopes to study law enforcement in college. For
now> he would like a job so he can pay child support for his 1-year- old daughter> whom he
rarely sees. The Phoenix recruiters> he says> failed to mention a critical point: He would
have to take out a government loan at 5 percent to 7 percent interest to pay the $10>000-plus
annual tuition. "I>m in a homeless shelter> and money is hard to come by> Rollins says.
"It>s not worth going to school to end up in debt.
For Related News and Information:
Stories about education: NI EDU <GO>
U.S. colleges and universities: USUV <GO> Education organizations: EDOR <GO> Stories about
the Department of Education:
NI EDN <GO>
--With assistance from Marybeth Sandell in Stockholm and Rodney Yap in Los Angeles. Editors:
Robin D. Schatz> Hugo Lindgren
To contact the reporter on this story:
Daniel Golden in Boston at +1-617-210-4610 or dlgolden@bloomberg.net.
To contact the editor responsible for this story:
Jonathan Kaufman at +1-617-210-4638 or Jkaufman17@bloomberg.net.
42
Sent: Friday, April30, 2010 10:04 AM
To:
Subject:
Cunningham, Peter; Rogers, Margot; Miller, Tony; Kanter, Martha
Re: HEADS UP: more Shireman for-profit press
Bob did this interview a couple of weeks ago. Contains the following quote:
<<Targeting vulnerable populations who are not likely to benefit is one example of
overzealous recruiting that can be driven by paying based on enrollment says Robert
Deputy Under Secretary of the u.s. Education which is pushing to
tighten the rules.
Justin Hamilton
Press Secretary
c: 202-591-6734
- - - - - Original Message
From: Hamilton) Justin
To: Cunningham) Peter; Rogers) Margot; Miller) Tony; Kanter) Martha
Sent: Fri Apr 30 09:02:52 2010
Subject: HEADS UP: more shireman for-profit press
Homeless Dropouts From High School Lured by For-Profit Colleges 2010-04- 30 04:01:00.4 GMT
By Daniel Golden
April 30 (Bloomberg) -- Benson Rollins wants a college degree. The unemployed high
school dropout who attends Alcoholics Anonymous and has been homeless for 10 months is being
courted by the University of Phoenix. Two of its recruiters got themselves invited to a
Cleveland shelter last October and pitched the advantages of going to the country)s largest
for-profit college to 70 destitute men.
Their visit spurred the 23-year-old Rollins to fill out an online form expressing
interest. Phoenix salespeople then barraged him with phone calls and e-mails) urging a tour
of its Cleveland campus. rf higher education is important to you for professional growth)
and to achieve your academic goals) why wait any longer? Classes start soon and space is
limited)JJ one Phoenix employee e-mailed him on April 15. rJll be happy to walk you through
the entire application process.JJ
Rollins)s experience is increasingly common. The boom in for-profit education) driven by
a political consensus that all Americans need more than a high school diploma) has
intensified efforts to recruit the homeless) Bloomberg Businessweek magazine reports in its
May 3 issue. Such disadvantaged students are desirable because they qualify for federal
grants and loans) which are largely responsible for the prosperity of for - profit colleges.
Federal aid to students at for-profit colleges jumped to $26.5 billion in 2009 from
$4.6 billion in 2000. Publicly traded higher education companies derive three-fourths of
their revenue from federal funds) with Phoenix at 86 percent) up from just 48 percent in 2001
and approaching the 90 percent limit set by federal law.
Biweekly Stipend
The privately held Drake College of Business) which trains people to be medical and
dental assistants) relied on taxpayers for 87 percent of its revenue in 2007. Almost 5
43
percent of the student body at its Newark, New Jersey, branch is homeless, says Jean Aoun,
director of admissions and student services there.
Late in 2008, it began offering a $350 biweekly stipend to students who show up for 80
percent of classes and maintain a "c average.
"It,s basically known in the community: If you,re homeless, and you need some money, go
to Drake, says Carmella Hutson, a case manager at the Goodwill Rescue Mission in Newark,
where about 20 clients have enrolled at Drake in the past two years. "It would put money in
my pocket, help me buy a car,
adds Jerome Nickens, 45, who lived at the mission when he talked to a Drake representative
but decided not to enroll.
After Bloomberg Businessweek called the Accrediting Council for Independent Colleges &
Schools to inquire about the stipends, the council opened an investigation into the college,s
recruitment practices. The inquiry could lead to revoking Drake,s accreditation, leaving it
ineligible for federal aid.
Chancellor University in Cleveland, which counts Jack Welch as an investor and features
a weekly video for students by the former General Electric Co. chief executive, explicitly
focused recruiting efforts on local shelters after it realized that Phoenix, owned by Apollo
Group Inc., was doing so. Chancellor has stopped pursuing the homeless, and Phoenix says any
recruiting by its employees in Cleveland shelters was unauthorized. Phoenix,s business code
prohibits recruiting at shelters, and any employee violating the ban could face termination,
Apollo says.
Phoenix wants to ensure that "only students who have a reasonable chance to succeed
enroll in our programs, Apollo spokesman Manny Rivera said in an e-mail.
Welfare Population
Other schools see nothing wrong with reaching out to the disadvantaged. "We don,t
exclusively target the homeless,
says Ziad Fadel, chief executive of Drake, which also sends recruiters to welfare and
employment agencies. "We are in a community that is low-income and happens to have a lot of
people on welfare.
The every-other-Friday payment encourages Drake students to stay in school and graduate,
he says. The stipend, which about three-fourths of Drake,s 1,200 students receive, is not ua
gimmick to just get students in the front door, Fadel says. He adds that a sample analysis
of 30 graduates placed by Drake,s career services office found "some very substantial
improvements in income.
While many caseworkers for the homeless are gratified by the attention, some see only
exploitation. The companies ((are preying upon people who are already vulnerable and can,t
make it through a university, says Sara Cohen, a case manager at Shelter Now in Meriden,
Conn. "It,s evil.
The current state of for-profit education has an element of deja vu. Twenty years ago
the sector had grown wild and unruly, as fly-by-night trade schools siphoned off students
from welfare and unemployment lines, ostensibly to train them as truck drivers or
hairdressers. Often these enterprises provided little or no schooling; their aim was the
federal student aid. Default rates on student loans skyrocketed to 22 percent before Congress
enacted tough regulations in 1992. Among them were limits on default rates for individual
colleges as well as a cap on the percentage of their revenue that they could receive from the
government . The schools were also forbidden to pay recruiters based on how many students they
enrolled.
The reforms injected discipline into the industry and brought down default rates. ThenJ
a decade laterJ the Bush administration relaxed the ban on incentive compensation for
recruitersJ opening the door for the aggressive wooing of the homeless.
<<Targeting vulnerable populations who are not likely to benefit is one example of
overzealous recruiting that can be driven by paying based on enrollment numbersJ'' says Robert
ShiremanJ Deputy Under Secretary of the u.s. Education DepartmentJ which is pushing to
tighten the rules.
Unleashing Potential
The Bush Administration also sought to unleash online educationJs potential. Phoenix now
boasts 458J600 studentsJ with more than 200J000 in its two-year online program. Enrollment in
for - profit colleges grew to 1.8 million in 2008 from 673J000 in 2000. Revenue rose to an
estimated $29.2 billion this year from
$9 billion in 2000J says Jeffrey SilberJ an analyst for BMO Capital Markets in New York.
Operating margins averaged 21 percent in 2009; schools typically charge $10J000 to $20J000 a
yearJ well above comparable programs at community colleges.
The industry is now fully mainstream. Goldman Sachs Group Inc. owns 38 percent of the
for-profit Education Management Corp. in PittsburghJ which has 136J000 students in programs
ranging from fashion to culinary artsJ and former President Bill Clinton took a position as
honorary chancellor of Laureate International UniversitiesJ owned by Baltimore-based Laureate
Education Inc. Investors are flocking to the industryJ drawn by the stability of government
funding and the profit potential of online classes. But some of the unsavory practices that
spurred Congress to act are springing back to lifeJ with a new wrinkle or two.
Homeless Circuit
In ClevelandJ Chancellor and Phoenix were both hitting the homeless shelters last year.
Byron ThompsonJ who joined Phoenix in 2009 as a recruiterJ soon made presentations at Y
HavenJ Salvation Army Harbor Light and Transitional HousingJ all of which serve the cityJs
homeless.
ThompsonJ 29J says the recruiting served a social purpose:
"I feel the homeless are a real population that canJt be ignored." Borrowing by the homeless
to pay tuition "is no different from a middle-class student who has to take out a loanJ" he
says. He also hoped to boost his pay. "The month I signed up two or three women from
Transitional Housing was a good monthJ" he admits. (Phoenix recruiters in Cleveland had a
quota of five students a monthJ according to a former employee.)
Legal Settlement
ThompsonJ who left Phoenix in JanuaryJ acknowledges that his bosses didnJt endorse his
efforts to recruit the homeless.
Apollo Group agreed last December to pay $78.5 million to settle a federal lawsuit in
California alleging that compensation for Phoenix recruiters violated restrictions on
incentive pay. The companyJ which admitted no wrongdoingJ says itJs changing its compensation
model.
While Thompson says he was "welcomed with open arms" at the sheltersJ some staff members
were wary. "The question in my mind about Phoenix wasJ ~ w h y are they doing this?J says Bruce
ShagovacJ a counselor at Y Haven . "ThereJs got to be some payoff for them."
One homeless woman whom Thompson steered to Phoenix was Marisol Lugo. Lugo ran away from
her Chicago home at age 12J became a heroin addictJ and lived on the streets for 22 yearsJ
eating out of restaurant trash bins and sleeping in parks and abandoned cars. After detoxJ
she moved in 2008 to Transitional HousingJ obtained a high school equivalency degreeJ and got
to know Thompson. "He gave me wonderful words of encouragementJ"
says Lugo.
45
With federal grants and loans covering the $10,000-plus annual tuition, she began
pursuing a two-year business degree online at Phoenix last August. She soon ran into academic
difficulties, failing a course in critical thinking.
"Sometimes, having used so much drugs, I have trouble retaining information," says Lugo,
who now has her own apartment and a maintenance job at the shelter. According to Phoenix, she
left the school in November. She says she is still registered and there is a payment dispute.
Phoenix,s forays into shelters were noted by a new Cleveland rival. In 2008, investors
bought nonprofit Myers University, which was under court receivership, and renamed it
Chancellor. A year later Welch acquired a stake in it; the university named its new master,s
degree program in business administration after him, and Welch helped develop the curriculum.
At a faculty function last August, Darius Navran, dean of Chancellor,s School of
Professional Studies, sought out Jeffrey Perkins Jr. , an adjunct professor of public
administration, and asked how Chancellor could boost its enrollment of about 400.
Nontraditional Students
"If we don,t tap into that population, Phoenix will,"
Perkins says he told Navran, meaning the homeless. The dean agreed.
Chancellor,s small classes and low student -to-faculty ratio are suited to nontraditional
students such as the homeless, Perkins says. He e-mailed managers of Cleveland social service
agencies in September, inviting them to a lunch at Chancellor to "discuss our new plans to
recruit the economically disadvantaged and at - risk groups. Many of them are targeted for on-
site recruitment at local transitional housing, halfway houses, and other human service
facilities."
Sixteen human services managers showed up for the lunch.
Two days later, in a memo to Navran, Perkins predicted that the program would produce rca
minimum of at least 10 enrollees by spring term."
In the ensuing weeks, Perkins and other Chancellor officials gave presentations at a
dozen social service programs.
Their pitch was "very heavy-handed," says Phillip Hines, housing coordinator for the
Community Women,s Shelter. "It was beating the drum, ~ G o to Chancellor. This is what we
offer.
Financial aid, financial aid, financial aid.,"
Afterward, Hines says, Chancellor hounded him with phone calls and e-mails to "get these
women rolling." Chancellor,s initiative reaped only one or two students and was discontinued.
It "had all the best intentions," CEO Bob Barker said in an e- mail, "but the time and effort
generated very little interest."
In one view, the rise of for-profit colleges represents a laudable merger of public
interest and the private sector. With public colleges beset by budget cuts, for - profit
colleges offer an opportunity for people who are down and out to get ahead.
Students with no assets or collateral can tap federal grants and loans on the theory that
degrees will lead to well -paying jobs that enable borrowers to repay.
Tuition Hikes
The trouble is the cost. Education companies charge high prices that require students to
take on debt. Chancellor charges $9,750 a year -- about four times the $2,400 tab at nearby
Cuyahoga Community College. Poor students can pay Cuyahoga,s tuition with federal grants and
don,t have to take out loans .
Student advisers from Cuyahoga make the rounds at Cleveland area shelters, helping the
homeless choose colleges and fill out applications.
And for - profit tuitions are rising fast. Drake hiked its tuition from $4,000 in 2007-
2008 to $15,700 this year, which Fadel attributes to new equipment and additional staff.
Borrowers who earned bachelor,s degrees from for-profit colleges in 2007-2008 had a median
debt of $32,653, well above the
$22,375 and $17,700 for graduates of four-year private nonprofit and public colleges,
respectively.
Such burdens can be difficult for homeless people who are more likely to suffer from
mental illness and substance abuse than the general population. Bad credit doesn,t go away
easily.
In the Cleveland shelters, you can still find people with trade school debts from 20 years
ago. Those who don,t repay their student loans may forfeit their chances for public housing
and are also ineligible for federal financial aid to return to college.
Default Consequences
((If the homeless have a bad student loan, they can,t find a place to live, they can,t go
back to school, and in this economy there,s not a lot of work," said Ardretta Jones, a case
manager at Tacoma Rescue Mission in Tacoma, Washington, ((That leaves a person with no
options."
Because they don,t have to repay their educational loans until they leave school, some
homeless students spend beyond their means. Kim Rose, a recovering crack cocaine addict and
ex- offender in Raleigh, North Carolina, began pursuing an online bachelor,s degree in
business last November at Capella Education Co.,s Capella University, based in Minneapolis.
At the time she was staying in a drug-free program with Internet access.
Big Splurge
Rose, 38, receives almost $4,000 each academic quarter in federal grants and loans for
tuition and living expenses. She splurged last Christmas, spending $700 of her financial aid
on presents for her seven-year -old son, who has lived with his grandmother. I got him
everything he wanted," Rose said in a telephone interview. ((Games, toys. He,s a guitar freak,
I got him a guitar. To make up for me not being there."
In February, Rose moved into a shelter where the only computer was broken. As a result,
she has struggled to keep up, dropping an English composition course. Rose isn,t typical of
Capella students, most of whom are midcareer professionals seeking graduate degrees, says
university spokeswoman Irene
Silber: we would not intentionally recruit someone who is in a life crisis, much less one as
significant as homelessness."
Given the troubled pasts of some homeless students, even a college education hardly
assures a well -paying job. Brenda Torchia, another recovering crack cocaine addict in Raleigh
who has served several prison terms for drug offenses, was in a shelter and looking online
for work when she saw an ad that asked if she wanted to further her education. She answered
yes and was directed to the website of a for -profit school called ECPI College of Technology
based in Virginia Beach, Virginia.
Placement Test
Torchia applied, passed a placement test, and started ECPI,s medical administration
program on March 1. The 40-year- old mother of four is borrowing about half of the $23,000
tab from the federal government, with grants and scholarships paying the rest. ECPI officials
are aware of her background and ((guarantee me a job in
Justin Hamilton
Press Secretary
c: 202- 591-6734
47
From: Miller, Tony
Sent: Thursday, April 29, 201 o 3:1 o PM
To: Rogers, Margot; Cunningham, Peter; Kanter, Martha; Martin, Carmel; Gomez, Gabriella;
Rose, Charlie
Cc: Yale, Matt
Subject: FW: Comparing Higher Ed to Wall Street
FYI
From: Rothkopf, Arthur J. [mailto:ajrothkopf@USChamber.com]
Sent: Thursday, April 29, 2010 3:05 PM
To: Private- Miller, Anthony
Cc: Fine, Stephanie; Ritsch, Massie
Subject: Fw: Comparing Higher Ed to Wall Street
Tony-
1 assume 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 Apr 29 14:52:55 2010
Subject: Comparing Higher Ed to Wall Street
Inside Higher Ed
Apri l 29, 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
48
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
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 publ icly 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
singl ing 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. " ... If there is not qual ity, 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,
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.
49
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) .
historically been up to the "triad" -- the three-headed regulatory scheme involving the federal
government, state governments and accrediting agencies-- to ensure access, qual ity 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 maj or 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 industries
that grew quickly and adopted increasingly complex practices, Shireman said, suggesting that the
ratings agencies lacked the "firepower" to regulate the financial markets.
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 confl ict 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 three-legged stool , not just accreditation, and why we all need to work together," said
50
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
Copyright 2010 Inside Higher Ed
Stephanie J ohnson
U.S. Chamber of Commerce
1615 H Street, NW
p: (202) 463-5938
f: (202) 463-5863
www. uschamber.com
51
From: Rogers, Margot
Sent: Thursday, April 29, 201 o 7:50 AM
To: Cunningham, Peter; Kanter, Martha; Miller, Tony
Subject: RE: Here's the story: "Comparing Higher Ed to Wall Street"
From: CunninghamJ Peter
Sent: ThursdayJ April 29J 2010 7:41 AM
To: KanterJ Martha; RogersJ Margot; MillerJ Tony
Subject: RE: Here's the story: "Comparing Higher Ed to Wall Street"
Whenever worried leaders of for-profit colleges have implied in recent months that the U.S.
Education Department is gunning for the institutionsJ officials of the federal agency have
discouraged such talkJ <http://www.insidehighered.com/news/2009/06/16/cca> offering
evenhanded r hetoric about treating all sectors the same in their push for increased
accountability.
The words have provided little reassurance to the collegesJ since they haven 't always seemed
to square with the aggressive approach
<http://www.insidehighered.com/ news/2010/04/21/gainful> the Obama administration is taking
in rewriting federal rules governing vocational and other programs.
On WednesdayJ in a speech to state regulators who oversee for-profit collegesJ the chief
architect of the Education Department's strategyJ Robert ShiremanJ offered a much more
critical assessment of the private sector institutions than he has in his public comments to
dateJ 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 individuallyJ one by oneJ 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 themselvesJ
they may be most noteworthy for his indictment of accreditationJ higher education's system of
institutional peer review. In Shireman's narrative before the annual meeting
<http://www. nasasps.org/conferencej registration-materials> of the National Association of
State Administrators and Supervisors of Private SchoolsJ 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 ry that has grown too quickly and too
complex for them to controlJ and t hat have an "inherent conflict of interest" because their
existence depends on financial cont ributions from those they regulate.
Accreditors lack the "firepower" to regulate the for-profit sectorJ and the states and the
federal government don't necessarily have all the tools they need to do it eitherJ Shireman
saidJ according to the notes of several in t he audience. ThatJ he suggestedJ is why the
Education Department must toughen its rules in the way it is now proposing.
Shireman could not be reached for commentJ and an Education Department spokesman said its
To several people in the audienceJ Shireman's comments represented a much more candid (and
critical) appraisal of the for-profit sector than he has offered publicly since he became
52
deputy under secretary of education almost exactly a year ago
<http://www.insidehighered.com/news/2009/04/21/shireman> . 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
whose students are disproportionately needy and disproportionately go into
heavy debt <http://www.insidehighered.com/news/2010/04/27/debt> to finance their educations.
But with Wall Street analysts hanging on his every word
<http://www.insidehighered.com/news/2009/06/01/qt#200115> looking for snippets that might
threaten the publicly traded companies' stock Shireman has often seemed to go out of
his way to avoid singling the institutions out for criticism.
A typical from last summer: <http://www.insidehighered.com/news/2009/06/16/cca>
"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 and that they have
good quality postsecondary education that serves both them as students and taxpayers as
Shireman said. " ... If there is not we want to know about it and if we we
want to do something about it. Whether that involves a public a a
a a a trade whatever type or sector of
Different Tone
In his comments 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 and has made it more imperative than ever that
more Americans get a higher education to strengthen the country's economic base for the
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
Shireman said Wednesday. Many public facing cuts in their state
have had to limit or even cut their reducing their ability to meet the
increasing demand from students.
The for-profit by have stepped seeing their enrollments explode --
and with the amount of Pell Grant money that follows the students to the
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 he said. Anyone from DeVry? Forty-two Shireman said. Strayer? ITT? One
by he ticked through a list of publicly traded pointing out the increasing
amounts of federal money the institutions were collecting ("It was like fourth with a
teacher scolding students over their said one person who was in the room).
historically been up to the "triad" -- the three- headed regulatory scheme involving the
federal state governments and accrediting agencies -- to ensure quality
and integrity in higher he said.
But is that regulatory system up to the job? To draw a Shireman noted that as this
meeting was unfolding in St. politicians back in Washington were debating possible
reforms of Wall to try to fix the "flawed" regulatory process that allowed Goldman
53
Sachs and other purveyors of subprime mortgages to engage in misbehavior that helped
instruments -- "a clear, inherent conflict of interest," Shireman said, according to the
accounts of several in the room.
suggesting that the ratings agencies lacked the "firepower" to regulate the financial
markets.
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.
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 three-legged 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 <mailto:doug.lederman@insidehighered.com>
54
From: Shireman, Bob
Sent: Thursday, April 29, 201 o 7:44 AM
To:
Subject:
Hamilton, Justin; Kanter, Martha; Cunningham, Peter; Rogers, Margot
RE: Here's the story: "Comparing Higher Ed to Wall Street"
The only person who is actually quoted (at the END!) got it right:
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 regulat1on and [Education] Department oversight to be part of
this three-legged 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.
Here's the recording of my remarks.
http://docs.google.com/leaf?id=OBxEeRDh60ka M2U2MGZkYWUtZmMOMyOONjJjLTgxNGitN2ElOThhM
m Y20GU4&hl=en
Robert Shireman
(202) 260-0101
Sent: Thursday, April 29, 2010 7:30AM
To: Shireman, Bob; Kanter, Martha; Cunningham, Peter; Rogers, Margot
Subject: Here's the story: "Comparing Higher Ed to Wall Street"
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,
<http://www.insidehighered.com/news/2009/06/16/cca> 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 <http://www.insidehighered.com/news/2010/04/21/gainful> 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 <http://www.nasasps.org/conference/registration-materials> of the National
Association of State Administrators and Supervisors of Private Schools, the accrediting agencies are to the for-profit
55
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 <http://www.insidehighered.com/news/2009/04/21/shireman>. 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 <http://www.insidehighered.com/news/2010/04/27 /debt> to finance their
educations.
But with Wall Street analysts hanging on his every word
<http://www.insidehighered.com/news/2009/06/0l/gt#200115> 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: <http://www.insidehighered.com/news/2009/06/16/cca> "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. " ... If 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? ITI? 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).
56
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
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 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 three-
legged 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 <mailto:doug.lederman@insidehighered.com>
57
From: Babyak, Stephanie
Sent:
To:
Cc:
Wednesday, April 28, 201 o 12:24 PM
Shireman, Bob; Hamilton, Justin
Glickman, Jane
Subject: FOR YOUR OK
From: Shireman, Bob
Sent: Wednesday, April 28, 2010 10:38 AM
To: Babyak, Stephanie
Cc: Glickman, Jane
Subject: RE: Re:Bioomberg
To: Shireman, Bob
Cc: Glickman, Jane
Subject: FW: Re:Bioomberg
Thanks so much.
From: DAN GOLDEN, BLOOMBERG/ NEWSROOM: [mailto:dlgolden@bloomberg.net]
Subject: Re:Bioomberg
58
I already interviewed Bob, who is quoted elsewhere in the story, so I guess a statement from Arne or Martha
would be best if they don't have time to talk.
From:
To:
Cc:
Subject:
Date:
Stephanie Babyak<Stephani e. Babyak@ed. gov>
DAN GOLDEN, BLOOMBERG/ NEWSROOM:
<Jane.Glickman@ed.gov>
Bloomberg
4/28/2010 9:27:49
I will check on availability ... likely Bob Shireman. Do you need a statement to plug in or do you need a brief interview?
Sent: Wednesday, April 28, 2010 9:26AM
Cc: Glickman, Jane
Hi Stephanie, Jane,
How are you? My Business Week story on for-profit colleges recruiting the homeless is going to press today,
and the editor-in-chief asked me to get a reactlon from Arne or somebody high up there on my finding-- which
is basically that recruiting the homeless is pretty widespread, with some recruiters actually going to shelters,
others emailing and calling, and one college paying low-income students to show up for class. I would really
appreciate it if you could get somebody to talk to this morning.
Yours,
Dan
From:
To:
Cc:
Subject:
Date:
<Jane.Glickman@ed.gov>
Bloomberg
4/21/2010 9:18:07
Dan-Jane was in yesterday, and I was not. She could have handled if you had copied us both.
The data are pulled off of a field on the FAFSA which is at the beginning of the aid process and we don't have data on
homeless by school.
For the 2009-2010 award year to date (first year questions were included)J approximately
46J000 students self reported on the FAFSA that they were classified as homeless or at risk
of becoming homeless.
59
Sent: Tuesday, April 20, 2010 2:51 PM
Hi Stephanie,
How are you? I have another last-minute urgent request. I already filed my story about for-profits recruiting the
homeless, but somebody just told me that the DOE a year or two ago added a question to the F AFSA form that
lets students self-identify as homeless.
Could you check ASAP if this is true and when the question was added? If true, can you then get me the total
number of students who identified as homeless in the most recent academic year? Then, if this is possible, the
total number of students at for-profits who identified as homeless? And, again if possible, the number at these
colleges-- University of Phoenix, Westwood College, Redstone College, Everest College, Drake College of
Business, who identified as homeless?
And unfortunately, I need this pretty quick.
Yours,
Dan
From:
To:
Cc:
Cc:
Subject:
Date:
Stephanie Babyak<Stephanie.Babyak@ed.gov>
<Chris. Greene@ed.gov>
<Jan e. Gl ickman@ed.gov>
Bloomberg
4/ 14/2010 17:06:08
OFF THE RECORD: Chris Greene is running the Title IV data himself for you off of the fsadatacenter website and
will send it to you directly. The NSLDS query is still running, and others have been asked to wait until your query
is completed. But Chris is working to get you at least a few years of data in the event the 10-year query is not
completed by your deadline.
FROM STUDENTAID.ED.GOV: www.studentaid.ed.gov is the website.
How much can I borrow?
It depends on your year in school and whether you have a subsidized or unsubsidized Direct or FFEL Stafford Loan. A subsidized loan
is awarded on the basis of financial need. If you're eligible for a subsidized loan, the government will pay (subsidize) the interest on
your loan whi le you're in school , for the first six months after you leave school , and if you qualify to have your payments deferred.
Depending on your financial need, you may borrow subsidized money for an amount up to the annual loan borrowing limit for your level
of study (see below).
You might be able to borrow loan funds beyond your subsidized loan amount even if you don't have demonstrated financial need. In
that case, you'd receive an unsubsidized loan. Your school will subtract the total amount of your other financial aid from your cost of
attendance to determine whether you're eligible for an unsubsidized loan. Unlike a subsidized loan, you are responsible for the interest
from the time the unsubsidized loan is disbursed until it's paid in full. You can choose to pay the interest or allow it to accrue
(accumulate) and be capitalized (that is, added to the principal amount of your loan). Capitalizing the interest will increase the amount
you have to repay.
You can receive a subsidized loan and an unsubsidized loan for the same enrollment period as long as you don't exceed the annual
loan limits.
60
If you're a dependent undergraduate student (excluding students whose parents cannot borrow PLUS Loans), each year you can
borrow up to:
$5,500 (for loans first disbursed on or after July 1, 2008) if you're a first-year student enrolled in a program of study that is at least
a full academic year. No more than $3,500 of this amount can be in subsidized loans.
$6,500 (for loans first disbursed on or after July 1, 2008) if you've completed your first year of study and the remainder of your
program is at least a full academic year. No more than $4,500 of this amount can be in subsidized loans.
$7,500 (for loans first disbursed on or after July 1, 2008) if you've completed two years of study and the remainder of your
program is at least a full academic year. No more than $5,500 of this amount can be in subsidized loans.
If you're an independent undergraduate student (and a dependent student whose parents have applied for but were unable to get a
PLUS Loan (a parent loan)), each year you can borrow up to:
$9,500 (for loans first disbursed on or after July 1, 2008) if you're a first-year student enrolled in a program of study that is at least
a ful l academic year. No more than $3,500 of this amount may be in subsidized loans.
$10,500 (for loans first disbursed on or after July 1, 2008) if you've completed your first year of study and the remainder of your
program is at least a full academic year. No more than $4,500 of this amount may be in subsidized loans.
$12,500 (for loans first disbursed on or after July 1, 2008) if you've completed two years of study and the remainder of your
program is at least a full academic year. No more than $5,500 of this amount may be in subsidized loans.
If you're a graduate or professional degree student, each year you can borrow up to:
$20,500. No more than $8,500 of this amount may be in subsidized loans.
When you graduate with a graduate or professional degree, the maximum total debt allowed from Stafford Loans is $138,500. No more
than $65,500 of this amount may be in subsidized loans. This maximum total graduate debt limit includes Stafford Loans received for
undergraduate study. However, the aggregate loan limit for graduate and professional students enrolled in certain approved health
profession programs is $224,000.
These amounts are the maximum yearly amounts you can borrow in both subsidized and unsubsidized FFELs or Direct Loans,
individually or in combination. Because you can't borrow more than your cost of attendance minus the amount of any Federal Pell Grant
you're eligible for and minus any other financial aid you'll get, you may receive less than the annual maximum amounts.
Sent: Wednesday, April14, 2010 3:59PM
Subject: Re:FW: Bloomberg
Pell maximum is $5,350. Then there's another $9,000 or $10,000 available in federal loans right? do you have
the exact amount? thanks.
From:
To:
Cc:
<Jan e. Gl ickman@ed.gov>
Subject: FW: Bloomberg
Date: 4/14/2010 13:09:18
Dan-this is not in dollars, but percentages. Not sure if this helps, from the National Center for Education Statistics.
From: D'Amico, Aurora
Sent: Wednesday, April14, 2010 12:50 PM
Cc: Glickman, Jane; Deii'Angela, Tracy
Subject: RE: Bloomberg
61
Hi, Stephanie:
Table 18 in the web tables listed below show that 63% of the undergraduates at private for-profit institutions received
a federal grant, averaging $2,600.
Table 17 shows that 92% of the undergraduates at private for-profit institutions received a student loan, averaging,
$8,100 (not necessarily a federal loan) .
Web Tables: Undergraduate Financial Aid Estimates by Type of Institution in 2007-08
http://nces.ed.gov/pubs2009/2009201.pdf
Table 17.-Average tuition and fees, average total price of attendance, and percentage of undergraduates in private for-
profit
institutions receiving any aid, any grants, or any student loans and average amounts received, by student
characteristics: 2007-08
Table 18.-Percentage of undergraduates in private for-profit institutions receiving grants from federal , state, institutional,
or
other sources and average amounts received, by student characteristics: 2007-08
The publication listed below provides much more specificity about the source and type of aid, but it doesn't include a total
for private for-profit institutions. Instead it shows the data for the "less-than-2-year'' and "2-year or more" private for-profit
institutions separately. For example,
Table 5 shows that 83% of the undergraduates at less-than-2-year private for-profit institutions received any federal
Title IV aid
compared with 96% of those at 2-year or more private for-profit institutions, while Table 6 shows the average amount
received.
2007-08 National Postsecondary Student Aid Study (NPSAS:08): Student Financial Aid Estimates for 2007-08
http://nces.ed.gov/pubs2009/2009166.pdf
Table 1 Percentage of undergraduates receiving selected types of financial aid, by
type of institution, attendance pattern, dependency status, and income
level: 2007-08 .. ..... ...... .... ..... ..... ..... .... ..... ..... ..... .... ..... ..... .... .... ..... ..... .... ..... .. 5
Table 2. Average amounts of selected types of financial aid received by
undergraduates, by type of institution, attendance pattern, dependency
status, and income level: 2007-08 ........ ... ..... ........ ..... .... ....... .... .... ..... .... ..... ... 6
Table 3. Percentage of undergraduates receiving selected types of financial aid
from federal, state, or institutional sources, by type of institution,
attendance pattern, dependency status, and income level: 2007-08 .... .... ......... 7
Table 4. Average amounts of selected types of financial aid from federal, state, or
institutional sources received by undergraduates, by type of institution,
attendance pattern, dependency status, and income level: 2007-08 .... ..... .... ... 8
Table 5. Percentage of undergraduates receiving federal Title IV aid from selected
programs, by type of institution, attendance pattern, dependency status,
and income level: 2007-08 ....... ... ..... ...... .... ..... .... ..... .... .... ..... ..... .... ..... ...... .. 9
Table 6. Average amounts of federal Title IV aid received by undergraduates from
selected programs, by type of institution, attendance pattern, dependency
status, and income level: 2007-08 .. .... ..... ..... ..... ...... .... .... .... ...... ... .. ... ..... ... 10
62
Table 3 in shows the percentage of undergraduates in the "less-than-2-year" and the "2-year and more" private for-profit
institutions who received:
any federal aid,
a federal grant,
a federal loan, or
federal work-study.
Table 4 shows the average amount received for type of aid by control and level-- for
. 2-year and more private for-profit institutions and
. less-than-2-year private for-profit institutions.
Table 5 shows the percentage of undergraduates in the "less-than-2-year" and "2-year and more" private for-profit
institutions who received:
any federal Title IV aid,
a federal Pell grant,
a federal ACG grant,
a federal SMART grant,
federal campus-based aid,
any federal Stafford loan,
a subsidized Stafford loan, or
an unsubsidized Stafford loan.
Table 6 shows the average amount of each category above for
. less-than-2-year private for-profit institutions and
. 2-year and more private for-profit institutions.
Table 1 shows the percentage of in the" "less-than-2-year'' and "2-year and more" private for-profit institutions who
received
Veterans benefits or Parent PLUS loans, and Table 2 shows the average amount received ..
Table 9 shows the percentage of graduate/first-professional students in 4-year private for-profit institutions who received
a loan, a Stafford loan, or a Graduate PLUS loan, while Table 10 shows the average amount received.
Without knowing the focus of the reporter, it's hard to summarize the data or provide bullets, but I'll try if you tell me more
about the request..
I'll pull out the I PEDS data, too, if you'd like, but it's limited to fi rst-time/full-time degree/certificate-seeking undergraduates
who were enrolled in the fall.
Hope this helps! Aurora
NCES Postsecondary, Adult, & Career Education (PACE) Division
[Please note the new name of our division.]
Sent: Wednesday/ April14
1
2010 11:33 AM
To: D'Amico, Aurora
Cc: Glickman, Jane
Subject: Bloomberg
Aurora-do you have handy any number on federal student aid to FOR-PROFIT postsecondary institutions. (We've asked FSA for a
while now and they are "running the numbers" but the reporter who needs it needs it NOW and we haven't heard back from FSA.)
We' ll take whatever you have, for whatever time frame you might have on hand.
63
Thank you.
64
From: Rogers, Margot
Sent: Tuesday, April 27, 201 o 11 :23 AM
To: Yuan, Georgia; Rose, Charlie; Kanter, Martha
Subject: Fw: More on the Department of Education's Gainful employment reg- leak number 2?
FYI
From: Miller, Tony
To: Rogers, Margot
Sent: Tue Apr 27 10:03:02 2010
Subject: Fw: More on the Department of Education's Gainful employment reg- leak number 2?
Fyi
From: Gordon, Robert M. gov>
To: Miller, Tony; Shireman.. SQb
Cc: Sunstein, Cass R. !!JW)
Sent: Tue Apr 27 __ __.
Subject: FW: More on the Department of Education's Gainful employment reg- leak number 2?
Tony and Bob,
Thanks,
Robert
APRIL 26, 2010, 10:57 A.M. ET
Debt, Job Rule Uncertainty Hits Shares Of For-Profit Colleges
NEW YORK (Dow Jones)--A government proposal to hold colleges accountable for graduating students with high debt
loads and low income levels came front and center, again, after Credit Suisse analysts reversed their assumption that the
Department of Education had softened its stance on the subject.
Monday morning, Credit Suisse issued a note saying the Department of Education has returned to a stiffer set of rules on
post-graduation debt and gainful employment levels that colleges must meet. The news hit share prices of for-profit
universities that had rallied on expected softer rules.
Credit Suisse downgraded ITT Educational Services Inc. (ESI) and DeVry Inc. (DV) to neutral from outperform and
slashed thei r price targets, citing the potential fallout from their new take on gainful employment as well as concerns of
countercyclicality. ITT recently was off 2.9% to $108.53, while DeVry was down 6.5% to $64.96. Credit Suisse had
upgraded the schools two weeks ago.
65
Other for-profit schools, including Strayer Education Inc. (STRA), Career Education Corp. (CECO) , Corinthian Colleges
Inc. (COCO) and Apollo Group Inc. (APOL), were also trading down.
The Department of Education originally said schools could face scrutiny that could put federal assistance--often the
primary revenue stream for for-profit col leges--at risk if they did not have at least a 70% graduation rate and 70% job
placement in field of study. Two weeks ago, Credit Suisse, and others, sent out notes saying they believe the Department
of Education had softened the graduation level to 50%, sending shares higher, with some hitting 52-week highs.
"Oddly, we suspect the big upward move the stocks had when the investment community found out about the 50%
exemption may have led to pressure on the DOE to remove the 50% exemption," the firm wrote Monday.
Some education insiders have had mixed feelings on predicting the gainful-employment measure, arguing that it's
improper to say what the Department of Education will put forth and it's best to wait until the official proposal is released
for public comment. That will happen by mid-June.
"I'm not sure who thinks they have what access to what's in this draft," said one for-profit school official, but "I would really
not be jumping to any conclusions just yet." He said there's no way of knowing "whether it's been hardened, softened,
pureed, whatever."
Representatives from the Department of Education weren't immediately available for comment.
http://online.wsj.com/article/BT-C0-20100426-710339.html?mod=rss Hot Stocks
Sharon Mar
Policy Analyst I Information Policy
O'NIB I Office of Information and Regulatory Affairs
Tel: 202.395.6466 1 Fax: 202.395.5167 1 smar@omb.eop.gov
66
From: Shireman, Bob
Sent:
To:
Cc:
=f dao Aod1 2Z 'fj10 12:14 PM
00 @omb.eop.gov' ; Miller, Tony
!}(6J omb.eop.gov'; Kanter, Martha
Subject: Re: More on the Department of Education's Gainful employment reg- leak number 2?
From: Gordon, Robert M. @omb.eop.gov>
To: Miller, Tony; Shiremlliiia !ftnR-== ----.
Cc: Sunstein, Cass R. omb.eop.gov>
Sent: Tue Apr 27 09:59:26 2010
Subject: FW: More on the Department of Education's Gainful employment reg- leak number 2?
Tony and Bob,
Thanks,
Robert
APRIL 26, 2010, 10:57 A.M. ET
Debt, Job Rule Uncertainty Hits Shares Of For-Profit Colleges
NEW YORK (Dow Jones)--A government proposal to hold colleges accountable for graduating students with high debt
loads and low income levels came front and center, again, after Credit Suisse analysts reversed their assumption that the
Department of Education had softened its stance on the subject.
Monday morning, Credit Suisse issued a note saying the Department of Education has returned to a stiffer set of rules on
post-graduation debt and gainful employment levels that colleges must meet. The news hit share prices of for-profit
universities that had rallied on expected softer rules.
Credit Suisse downgraded ITT Educational Services Inc. (ESI) and DeVry Inc. (DV) to neutral from outperform and
slashed their price targets, citing the potential fallout from their new take on gainful employment as well as concerns of
countercyclicality. ITT recently was off 2.9% to $108.53, while DeVry was down 6.5% to $64.96. Credit Suisse had
upgraded the schools two weeks ago.
Other for-profrt schools, including Strayer Education Inc. (STRA), Career Education Corp. (CECO) , Corinthian Colleges
Inc. (COCO) and Apollo Group Inc. (APOL), were also trading down.
The Department of Education originally said schools could face scrutiny that could put federal assistance-often the
primary revenue stream for for-profit colleges--at risk if they did not have at least a 70% graduation rate and 70% job
67
placement in field of study. Two weeks ago, Credit Suisse, and others, sent out notes saying they believe the Department
of Education had softened the graduation level to 50%, sending shares higher, with some hitting 52-week highs.
"Oddly, we suspect the big upward move the stocks had when the investment community found out about the 50%
exemption may have led to pressure on the DOE to remove the 50% exemption," the firm wrote Monday.
Some education insiders have had mixed feelings on predicting the gainful-employment measure, arguing that it's
improper to say what the Department of Education will put forth and it's best to wait until the official proposal is released
for public comment. That will happen by mid-June.
"I'm not sure who thinks they have what access to what's in this draft," said one for-profrt school official, but "I would really
not be jumping to any conclusions just yet." He said there's no way of knowing "whether it's been hardened, softened,
pureed, whatever."
Representatives from the Department of Education weren't immediately available for comment.
http://online.wsj.com/article/BT-C0-20100426-710339.html?mod=rss Hot Stocks
Sharon Mar
Policy Analyst I Information Policy
OMB I Offi ce or Information and Regulatory Affairs
Tel: 202.395.64661 Fax: 202.395.51671 smar@omb.eop.gov
68
From:
Sent:
To:
Cc:
Subject:
Attachments:
Dear Tony:
Andrew S. Rosen [andrew.s.rosen@kaplan.com]
Monday, April19, 2010 7:01 PM
Miller, Tony
Kanter, Martha; Martin, Carmel; Shireman, Bob; Yale, Matt; Yuan, Georgia; Fine, Stephanie;
Rebecca Campoverde
Letter to Hon. Tony Miller
image003.jpg; Letter to Hon. Tony Miller 4-19-10.pdf
Thank you for inviting us to meet with you and your team on Thursday. Following up on that session, attached
is some additional input from Kaplan, DeVry and Education Management Corp. We believe it is possible to
address the Department's concerns without losing all the many positives that private sector educators offer
students. The attached letter outlines some paths to do so. We would welcome the opportunity to continue to
provide feedback on these and other issues before your office.
Best regards,
Andy
~
Andrew S. Rosen
Chairman and CEO
Kaplan, Inc.
6301 Kaplan University Avenue
Fort Lauderdale, Florida 33309
(954) 515-3888
www .kaplan.com
69
The Honorable Anthony Wilder Miller
Deputy Secretary
400 Maryland Avenue, SW
Dear Secretary Miller:
Aprill9, 2010
Thank you for meeting with us this past Thursday to discuss the Department of Education' s (ED)
proposed Gainful Employment (GE) regulation. We appreciate the candid discussion, and want to
follow up on several items that arose in our meeting.
We appreciated your reinforcement of the ED's public statements that it views private sector
presence in the higher education marketplace as positive. We also believe that it is not the ED' s
intention to eliminate private sector institutions or eliminate private capital from higher education.
We view these as important points because the GE proposal made during Negotiated Rulemaking -
which would substantially eliminate proprietary institutions' ability to offer degrees - is not
consistent with the ED' s goals.
Our comments come from a sincere concern for the students we serve, an understanding of the
limited educational opportunities afforded to these students, and the success stories of their fellow
students who graduated before them. We educate hundreds of thousands of students each year,
enabling them to obtain jobs and begin careers that are transformational not only for those students,
but for generations to follow. We each offer non-degree, associate, baccalaureate and graduate
degree programs. Across our three organizations, we enroll more than 300,000 students and employ
more than 50,000 faculty and staff each year.
As we discussed, while the ED's GE proposal will exclude fully one-third of our students from the
programs they currently attend, its effect on degree programs is the most severe. The ED's GE
proposal is tmworkable for the vast majority of degree programs in our sector and will result in as
many as half of the two million plus degree students at our colleges being denied Title IV funds.
This includes, among countless examples, Bachelor' s of Science in Nursing students, at a time when
our country faces a growing nursing shortage. Private sector colleges are a vital source of new
capacity in nursing education as well as in allied health fields, where they educate 54% of all such
professionals. We do not believe this could possibly be the intent of the ED, which is why we are
asking you to revise your proposal to avoid these unintended consequences.
April19, 2010
Page2
Likewise, we reiterate that the 50% graduation rate exception described recently does little to
ameliorate the impact of the ED's last GE proposal. With the nation's median aggregate college
graduation rate at less than 50% for all types of colleges (private, public and non-profit alike-
including elite colleges with 90%+ graduation rates), even this exception would exclude the students
at more than half of all colleges from participation in the Title IV program. Many of those excluded
students would be the very ones Congress was attempting to help through the Stafford and Pell
programs, and those for whom there are few other educational opportunities today.
We understand the objectives of the proposed GE regulations are focused on two concerns:
1. The ED's concern that a material segment of students take on disproportionate debt for value
received. More specifically, a concern that the risk tolerance of these students essentially
means that no amount of warning would deter them from making a poor enrollment decision
and "over-borrowing" - i.e., borrowing more than their ultimate job prospects would enable
them to repay.
2. The ED's concern about the risk that certain investors could purchase schools with the
intention of growing revenue by dramatically increasing enrollment without regard to
educational quality, and then turning a quick profit by re-selling the institution to another
buyer or to the investing public through a securities offering. The concern here is that such
investors would take advantage of the difference between their short timetable and the
inherently longer term during which regulatory problems mature - - all while drawing federal
financial aid and increasing the overall student debt burden.
As we discussed in our meeting, we share your concern about student over-borrowing and believe
our proposal can solve that problem without harming quality schools. Section 1 of this letter
expounds further on our student debt proposal and offers additional alternatives.
We also understand your concerns about the incentives certain investors might have and believe that
the ED has the tools to constrain them without harming students across the sector. The ED's ability
to constrain such investors is discussed in Section 2 of this letter.
1. Our Proposal and Simple Modifications To the Debt-Service-To-Income Ratio Can Solve
the Problem of Student Over-Borrowing without Harming Students of Quality Schools
We continue to believe that student debt concerns can be addressed quickly and meaningfully by: (a)
mandating that institutions disclose to students the information students need to make informed
decisions prior to taking on debt, and (b) implementing a student consumer "lemon law'' that warns
students prior to enrollment about programs that fail to meet a minimum debt-service-to-income
ratio (Appendix A). This approach has at least four advantages over the ED' s GE proposal: (1) it
addresses the concern that defining "gainful employment" by student debt levels is beyond
April19, 2010
Page 3
Congressional intent; (2) it is a less draconian approach from an enforcement perspective; (3) it
avoids the risk of inadvertently eliminating quality programs if the ratio parameters are not set
appropriately; and (4) it will immediately address the ED's concerns while still allowing the ED and
schools to complete the data collection and analysis necessary to develop a more studied approach, if
necessary. This approach would indeed give the ED new tools to address the risk for programs that
do not provide value commensurate with their cost.
Under our proposal, in addition to disclosure, a school would be required to warn students if that
school had failed certain debt-service-to-income metrics. The proposed metrics would roughly
follow those in the ED's latest GE proposal, but with the following modifications:
a. Any Debt-Service-To-Income Ratio Should Apply
Only To Non-Degree Programs
As you are aware, the GE requirement contained in the Higher Education Act (HEA) applies to all
program offerings at proprietary institutions including Associate's, Bachelor's and Master's and
doctoral-level and professional degrees (other than a de minimis number of"liberal arts" programs)
and only non-degree programs at public and private nonprofit institutions. While we believe that a
debt-service-to-income formula is inappropriate, we are especially concerned with a formula that is
inherently biased against degree programs (and with corresponding alternative measures that are
biased as well).
There are a number of reasons why debt-service-to-income ratios such as those contained in the
ED's GE proposal should not apply to degree programs. First, it is very unlikely that Congress
intended the GE requirement to apply to degree programs. When the GE requirement was first
introduced by Congress in the 1965 HEA, very few proprietary schools were degree granting.
Second, the at-risk students the ED is seeking to protect are much more likely to enroll in non-degree
programs than in degree programs. Third, the lifetime benefits conferred by degree programs, such
as higher lifetime earnings, higher income growth rates, greater employability, better career
advancement and job stability, don't readily lend themselves to a formulaic approach to measuring
value using job codes and BLS statistics. For.these reasons, debt-service-to-income ratios should not
apply to degree programs.
To accomplish the above and to overcome our concerns with the ED's debt-service-to-income
proposal, we recommend the ED use the following language, which tracks the last language
proposed at the Negotiated Rulemaking session (bolded to show changes/additions):
(a) General. (1) An institution ... offering an eligible non-degree program ... shall
be required to warn students that they are likely to have difftculty meeting their repayment
obligations in such program where . . . at the end of each three-year period . . . the debt to
earnings ratio associated with the program is twelve percent or less ....
April19, 2010
Page4
(b) Debt to earnings ratio.{Ajn institution calculates the ratio for the three-year
period by-
( 1) Determining the median loan debt of students who completed or graduated from
the non-degree program (loan debt includes title IV, HEA programs (except Parent PLUS),
institutional loans and private educational loans) during the three-year period and using the
mean loan debt to calculate an annual loan payment based on a 15-year repayment schedule
and the current annual interest rate on Unsubsidized Federal Stafford Loans or Direct
Unsubsidized Loans;
(2) Using the most current Bureau of Labor Statistics (BLS) data ... to detennine the
annual earnings, at the 25th percentile, made by persons employed in occupations related to
the training provided by the non-degree program; ...
b. Alternatively, There Should Be a Tiered Approach
To the Debt-Service-To-Income Formula
Should the ED be inclined to include degree programs, we recommend different formulae for non-
degree programs, Associate's degree programs, and Bachelor's degree programs. Post-baccalaureate
programs would not be included as those students, having successfully completed at least a
Bachelor's level of education, are more sophisticated consumers and better equipped to make
informed borrowing decisions.
We recommend the following graduated degree metrics:
Program Level Debt-service-to- BLS Percentile Years in
income threshold Repayment
Non-Degree 12%
25m
15
Associate's Degree 15%
50Ul
15
Bachelor's Degree 15%
50m
20
These numbers are consistent with the studies by Kantrowitz and Baum referenced in our April 12,
2010 letter.
c. Any Formula Should Contain An Exclusion for Prior School Debt
As we also discussed, prior school debt should be excluded from any debt-service-to-income ratio
test. By excluding prior debt, the ED can ensure that students who may have failed in the past will
continue to have an opportunity to succeed in the future, without penalizing schools for giving the
students that opportunity.
April 19,2010
PageS
d. There Are Other Alternatives Worth Exploring
In the event the ED chooses to pursue a debt-service-to-income ratio test, we reiterate our
recommendation that the ED consider alternative routes to compliance as part of that test. These
alternatives include maintaining target graduate cohort default rates (GCDRs) at 12.5% over two
years and 15% over three years. They also include a threshold for post-graduate employment rates.
We recommend setting a minimum employment rate of70% within six months following
graduation. As we discussed, the employment rate would be measured using methodologies similar
to those of the larger national accrediting agencies, but with additional flexibility, particularly for
degree programs, as degree-seeking students are likely to use their degree for general employment
advancement.
2. The ED Has an Array of Powerful Tools to Constrain Certain New Investors
As we discussed, most private sector higher education companies are invested in students for the
long haul. Certainly, Kaplan, DeVry, and EDMC- as well as other higher education organizations-
are focused on building enduring institutions that create value for our students, our employees, and
our communities. Our institutions will only succeed to the extent our students succeed. We are
passionate about our students' achieving their learning outcomes, securing good jobs, and becoming
contributing members of society. Our reputation is essential to attracting students, faculty, and
employees. Indeed, most of our alumni quietly but successfully enter into essential roles in the
American economy - working hard, paying taxes, and raising their families. Their enthusiasm is
what encourages other students to join our institutions - and any unhappiness or frustration with
their learning experiences would quickly hamper our institutions' ability to attract new students.
We understand your concern that some firms may invest in higher education with different motives
and according to a vastly different timetable. They may see an opportunity to purchase a struggling
institution, grow it rapidly, and exit the business before difficulties like poor completion,
employment rates, cohort default rates or other problems mature -- all at the students' and the
taxpayers' expense.
We respectfully submit that the HEA currently provides the ED with ample measures to prevent
such a scenario from occurring. A number of such measures are enumerated below. A chart
providing additional detail regarding these measures is attached as Appendix B to this letter.
1. The ED has the authority to condition or withhold Title IV approval from new owners
who do not have a demonstrated track record.
2. The ED may condition or disallow the resumption of Title IV participation following a
change in ownership.
April19,2010
Page6
3. Following a change in ownership, the ED may terminate an institution's eligibility to
participate in the Title IV programs without the institution having the usual due process
rights to contest the termination.
4. The ED has the ability to ensure that no students receive Title IV funds until the ED is
satisfied that the students are eligible for the funds and the school is worthy.
We appreciate your meeting with us and we sincerely hope that you have found these observations
and ideas useful. We look forward to discussing these matters further. Should you so desire, we
would be happy to provide you with further clarifications and are available to meet at your
convenience.
Yours Truly,
Andrew S. Rosen
Chairman and CEO, Kaplan, Inc.
Daniel Hamburger
President and CEO, DeVry Inc.
Todd S. Nelson
CEO, Education Management Corporation
Enclosures
cc: The Honorable Martha J. Kanter
The Honorable Carmel Martin
Mr. Robert Shireman
Mr. Matthew A. Yale
Ms. Georgia Yuan
Appendix A
XVZ UNIVERSITY
INSTITUTIONAL DISCLOSURES RELATED TO EXPECTED EARNINGS AND DEBT
You have requested information about our Veterinary Assistant program
WARNING: The annual loan repayment burden for graduates of this program at XVZ University
exceeds the maximum debt-to-earnings ratio as recommended by the U. S. Department of
Education.
Program Level: 0Associates Osachelors IZ!certificate/Diploma
Here are some important disclosures for the award year e ~ d i n g June 30, 2009
During the year ended June 30, 2009, 81.2% of students enrolled in this program graduated or
continued their enrollment into the next year while 18.8% withdrew from schoo1.
1
Of the students who graduated and were available for employment
2
, 73.4% were employed in their
field of study, or a related field, within six months of graduation with an average annual salary of
$23,600 per year.
------------------
$40,000
$35,000
$30,000
$25,000
$20,000
$15,000
$10,000
XYZ University
Veterinary
Assistant
Graduates' 1st
year Salaries
$5,000
$-
Cost of Program Average Loan debt for Average earnings for
Graduates all Accounting
graduates at 25th
percentile
Average earnings for
all Accounting
graduates at 75th
percentile
The weighted annual salaries for this occupation at the 25th and 75th percentiles are $20,809 and
$30,706, respectively.
3
The cost for this program of study at XYZ University for a student enrolled full-time and with no
transfer credits is $28,440. The average annual tuition increase for the three most recent years was
4.6%.
The average education loan debt incurred at this institution for graduates of this program during the
2009 award year was $27,400. This amount includes $20,300 of federal student loans and $17,100 of
institutional loans. Additionally, 2.0% of graduates obtained private student loans from third parties.
1
Appendix A
$4,000.00
$3,000.00
$2,000.00
$1,000.00
$-
Loan Repayment as a Percentage of 25th Percentile of
Salaries for Veterinary Assistant Occupations
Annual loan repayment
10 year standard plan
Annual loan repayment Recommended maximum
15 year extended repayment annual loan repayment
plan
If this average education loan debt was 100% federal loans with an average interest rate of 6.8% and
you chose to repay using a 10 year standard repayment term, the annual total of 12 monthly
payments would be $3,783.34. If you chose to pay using a 15 year extended repayment term, the
total of your first 12 monthly payments would be $2.918.76.
3
The latest official Cohort Default Rate (FY07) from t he US Department of Education indicates that
3.6% of graduates in this program defaulted on their federal loans.
NOTE: YOUR ACTUAL EXPERIENCE MAY BE DIFFERENT THAN THE AVERAGES AND STATISTICS
PRESENTED ABOVE AND THAT THE DATA PRESENTED WILL CHANGE IN THE FUTURE.
(Student Signature)
(Date)
(1) Withdrawal rates ore calculated for the selected program using the methodology required for the Institutional
Post-secondary Enrollment Data Survey to the U. S. Department of Education. The graduation and continuing
enrollment rate represents the complement of the withdrawal rate.
(2) Graduates in the following categories are considered unavailable for employment and ore not counted in the
placement rote calculation: graduates who ore pursuing further education, ore deceased, ore in active military
service, have medical conditions that prevent them from working, ore continuing in o career unrelated to their
program of study because they currently earn salaries which exceed those paid to entry-level employees in their
field of study, or ore international students no longer residing in the country in which their school is located.
(3) Salaries are from the Bureau of Labor Statistics as reported for the Standard Occupational Classification (SOC)
codes that correspond to the Classification of Instructional Program (CIP) code for this academic program. For
information related to salaries from these and other occupations, please visit
http://www.bls.gov/oes/current/oes nat.htm.
(4) Costs are based on tuition rates and fees currently charged to students in the indicated program of study.
(5) The recommended loon repayment is calculated using a debt-to-earnings ratio of 12% of the 25th percentile of
salaries as reported from the Bureau of Labor Statist ics for the Standard Occupational Classification (SOC) codes
that correspond to the Classification of Instructional Program (CIP) code for this academic program.
(6) For more information concerning repayment options on federal loans, please visit
https://studentloans.qov/myDirectLoon/index.action.
2

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

....... ,.'1'
34 C.F.R. 600.20(g) and (h)
34 C.F.R. 600.3l(a)
34 C.F.R. 668.13
34 C.F.R. 668.14
34 C.F.R. 668.23
34 C.F.R. 668.13{cX4)(ii)
34 C.F.R. 668.13(d){l)
34 C.F.R. 668.162
34 C.F.R. 668.175(d)(2Xi)
34 C.F .R. 668.23(b)
34 C.F.R. 668.24(f)
From:
Sent:
To:
Subject:
Attachments:
Here's the PPT
Shireman, Bob
Friday, April16, 2010 3:37PM
Smith, Kathleen; Dannenberg, Michael; Arsenault, Leigh
FW: Slides
ED Presentation_final.ppt
From: Black, Andrew [mailto:ablack@fppartners.coml
To: Shireman, Bob
Cc: Susanin, Chris
Subject: Slides
Bob - Please find the attached slides.
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In the last 10 years, the for-profit education industry has grown at 5-10 times the
I 0 Total industry enrollment growth II For-profit enrollment growth I
25% ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,
20%
15%
10%
5%
0%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
3
9%
8%
7%
6%
5%
4%
3%
2%
1%
In 1990, < 1% of all postsecondary
students attended for-profit colleges ...
n n n n n n n
~ ~ ~ ~ # ~ ~ ~ ~ * ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
.. . by 2009, almost 10% of students
attend for-profits
I
I
4
In 1990, < 10% of all postsecondary
schools were for-profit. ..
30% ,-
25%
20%
15%
10%
5% I I I ' I I I I ' I I I I I I I ' I I I I ' I I I I ' I I + I I I I I I I I ' I I I I ' I I ' I I l
~ ~ ~ ~ ~ ~ ~ ~ ~ * ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~
.. . by 2009, 25% of schools are for-profit
Despite being less than 10% of total enrollments, for-profits now claim nearly 25/o
of the $102 billion of Federal Title IV student loans and grant disbursements
For-profit share of Title IV disbursements (Pell grants and Federal stafford loans), 1998 - 2009
27o/o ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~
26%
26%
24%
23%
22%
21%
20%
19%
18%
17%
16%
16%
14%
13%
12%
11%
10%
9%
8%
7%
1998 1999 2000 2001 2002 2003 2004 2006 2006
0 Pell grants 1!1 Subsidized stafford loans 0 Unsubsidized stafford loans
Source: College Board. FedBizOps.gov, NCLC
5
2007 2008 2009
From 1987 through 2000,, the amount of total Title IV dollars given to for-profit
schools fluctuated between $2 billion and $4 billion dollars . ..
Total Federal disbursements of Title IV Stafford Loans and Pell Grants and For-profit's share. 1987 - 2009
Dollars in billions
1987 $3.5 $7.3 $0.9 $1 .8 $2.7 25% 25%
1988 $3.8 $8.0 $1 .0 $2.1 $3.1 27% 27%
1989 $4.5 $8.2 $1 .1 $2.3 $3.4 24% 28%
1990 $4.8 $8.3 $1 .1 $1.9 $3.0 23% 23%
1991 $4.9 $8.8 $1 .1 $1.5 $2.6 22% 17%
1992 $5.8 $9.5 $1 .2 $1 .3 $2.5 21% 14%
1993 $6.2 $9.9 $1 .1 $1 .0 $2.1 18% 10%
1994 $5.7 $14.1 $0.9 $1.4 $2.3 15% 10%
1995 $5.5 $19.9 $0.7 $2.0 $2.7 13% 10%
1996 $5.5 $22.8 $0.7 $1 .9 $2.6 13% 8%
1997 $5.8 $25.1 $0.7 $2.2 $2.9 12% 9%
1998 $6.3 $26.3 $0.8 $2.3 $3.0 12% 9%
1999 $7.2 $27.2 $2.6 $3.5 13% 10%
2000 $7.2 $28.4 $3.9 13% 10%
2001 $8.0
''''
$29.6
''''''''
$4.6
''''''''
14%
''''''''
12%
2002 $10.0 $32.1 $6.6 14% 13%
2003 $11.6 $36.6 $7.0 16% 14%
2004 $12.7 $41.6 $8.7 16% 16%
2006 $13.1 $45.7 $10.3 18% 17%
2006 $12.7 $48.0 $11.2 19% 18%
2007 $12.8 $49.4 $12.0 19% 19%
2008 $14.7 $66.8 $16.6 21% 22%
2009 $18.2 $70.9 $21.4 24% 24%
Pel/ Grants Loans grew by
quadrupled from $1 580% from $3 billion
billion to $4 billion to $17 billion
dollars that flowed to the industry exploded to over $21 billion( a 450/o increase
6
and has infiltrated the highest levels of government. . . a prime example
2001-2002: Director of Industry and Government Affairs for the Apollo Group
Education and Labor
Jonathan Vogel Deputy Counsel to the Department of ED, 2002-2005 Sonnenschein, Nath & Rosenthal GRAND CANYON UNIVERSITY
Lauren Maddox DOE Ass! Sec for Communications, 2006- 2008 Podesta Group CAREER EDUCATI ON CORP
Rebecca Campoverde DOE Ass! Sec for Congressional & Legislative affairs, 2005- 2008 Kaplan, Inc. KAPLAN, INC
Victor F. Klatt Ill GOP Staff Director for House ED and labor, 2005- 2008 VanScoyoc Associates APOLLO GROUP
7
comprise close to 90o/o of total revenues
Apollo Group
ITT Technical
Institute
Other,
52%
2001
Title IV,
48%
65%
Note: Title IV figures include 2008 unsubsidized Joan limit increases
Source: Company-rep orled financials
8
Other,
11%
2009
Tit le IV,
89%
85%
ITT Technical Institute (ESI) Profitability has grown 5-fold since 2006 .. .
ESI operating margin %, Q1 06 - Q409 ESI operating profit($ millions), Q106 -Q409
45% ---- $165
$155
40%
$145
$135
$125
35%
$115
$105
30% $95
$65
25%
$75
$65
$55

20%
n n n
$45
n
$35
$25
r;:,'<> r;:,'<> s:." r;:,'\ r;:,'\ r;:,'O r;:,'O _<;>'0 r;:,'O r;:,"> r;:,"> r;:,"> r;:,">
...,0' '),0' ..,u-- .,.u-- ...,0' '),0' o;O' .,.u-- ...,0' '),0' ..,u-- .fi ...,0' '),0' o;O' .fi

...,0' r? ..,0' .,_0' '),0' ..,0' .fi ...,0' '),0' ..,0' .fi ...,0' '),0' ..,0' .fi
. .. and the top 5 executives at ESI, Corinthian colleges (COCO) and Apollo Group (APOL)
To12 5 executives total com12ensation
ESI coco APOL Total
2007 $9,834,695 $4,938,982 $10,441 ,170 $25,214,847
2008 $8,923,791 $8,849,386 $26,766,979 $44,540,156
2009 $14,366,540 $1 1,222,377 $34,707,377 $60,296,294
3-yr total comp $33,125,026 $25,010,745 $71,915,526
Total comp =salary, bonus. stock awards, option awards, non-equity incentives
9

40%
37.4%
35%
30%
25%
20%
15%
12.1%
9.9% 9.8%
10%
7.4%
5%
0%
Source: Company-reporled financials and proxy statements
10
Average Company Operating Margins, 2005-2009

30%
29.0%
25%
20% 18.4%
15%
10%
5%
0%
ITT Technical Apple
Institute Computer

Procter &
Gamble
9.5%
Lockheed
Martin
9.1%
Home Depot
So how can Title IV-funded education companies
earn substantially more money than nearly every
has accounted for more than 100% of the revenue growth of these companies
A(!ollo Grou(! (APOL} 2007
Year-year growth
Title IV revenues $1,770
Year-year growth
Total revenues $919
Year-year growth
Year-year growth
ITT Technical Institute (ESt} 2007
Total revenues $758
Year-year growth
Year-year growth
Dollars in millions
Source: Company-reporled financial s
2008
$3,141
$41 7
77%
$2,419
$648
155%
2008
$1 ,069
$1 49
81%
$866
$174
117%
2008
$870
$112
73%
$635
$157
141%
11
2009
$3,974
c $833
89%
$3,537
$1 ' 119
134%
2009
$1,308
$239
89%
$1 ,163
$297
124%
2009
$1 ,015
$146
85%
$863
$228
157%
IV dollars ...
.. . and of this incremental
ONLY $99 million or 9%
instructional costs
Growth in Title IV means growth in Pell Grants too . .. an area ripe for abuse
APOL Pell Data (fiscal ~ - e n d in bold}
Total Pell Yoygrowth Total Pell Yoy growth Total
Timeframe Recipients Recipients Disbursements Disbursements Enrollment
Jul 06 - Sep 06 17,241 $27,585,089 282,300
Oct 06 - Dec 06 36,476 $60,746,326 291,800
Jan 07 -Mar 07 43,019 $71 ,799,605 298,400
Apr 07 - Jun 07 50,695 $83,662,013 311 ,100
Jul 07 - Sep 07 26,327 53% $46,396,320 68% 313,700
Oct 07 - Dec 07 60,289 65% $112,882,323 86% 325,000
Jan 08 - Mar 08 66.492 55% $126,190,829 76% 330,200
Apr 08 - Jun 08 63,320 25% $112,571,562 35% 345,300
Jul 08 - Sep 08 50,482 92% $103,335,140 123% 362,100
Oct 08 - Dec 08 87,345 45% $187,571,993 66% 384,900
Jan 09- Mar 09 89,949 35% $189,277,778 50% 397,700
Apr 09 - Jun 09 86,209 36% $175,581,597 56% 420,700
Jul 09 - Sep 09 76,980 52% $189,413,197 83% 443, 000
Oct 09 - Dec 09 122,672 40% $317,558,928 69% 455,600
http:llfederalstudentai d.ed.gov/datacenterlprogrammatic.html
Dollars in millions
2007 2008
Total FY Pell Disbursements $262,604,263 $454,979,854
Company-reported Pell revenue $177, 046,545 $282,683,610
Delta (disbursements less reported revs) $85,557,718 $172,296,244
Average Pell/ student $1,762 $2,047
Estimated reported Pell recipients 100,463 138,099
Esitmated non-reported Pelt recipients 48,549 84,171
Source: Federal Student Aid Data Center database, company-reported financi als
12
Yoygrowth
enrollment
2009
$2,461
184,306
117,189
11%
11 %
11 %
11 %
15%
18%
20%
22%
22%
18%
Growth in Pell Grant
Recipients and
Disbursements has
dramatically outpaced
actual enrollment
growth at Apollo over
the last several
years ...
Pell Running?
Apollo received $7 41 .8 million dollars
in Pell grant disbursements in 2009,
yet only reported $453.5 in Pell grant
revenues ... a $288.4 million difference.
And, if we assume the reported
average Pell per student of $2,461 in
2009, then we are somehow missing
117K students.
What happened to this money and
these students?

s
Q)
.....
Even when assuming reported graduation rates (BIG ASSUMPTION), 50-100% of
the student body still drops out every year
APOL 2006 2007 2008 2009
+ New students 216,600 258,500 288,200 355,800
Graduates 61 ,390 72,338 78,484 83,440
ESI 2006 2007 2008 2009
........._ enrollment annually .
Beginning enrollment 42,985 46,896 53,027 61 ,983
+ New students 49,935 54,593 65,313 85,928
Graduates 18,449 19,774 21,983 25,302
National Center of Education Statistics dat a;
Drop outs 27, 575 28,688 34,374 41,843
figures represent average instituti onal graduation
rates at top 5 largest institutions
*Assume avg tenure btwn 2-3 year.s for graduates For reference, 2009 Dept of ED reported
graduati on rat es for full -ti me, first t ime students at
for-profit schools is between 14-22%; these
coco 2006 2007 2008 2009
I
graduation rates have been adjusted to include non
Beginning enrollment 66,114 60,964 61 ,332 69,211 fi rst-time, full -time students, still may be largely
+ New students 92,185 90,105 100,210 117,352 overstated
-Graduates I drop outs (97,335) (89,737) (92,331) (1 00,475)
COCO claim real graduation rates at many
I
locations are in the single digits
Graduates 20,968 20,179 21,540 25,624
Drop outs 76,367 69,558 70,791 74,851
Drops % of avg t otal enrollment 120% 114% 108% 96%
*Assume avg tenure btwn 1-2 year.s for graduates
And yet that those who do graduate often cannot afford to repay their loans
ESI tuition, salary and expected loan payment breakdown
Avg tuition per year (2009)
A vg annual grant contribution
A vg annual loan amount
Estimated total loans per graduate
2009 avg starting salary of ESI grad
After-tax monthly take-home pay
Monthly loan payment
Loan payment % of total monthly pay
Borrowing est assumes a 3% tuition increase annually
Associates (2-yr)
$19,059
$2,500
$16,559
$33,615
$311104
$2,203
$408
19%
Monthly loan pymt assumes a 10-yr repayment period, 8% weighted avg interest rate
Assume a 15% tax rate for monthly take-home pay
Note: reported avg starting salary for ESI grads in 2009 was $31, 104,
15
Bachelors (4-yr}
$19,059
$2,500
$16,559
$69,628
$38,880
$2,754
$845
31%
Corinthian Colleges Cohort Default Rates, 2004- 2008
42%
40%
40% -1 I -+-2-yr rates ---- 3-yr rates I
38%
36%
34% _,
32%
30%
28%
26%
24%
22% 1 .---- 21 %
..
20%
18%
16%
14% _,
12% j
11%
11%
10%
2004 2005 2006 2007 2008
16
So who bears the brunt of the risk- and therefore losses- in this model?
+
Students Federal Gov't
17
AND
the risk for these loans is borne SOLELY BY students and the government ...
THEN
-Grow at all costs
-Influence key regulatory bodies
- Bill Brebaugh, head of University of Phoenix Corporate Emollment
not our problem ... "
application . .. "
It's a boiler room- selling education to people who
don't really want it."
- Ashford University (BPI) former enrollment
counselor
"The EC [enrollment counselor) review matrix is all
the DOE ... "
19
Utrolll\ttllb.

-e

ltl to 4-4 tl6trfltolt
.fSe."""'lm<nls

4&Clll<lfln!Mit
4$41111ll-

$1 (f"Wol'll'Cnbt
iSZCIIIot-
51 cncllf!mntt

60 II!'Cih::r.b

&tnte ..... IICI

fSI

1Doii!J)J11!1t!!l
1' n'Ollmtnlo

m.\
UP.
S2i9\
$29\

31:
.,)lk

S24k

$3$11

f38lt
I:J1lc
n..-

S$EII

$3!tt
!<0<
Wll
$.10'1.
$10
$1Cll

S..lllyOI>
..
$ftllt"' ,,01<
$7:01\611$m

SUk

)1!(
$.ut,
ua
$S3t.

Wl

s.3$t.
SJ!llt
'*
sm:
S$71
$341.
S3llk
$311.
$411k
541k

$43k
Si.4t
1m.
$1flt
5$&0 I 1 """ 0 t
W2$C:(!( 1 ...... 01
l1110. 0l
S61&pet rn. O.t.
SG3l,.:r :t mo.. 0 T.
P<'" '&"0 0 1'

Source: Court documents. Hendow & Albertson vs. UOP. filed 2009
Title IV Programs
institutions!
Ms. Mary Hale Barry
Ms. Jill DeAtley
Mr. Francis Giglio
Director of Compli ance and Regulatory Services
Lincoln Educational Services
Mr. David M. Luce
Assistant Vice President, Accreditation and Licensi ng
members of ACICS
are for-profit
representatives
"Not a/116 Board members shown
We have seen this before ... rating agencies and subprime mortgages.
20
Timeline
BPI flows students through online platform .. . grows
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
312
M a r ~ 5
21
31,558
,...----
12,623
4,471
n ll
2006 2007 2008
--- -
70,000
,---
53,688
-
2009 2010E
22
The 90/10 rule
loans grants)
23
24
Why the manipulation?
Because every incremental dollar of Title IV money yields at least 50 cents of company
So how do you make the most money? Drive enrollments as fast as you can and raise tuition!
How do you drive enrollments? Recruit hard and advertise!
At Apollo Group, 1/3 of all Title IV received over the last 4 vears was
spent on advertising and enrollment counselor compensation
Dollars in millions 2006 2007 2008 2009 2006-2009 Total
APOL
Advertising spending $232 $278 $323 $377 $1,209
Enrol lment counselor compensation $330 $392 $480 $580 $1,782
APOL total ad spend + EC comp $562 $670 $802 $957 $2,991
Total Title IV received $1,536 $1 ,770 $2,419 $3,239 $8,964
Average ad spend + EC comp % total Title IV received
~
Enrollment counselor comp does not Include stock comp
Source: Company-reported financials, Arizona Republic
25
UNIVERSITY
OF PHOENIX
STADIUM
University of Phoenix Stadium
Home to the Arizona Cardinals
In 2006, 10% of the Title IV funds received
by APOL ($155m) were spent on acquiring
naming rights for the next 20 years ...

(/)
C)
>
..o
~
C)
u
~
1""""1

Solutions - any solution has to deal with the fundamental nature of the
problem
Major problems
10 Industry gets all the revenues; students and government bear all the risk
20 Because of #1 , the incentive is to grow and the underwriting quality of Federal loan and grant dollars
is non-existent. 0 0 THIS IS EVEN WORSE THAN SUBPRIME HOME EQUITY
30 Virtually all industry and company statistics used to guide regulations are self-reported and cannot
be trusted
What cannot work
Any solution that relies on industry or company-reported statistics
(enrollments, completions, placements) is a non-starter.
27
Solutions - share the risk
1 . Gainful employment gets at part of the problem because it deals with debt loads, but verification is
problematic
2. The Accreditation of all for-profit schools has to be put in the hands of the Department of Education,
as current Accreditation boards are compromised and the process is broken (especially for online
education)
3. The For-Profit education industry must bear a significant portion the underlying risk in
lending to students
28
What would a risk-sharing agreement look like and what would be some
likely outcomes?
Make for-profit companies share in a portion of the losses on Federal loans
This will immediately change behavior at every level of the organization because companies will
be punished for poor underwriting
Aggressive recruiting and tuition hikes slow, companies improve educational quality, and
retention. Graduation and placements become more important than growth because companies
are penalized financially when students fail!
29
own students ... these are students who already have Title IV loans
Companies are provisioning for more than 50/o+ loss on loans they make to students ...
Both companies would still be hugely profitable on a per-student basis even with a 100%
ESI
Title IV loans, grants and private loans $16,959
Internal company Joan per student $2.100
30
coco
$14,443
$1 ,770
$16,213
I
68%
I
($1 ,027)
$4,282
4.2X
What if companies shared in losses on Title IV loans? Risk sharing at Apollo Group
APOL is still a profitable business, even when bearing 50% of the loan losses
Dollars in millions 2009 Pro-forma results
2009 Fiscal Yr 10% share 25% share 50% share 75% share
APOL Actual results loan losses loan losses loan losses loan losses
Total company revenues $3,974 $3,974 $3,974 $3,974 $3,974
Title IV revenues (ex-grants) $2,786 $2,786 $2,786 $2,786 $2,786
Loan loss provisions 55% 55% 55% 55% 55%
Total expected loan losses $1,532 $1 ,532 $1,532 $1,532 $1,532
Share of risk 0% 10% 25% 50% 75%
-------------------------
~ - - - - - - - - - - - - ------- ------- -----
Expected losses to APOL $0 $153 $383 $766 $1 ,149
Operating profit (ex-nonrecurring) $1,129 $976 $746 ($20)
Operating margin % 28.4% 24.6% 18.8% .0.5%
Net income $593 $513 $392 $191 {$1 1)
Assets {less cash, LTM) $1,623 $1,623 $1,623 $1,623 $1,623
Return on Assets (ROA%) 36.5% 31.6% 24.1% 11.7% -0.7%
Note: Loan loss provisions estimated based on current ESI and COCO institutional loan provisions
Source: Companyreported financials
31
Risk sharing at ITT Tech
ESI is still a profitable business, even when bearing 75% of the Joan losses
Dollars in millions
ESI
Total company revenues
Title IV revenues (ex-grants)
Loan loss provisions
Total expected loan losses
Share of risk
Expected losses to ESI
Operating profit (ex-nonrecurring)
Operating margin %
Net income
Assets (less cash, L TM)
Return on Assets (ROA%)
2009 Fiscal Yr
Actual results
$1,319
$1,121
55%
$617
0%
$0
$493
37.4%
$303
$1,327
22.8%
10% share
loan losses
$1,319
$1,121
55%
$617
10%
$62
$431
32.7%
$265
$1,327
20.0%
Note: Loan loss provisions estimated based on current ESI and COCO institutional Joan provisions
32
2009 Pro-forma results
25% share
loan losses
$1,319
$1,121
55%
$617
25%
$154
$339
25.7%
$208
$1,327
15.7%
50% share
loan losses
$1,319
$1,121
55%
$617
50%
$308
$185
14.0%
$113
$1,327
8.5%
75% share
loan losses
$1,319
$1' 121
55%
$617
75%
$463
(s;\
~
$19
$1,327
1.4%
Risk sharing at Corinthian Colleges
COCO loses money as soon as it has to bear only 20% of the losses
Dollars in millions 2009 Pro-forma results
2009 Fiscal Yr 10% share 25% share 50% share 75% share
coco Actual results loan losses loan losses loan losses loan losses
Total company revenues $1,308 $1,308 $1,308 $1,308 $1,308
Title IV revenues (ex-grants) $1,163 $1,163 $1,163 $1, 163 $1, 163
Loan loss provisi ons 55% 55% 55% 55% 55%
Total expected loan losses $639 $639 $639 $639 $639
Share of risk 0% 10% 25% 50% 75%
~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~
- - - - - - ~ ------- ~ - - - - - -
Expected losses to ESI $0 $64 $160 $320 $480
Operating profit (ex-nonrecurring) $124 $60 ($196) ($356)
Operating margin % 9.5% 4.6% -15.0% -27.2%
Net income $69 $33 ($20) ($109) ($198)
Assets (less cash, L TM) $2,573 $1,327 $1,327 $1,327 $1,327
Return on Assets (ROA%) 2.7% 2.5% -1.5% -8.2% -14.9%
Note: Loan loss provisions estimated based on current ESI and COCO institutional loan provisions
33
Summary
IV loans and grants
government largesse
Regulations built around company-reported statistics are ineffective
34
From:
Sent:
To:
Cc:
Kanter, Martha
Monday, April12, 2010 1 :55 PM
Yuan, Georgia
Shireman, Bob
Subject: Fwd: Kaplan, DeVry, EDMC Letter to Dep. Sec. Miller
Attachments:
Martha Kanter
Under Secretary
image003.jpg; ATT00001.htm; Kaplan, DeVry, EDMC Letter to Dep. Sec. Miller 4-12-10.pdf;
A TT00002.htm
U.S. Department ofEducation
"The future belongs to those who believe in the beauty of their dreams!"
--Eleanor Roosevelt
Begin forwarded message:
From: "AndrewS. Rosen" <andrew.s.rosen@kaplan.com>
To: "Miller, Tony" <Tony.Miller@ed.gov>
Cc: "Kanter, Martha" <Martha.Kanter@ed.gov>, "Shireman, Bob" <Bob.Shireman@ed.gov>,
"Fine, Stephanie" <Stephanie.Fine@ed.gov>, "Rebecca Campoverde"
<Rebecca. Cam poverde@kaplan .com>
Subject: Kaplan, DeVry, E:DMC Letter to Dep. Sec. Miller
Dear Tony:
Attached, in advance of our meeting on Thursday, is a letter on behalf of Kaplan, DeVry and
Education Management Corp. in response to your request for suggestions regarding the issue of
excessive student debt. We look forward to discussing these and other issues when we meet.
Best regards,
Andy
fcid:image003.jpg@OlC9E81E.FA05B230]
AndrewS. Rosen
Chairman and CEO
Kaplan, Inc.
(954) 515-3888
www.kaplan.com
From:
Sent:
To:
Kanter, Martha
Tuesday, April 13, 201 o 5:43 PM
Weiss, Joanne
Subject: FYI : Kaplan, DeVry, EDMC Letter to Dep. Sec. Miller
Attachments: image003.jpg; ATT00001.htm; Kaplan, DeVry, EDMC Letter to Dep. Sec. Miller 4-12-10.pdf;
A TT00002.htm
Martha Kanter
Under Secretary
U.S. Department ofEducation
"The future belongs to those who believe in the beauty of their dreams I"
--Eleanor Roosevelt
Begin forwarded message:
From: "AndrewS. Rosen" <andrew.s.rosen@kaplan.com>
To: "Miller, Tony" <Tony.Miller@ed.gov>
Cc: "Kanter, Martha" <Martha.Kanter@ed.gov>, "Shireman, Bob" <Bob.Shireman@ed.gov>,
"Fine, Stephanie" <Stephanie.Fine@ed.gov>, "Rebecca Campoverde"
<Rebecca.Campoverde@kaplan.com>
Subject: Kaplan, DeVry, EDMC Letter to Dep. Sec. Miller
Dear Tony:
Attached, in advance of our meeting on Thursday, is a letter on behalf of Kaplan, DeVry and
Education Management Corp. in response to your request for suggestions regarding the issue of
excessive student debt. We look forward to discussing these and other issues when we meet.
Best regards,
Andy
[cid:image003.jpg@01C9E81E.FA05B230]
Andrew S. Rosen
Chairman and CEO
Kaplan, Inc.
(954) 515-3888
www.kaplan.com
2
Deputy Secretary
400 Maryland A venue, SW
Dear Secretary Miller:
April 12, 2010
Thank you for soliciting input on the Department of Education's (ED) proposed Gainful
Employment (GE) regulation at our recent meetings. We are writing on behalf of our
institutions (Kaplan, DeVry, and Education Management Corporation), which together offer
opportunities for over three hundred thousand students to attend college annually. We are
deeply committed to educating and preparing our students for the new jobs of the 21st century,
and to ensuring that our students receive high-quality, results-oriented education, without being
burdened by excessive debt.
We understand and support what you are trying to accomplish. We believe that together we
can flnd a solution that addresses student debt and simultaneously enables the Administration
to achieve its goals of expanding access to quality higher education, particularly among non-
traditional students. We believe both sets of goals are achievable.
We thought it would be most helpful to (a) describe the contribution of the private sector in
achieving the Administration's goals, (b) explain the impact of the latest GE proposal made
public, and (c) offer a constructive alternative to this GE proposal that would address the ED's
concerns without restricting students' access to college opportunities.
Quality Private Sector Colleges Play A Critical Role in Achieving Administration Goals
President Obama has said he wants America to have the highest percentage of college
graduates in the world by 2020. This goal will require educating millions of additional college
students at a cost of many billions of dollars and cannot be met without the participation of
quality private sector colleges like ours. The private sector currently educates some 2.7 million
students a year and has the resources to help alleviate the fmancial burden of achieving the
Administration's goal. Moreover, the private sector attracts more non-traditional students - a
critical requirement to increasing the number of college graduates.
Aprill2, 2010
Page2
Not only do private sector colleges attract more non-traditional students, but we also help them
graduate and achieve gainful employment at significantly higher rates. A recent report by The
Parthenon Group, using ED data for public and private two-year and less institutions, shows
that students at private sector colleges graduate at rates roughly 50 percent higher than public
schools. The study further shows that private sector college students achieve higher percentage
wage increases (54% vs. 36%) after completing their education.
1
The Current GE Proposal Would Dramatically Limit Students, College Opportunities
Kaplan, DeVry, and EDMC share the ED's goal of ensuring that students receive a quality
education and enter programs with a full understanding of the costs, without incurring
excessive debt. We would support regulation that appropriately addresses over-borrowing
while enabling high-quality institutions to continue their good work of building capacity and
innovation in higher education.
The GE criteria proposed by the ED at the end of the most recent Negotiated Rulemaking
session attempt to define "gainful employment" by establishing an 8 percent debt-service-to-
income threshold based on median student debt for college graduates. Income would be based
either on the Bureau of Labor Statistics (BLS) 25th percentile wage data, or actual earnings of
college graduates. Loan payments would be based on a 10-year repayment plan.
This proposal as written would have a number of unintended consequences. A recent study by
Mark Kantrowitz, a respected independent authority on financial aid, concludes:
"The 8% debt-service-to-income threshold is so strict that it would preclude for-profit
colleges from offering Bachelor's degree programs. It would also eliminate many
Associate 's degree programs at for-profit colleges. Even non-frofit colleges would find
it difficult to satisfy this standard if they were subjected to it. "
Kantrowitz further found that:
"The proposed use of Bureau of Labor Statistics wage data ... will disproportionately
harm minority and female students. "
3
Kantrowitz also points out that the proposed GE rule tasks institutions with a job without
providing the tools necessary to complete the job:
1
Parthenon Perspectives on Private Sector Post-Secondary Schools, February 24, 2010, by Robert Lytle, Roger
Brinner and Chris Ross; p. 8; Source: NCES BPS 2004-2006.
2
What is Gainful Employment? What Is Affordable Debt?, Mark Kantrowitz, March 1, 201 0, p. 1.
3
Ibid.
April 12,2010
Page 3
"The debt-service-to-income threshold effectively establishes borrowing limits based on
field of study and degree programs, but does not give colleges the controls needed to
enforce these limits. Current sub-regulatory guidance precludes colleges from
establishing lower loan limits. "
4
Another study conducted by Charles River Associates reaches similar conclusions, estimating
that 18 percent of private sector programs will be disqualified from participation in Title IV
programs and that this would impact one-third of private sector students. This means that
hundreds of thousands of entering students would be displaced annually from private sector
colleges.
5
By 2020, approximately 5.4 million students who otherwise would be on track to
attend college would be denied access by the proposed GE regulation.
6
Finally, the GE proposal would result in significant job loss among the hundreds of thousands
of faculty members, administrators, and staff who work in the private post-secondary sector,
and in non-degree programs in public sector and independent schools as well.
Students Will Be Protected by Transparent Cost and Debt Information.
We remain concerned that defining "gainful employment" by student debt levels is beyond
Congressional intent. We believe that the necessary data to both defme the problem and
support a sufficient and informed policy have not yet been compiled and analyzed. We are
certain there are numerous consequences of the GE proposal that are not currently
contemplated by the ED.
For these reasons, we propose that student debt concerns be addressed by mandating that all
institutions disclose to students the information students need to make informed decisions prior
to taking on student debt, as well as warn students about programs that fail to meet a minimum
debt-service-to-income ratio under a new student consumer "lemon law." Prospective students
who receive sufficient information at the time of enrollment are in the best position to make an
informed decision regarding whether or not to attend an institution. We believe the information
students need to make decisions concerning the appropriate amount of debt to incur for a given
program should be provided in a disclosure form to students.
The form would include: (a) the cost of the program of study, (b) a reasonable projection of
potential earnings in the students' chosen field upon graduation and throughout the life of their
employment in that field, (c) a reasonable estimate of the debt students typically incur to
complete their program, and (d) students' repayment plan options. A proposed disclosure form
4
Ibid. p. 2.
5
Report on Gainful Employment, Charles Rivers Associates, April2, 2010, prepared by Jonathan Guryan, PhD,
and Matthew Thompson, PhD, p. 38.
6
Executive Summary to Report on Gainful Employment, Charles Rivers Associates, April 2, 2010, prepared by
Jonathan Guryan, PhD, and Matthew Thompson, PhD, p. I.
April12, 2010
Page4
is attached as Appendix 1. The accuracy of the information contained in the disclosure form
would be ensured by the misrepresentation prohibition that received tentative agreement at the
last Negotiated Rulemaking session. The proposed misrepresentation prohibition provides,
among other things, that:
If the Secretary determines an institution has engaged in substantial misrepresentation,
the Secretary may revoke or limit that institution's participation in the Title IV
programs.
Misrepresentation is defined as any false, erroneous or misleading statement an
institution makes directly or indirectly to a student, prospective student, or any member
of the public, an accrediting agency, State agency, or the Secretary.
A misleading statement includes any statement that has the capacity, likelihood, or
tendency to deceive or confuse. The omission of information may also be interpreted as
a misrepresentation.
In addition to this disclosure, schools would be required to warn students prior to enrollment of
any program that fails to meet a debt-service-to-income ratio test. The debt-service-to-income
ratio would be based on the approach recently proposed by the ED, with appropriate
modifications discussed below. Institutions offering programs that fail the test would be
required to warn students in appropriate marketing materials, and in a written disclosure signed
by the student prior to enrollment, that (a) the program has failed a debt-service-to-income-
ratio test, and (b) student borrowers enrolling in the program should expect to have difficulty
meeting their repayment obligations upon graduation.
To ensure that the debt-service-to-income ratio is appropriately directed at identifying "outlier"
programs we propose that the ratio currently contained in the GE proposal be adjusted as
follows:
Formula applied to non-degree programs only.
)> Degree programs confer lifetime benefits that don't correlate easily to
specific job codes, such as higher lifetime earnings, higher income growth
rates, greater employability, better career advancement and job stability.
7
In
addition, degree holders tend to change jobs and pursue careers seemingly
unrelated to the degrees, but using the skills they developed in college.
Including degrees in the ratio definition would dramatically undervalue these
programs.
)> By applying the formula only to non-degree programs, both private and
public institutions are impacted in the same manner.
A debt-service-to-income threshold of 15 percent, based on median student debt for
college graduates, and assuming a current unsubsidized Stafford loan interest rate of
6.8% to calculate the annual repayment amount.
'Kantrowitz, pp. 20-21.
April 12,2010
Page 5
};;> The 15 percent debt-service-to-income threshold is referenced in the
Kantrowitz study as a well as a recent study published by the College
Board,
8
and is within the range generally used by personal financial
counseling professionals.
Income based either on the BLS 50th percentile wage data, or actual earnings of
graduates if the latter are higher than the BLS 50th percentile.
};;> The 50th percentile of the BLS wage data more accurately reflects the long-
term potential earnings of a graduate. Moreover, there is no reason to
assume that non-degree program graduates, regardless of their backgrounds,
would be unable to achieve average earnings.
Loan payments based on a 20-year repayment plan.
};;> The 20-year loan repayment plan is also referenced in the Kantrowitz study
and supported by the fact that borrowers are permitted to, and do, choose
repayment plans covering a period of up to 25 years.
Exclude prior school debt from the calculation and provide institutions the
regulatory ability to control student borrowing, thereby enabling compliance with
ratio and 90/ 1 0 requirements.
};;> Absent the regulatory ability to control student borrowing, the GE
calculation should be based only on direct cost of education.
Eliminate the ED pre-approval requirement for new programs.
};;> State regulatory bodies and accrediting agencies already require approval of
all new programs.
We also recommend that the ED consider alternative routes to compliance with the debt-
service-to-income ratio test, specifically by establishing: (1) target graduate cohort default rates
(GCDRs) (e.g., 12.5% GCDR on a two-year calculation; 15% on a three-year calculation), (2)
targets for actual post-graduation salaries that include a multiplier of 1.5x to recognize the fact
that lifetime earnings are significantly higher than BLS rates, and (3) thresholds for post-
graduate employment rates.
We believe that the proposal contained in this letter provides an innovative and effective way to
protect students from institutions that over promise and under deliver to students, thus leaving
students with too much debt and not enough return on investment.
8
How Much Debt Is Too Much, Sandy Baum and Saul Schwartz, The College Board, 2006, p. 12.
April 12,2010
Page6
We appreciate the opportunity to provide this input and we look forward to sitting down with
you soon to discuss these matters further.
Yours Truly,
Andrew S. Rosen
Chairman and CEO, Kaplan, Inc.
Daniel Hamburger
President and CEO, DeVry Inc.
Todd S. Nelson
CEO, Education Management Corporation
Enclosures
cc: The Honorable Martha J. Kanter
Mr. Robert Shireman
APPENDIX 1
INSTITUTIONAL DISCLOSURES RELATED TO EXPECTED EARNINGS AND DEBT
You have requested information about our _....;.A=c=co=u=n"'-'t=in"""'g.__ ___ program
Program Level: D Associates [g)Bachelors 0 Masters Ocertificate/Diploma
Here are some important disclosures for the award year ending June 30, 2010
During the year ended June 30, 2009 , 75.8 %of students enrolled in this program graduated or
continue to be actively enrolled at the institution while 24.2 % ceased enrollment.
Of the students who graduated, 88.6 % were employed in their field of study, or a related field,
within six months of graduation with an average annual salary of approximately$ 46,300 per year.
This academic program corresponds to the following Standard Occupational Classification (SOC)
codes as reported by the Bureau of Labor Statistics (BLS): 13-2011 . The weighted annual
salaries for these SOC codes at the 25th and 75th percentiles are $ 45,900 and $ 78,210 ,
respectively. For information related to salaries from these and other occupations, please visit
http://www.bls.gov/oes/current/oes_nat.htm.
The cost of this program of study for a student enrolled full-time and with no transfer credits is
$ 62,040 . The average annual tuition increase for the most recently concluded three years was
4.6 %
The average education loan debt of students incurred at this institution and who graduated from this
program during the prior award year was $ 33.100 . This amount includes $ 30,900 of federal
student loan debt and $ 2,200 of institutional loan debt. This does not include any debt incurred
while attending another institution. Additionally, 4.6 %of graduates obtained private student loans
from third parties.
If this average education loan debt was 100% federal loans with an average interest rate of 6.8% and
you chose to repay using a 10 year standard repayment term, the annual total of 12 monthly
payments would be $ 4,571.04 . If you chose to pay using a graduated repayment plan (over 10
years), the total of your first 12 monthly payments would be$ 3,138.60 . For more information
concerning repayment options on federal loans, please visit
https:/ /studentloans.gov/myDirectLoan/index.action.
The latest official Cohort Default Rate (FY07) from the US Department of Education indicates that
1.7 % of graduates in thi s program defaulted on their federal loans.
PLEASE NOTE THAT YOUR ACTUAL EXPERIENCE MAY BE DIFFERENT THAN THE AVERAGES AND
STATISTICS PRESENTED ABOVE.
From:
Sent:
To:
Subject:
From: Shireman, Bob
Arsenault, Leigh
Babyak, Stephanie; Glickman, Jane
FW: Press Question on Gainful Employment Gains
Sent: Tuesday, Aprill3, 2010 1:51PM
To: Hamilton, Justin; Arsenault, Leigh
Subject: Re: Press Question on Gainful Employment Gains
To: Arsenault, Leigh; Shireman, Bob
Sent: Tue Apr 13 12:40:48 2010
Subject: Press Question on Gainful Employment Gains
Bob,
------ Forwarded Message
From: Doug Lederman <doug.lederman@insidehighered.com>
Date: Tue, 13 Apr 2010 09:24:57 -0500
To: "Hamilton, Justin" <justin.hamilton@ed.gov>
Subject: Fwd: Signal Hill- Post-Secondary Education: Relief: Gainful Employment Gains Alternative Measure
Justin:
The analysts seem to be putting their own spin on information that they say they've gotten from OMB ... is there any
way to make sure that they're presenting this information accurately, etc.?
I'd love to get my hands on the document, or at least the portion related to gainful employment. If there's any way of
doing that, please let me know ...
Thanks,
Doug
---------- Forwarded message ----------
From: Trace A. Urdan <turdan@signalhill.com>
Date: Tue, Apr 13, 2010 at 7:20AM
Subject: Signal Hill- Post-Secondary Education: Relief: Gainful Employment Gains Alternative Measure
To: doug.lederman@insidehighered.com
Business Services - Education Services
Industry Update
April13, 2010 Relief: Gainful Employment Gains Alternative Measure
Trace Urdan
415.364.0365
turdan@signalhill.com
Our Call:
As anticipated, Department of Education {USDOE) draft regulations went to the
Office of Management & Budget (OMB) last Friday 4/9 for review prior to their
publication in the Federal Register --likely 5/15. A credible source close to
OMB tells us that while the 8% median debt/income measure, and the 90% student
loan repayment measures appear to be essentially unchanged from the terms
presented by the USDOE in January, a third alternative measure has been added.
This measure would allow programs with a graduation rate of 50% or better and
a subsequent job placement (in the relevant field) of 70% or better to qualify
out of the other two measures.
Though the devil will certainly be in the details, including how these items
are to be considered for students that are transferring credits and may be
already employed, the new measure effectively removes the significant threat
the rules had created for nationally-accredited degree programs with typically
high default rates. The new measure, in fact, seems to closely resemble rules
already imposed by national accrediting bodies. And while we might anticipate
that the terms could be stricter in USDOE's conception, they should be
eminently achievable with minimal disruption for all programs.
According to USDOE analysis, (in process of being reviewed by OMB,) the rules
themselves would only affect 6-8% of all for-profit programs, with culinary,
automotive tech, and nursing programs hardest hit. (We note that this seems
out of keeping with our knowledge of these programs as represented by
publicly-traded schools, but nevertheless appears to represent a conclusion
reached by USDOE.) Our contact indicated that the University of Phoenix
(NASDAQ: APOL; Buy) was not seen as affected at all in the USDOE analysis.
While we expect all post-secondary school stocks to benefit from the news, we
believe that the those names that had been most challenged by the existing
terms are likely to see the biggest benefit as a result of the change. These
include ITI Educational Services (NYSE: ESI; Buy), Corinthian Colleges
(NASDAQ: COCO; Buy), and Career Education (NASDAQ: CECO; Buy) which recently
heralded graduation rates comfortably above 50%. Though some individual
programs may still fail all three tests, we believe these are likely to be
isolated, rare and fixable.
We view this apparent concession as evidence of a desire by Secretary Duncan
to defuse what was promising to be an area of real contention, as evidenced by
House Republicans, members of the Congressional Black Caucus, and Senator
2
Lamar Alexander all calling out the Secretary on this issue. Secretary Duncan
needs, in our opinion, a diverse coalition of supporters to pass his signature
issue: K-12 education reform. Because the Secretary's K-12 proposals do not
easily fall within typical party boundaries, he really does need a bipartisan
coalition in both the House and Senate education committees to pass his
version of ESEA {NCLB). No concession at all would have kicked off a loud and
publicized summer of public commentary. Because it is very difficult to argue
that a 50% graduation rate and a 70% employment rate is an onerous burden, we
think USDOE has effectively neutered the campaign to ditch the rule entirely.
We still expect industry to challenge the rule in public and likely later in
court, but based on our reliable source, we believe investors need no longer
fear that significant revenues could be at risk in the event that the rules
are passed.
Please see end of this report for important disclosure(s)
Investment Analysis:
I, Trace Urdan, hereby certify that all of the views expressed in this
research report accurately reflect 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 research report. Signal Hill does not compensate its
equity research analysts based on specific investment banking transactions.
Signal Hill Equity research analysts receive compensation based on several
factors, including overall profitability and revenues of the firm, which
include investment banking revenues.
Meaning of Ratings
Signal Hill uses a three-tiered rating system defined as follows:
BUY: We expect this stock to outperform its peers over the next 12 months:
HOLD: We expect this stock to perform in line with its peers over the next 12
months:
SELL: We expect this stock to underperform its peers over the next 12 months:
Distribution of Ratings/IB Services
Signal Hill
IB Serv./Past 12 Mos.
Rating Count Percent Count
BUY{BUY) 77 61.6 72
HOLD(HOLD) 47 37.6 38
SELL{SELL) 1 0.8 1
Disclaimer
Percent
93.5
80.9
100.0
This report has been prepared using sources we deem to be reliable but we do
not guarantee its accuracy and it does not purport to be complete. This
report is published solely for information purposes and is not intended to be
used as the primary basis for making investment decisions, which should
reflect the investment objectives and financial situation of the investor.
3
The opinions expressed herein are subject to change without notice. This
report is not an offer or the solicitation of an offer to buy or sell
securities. Additional i nformation is available upon request.
Doug Lederman
Editor, Inside Higher Ed
http://insidehighered. com
doug.lederman@insidehighered.com
1320 18th Street, N.W., Fifth Floor
work: 202.659.9208, ext. 100
fax: 202.659.9381
cell : l l f i l i ~ = = : : : J
Join the new conversation in higher education.
Sign up for your f ree daily e-mail news alert at http://insidehighered.com/sign up
------ End of Forwarded Message
4
Sent:
To:
Shireman, Bob; Arsenault, Leigh
Roger
Justin Hamilton
Press Secretary
c: 202-591-6734
From: Shireman, Bob
To: Hamilton, Justin; Arsenault, Leigh
Sent: Tue Apr 13 12:51:20 2010
To: Arsenault, Leigh; Shireman, Bob
Sent: Tue Apr 13 12:40:48 2010
Bob,
Date: Tue, 13 Apr 2010 09:24:57 -0500
Justin:
Thanks,
Doug
5
Subject: Signal Hill - Post-Secondary Education: Relief: Gainful Employment Gains Alternative Measure
Industry Update
Trace Urdan
415.364.0365
Our Call:
publication in the Federal Register --likely 5/15. A credible source close to
high default rates. The new measure, in fact, seems to closely resemble rules
include ITI Educational Services (NYSE: ESI; Buy), Corinthian Colleges
6
version of ESEA (NCLB). No concession at all would have kicked off a loud and
are passed.
Meaning of Ratings
months:
Signal Hill
Rating Count Percent Count Percent
BUY(BUY) 77 61.6 72 93.5
HOLD(HOLD) 47 37.6 38 80.9
SELL(SELL) 1 0.8 1 100.0
7
Disclaimer
This report has been prepared using sources we deem to be reliabl e but we do
report is published solely for i nformation purposes and is not i ntended to be
used as the primary basis for maki ng i nvestment decisions, which should
reflect the i nvestment objectives and f inancial situation of the investor.
The opi nions expressed herein are subject to change without notice. This
securities. Additional i nformat ion is available upon request.
Doug Lederman
http://i nsidehighered. com
work: 202.659.9208, ext. 100
fax: 202.659.9381
cell:....,......., ___ .....
Sign up for your free daily e-mail news alert at http://insidehighered.com/sign up
8
From: Arsenault, Leigh
Sent:
To:
Glickman, Jane; Babyak, Stephanie
Subject:
Attachments:
FW: Press Question on Gainful Employment Gains
Post-Secondary_Education-201 00413.pdf
Office of the Under Secretary
leigh .a rse na u It @ed .gov
From: Hamilton/ Justin
Sent: Tuesday/ Aprill3
1
2010 1:41PM
To: Arsenault, Leigh; Shireman/ Bob
Bob,
Date: Tue, 13 Apr 2010 09:24:57 -0500
Justin:
Thanks
1
Doug
Subject: Signal Hill - Post-Secondary Education: Relief: Gainful Employment Gains Alternative Measure
9
Industry Update
Trace Urdan
415.364.0365
Our Call:
publication in the Federal Register-- likely 5/15. A credible source close to
high def ault rates. The new measure, in fact, seems to closely resemble rules
include ITT Educational Services (NYSE: ESI; Buy), Corinthian Colleges
10
version of ESEA (NCLB). No concession at all would have kicked off a loud and
are passed.
Meaning of Ratings
months:
Signal Hill
Rating Count Percent Count
BUY(BUY) 77 61.6 72
HOLD(HOLD) 47 37.6 38
SELL(SELL) 1 0.8 1
Disclaimer
Percent
93.5
80.9
100.0
This report has been prepared using sources we deem to be reliable but we do
report is published solely for information purposes and is not intended to be
used as the primary basis for making investment decisions, which should
reflect the investment objectives and financial situation of the investor.
The opinions expressed herein are subject to change without notice. This
securities. Additional information is available upon request.
11
Doug Lederman
http://insidehighered.com
work: 202.659.9208, ext. 100
fax: 202.659.9381
Sign up for your free daily e-mail news alert at http://insidehighered.com/sign up
12
April 13, 2010
Trace Urdan
415.364.0365
Signal Hilill
Industry Update
Relief: Gainful Employment Gains Alternative Measure
Our Call:
As anticipated, Department of Education (USDOE) draft regulations went to the Office of
Management & Budget (OMB) last Friday 4/9 for review prior to their publication in the Federal
Register -- likely 5/15. A credible source close to OMB tells us that while the 8% median
debt/income measure, and the 90% student loan repayment measures appear to be essentially
unchanged from the terms presented by the USDOE in January, a third alternative measure has
been added. This measure would allow programs with a graduation rate of 50% or better and a
subsequent job placement (in the relevant field) of 70% or better to qualify out of the other two
measures.
Though the devil will certainly be in the details, including how these items are to be considered
for students that are transferring credits and may be already employed, the new measure
effectively removes the significant threat the rules had created for nationally-accredited degree
programs with typically high default rates. The new measure, in fact, seems to closely resemble
rules already imposed by national accrediting bodies. And while we might anticipate that the
terms could be stricter in USDOE's conception, they should be eminently achievable with
minimal disruption for all programs.
According to USDOE analysis, (in process of being reviewed by OMB,) the rules themselves
would only affect 6-8% of all for-profit programs, with culinary, automotive tech, and nursing
programs hardest hit. (We note that this seems out of keeping with our knowledge of these
programs as represented by publicly-traded schools, but nevertheless appears to represent a
conclusion reached by USDOE.) Our contact indicated that the University of Phoenix (NASDAQ:
APOL; Buy) was not seen as affected at all in the USDOE analysis.
While we expect all post-secondary school stocks to benefit from the news, we believe that the
those names that had been most challenged by the existing terms are likely to see the biggest
benefit as a result of the change. These include ITT Educational Services (NYSE: ESI ; Buy) ,
Corinthian Colleges (NASDAQ: COCO; Buy), and Career Education (NASDAQ: CECO; Buy)
which recently heralded graduation rates comfortably above 50%. Though some individual
programs may still fail all three tests, we believe these are likely to be isolated, rare and fixable.
We view this apparent concession as evidence of a desire by Secretary Duncan to defuse what
was promising to be an area of real contention, as evidenced by House Republicans, members
of the Congressional Black Caucus, and Senator Lamar Alexander all calling out the Secretary
on this issue. Secretary Duncan needs, in our opinion, a diverse coalition of supporters to pass
his signature issue: K-12 education reform. Because the Secretary's K-12 proposals do not
easily fall within typical party boundaries, he really does need a bipartisan coalition in both the
House and Senate education committees to pass his version of ESEA (NCLB) . No concession
at all would have kicked off a loud and publicized summer of public commentary. Because it is
very difficult to argue that a 50% graduation rate and a 70% employment rate is an onerous
burden, we think USDOE has effectively neutered the campaign to ditch the rule entirely.
We still expect industry to challenge the rule in public and likely later in court, but based on our
reli able source, we believe investors need no longer fear that significant revenues could be at
risk in the event that the rules are passed.
Please see important disclosure information on page 2 of this report.
April 13, 201 o
I, Trace Urdan, hereby certify that all of the views expressed in this research report accurately reflect 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 research
report.Signal Hill does not compensate its equity research analysts based on specific investment banking
transactions. Signal Hill Equity research analysts receive compensation based on several factors, including
overall profitability and revenues of the firm, which include investment banking revenues.
Meaning of Ratings
HOLD: We expect this stock to perform in line with its peers over the next 12 months:
Rating
BUY
HOLD
SELL
Disclaimer
Distribution of Ratings/IS Services
Signal Hill
Count
77
47
1
Percent
61.6
37.6
0.8
18 Serv./Past 12 Mos.
Count
72
38
Percent
93.5
80.9
100.0
This report has been prepared using sources we deem to be reliable but we do not guarantee its accuracy and
it does not purport to be complete. This report is published solely for information purposes and is not intended
to be used as the primary basis for making investment decisions, which should reflect the investment objectives
and financial situation of the investor: The opinions expressed herein are subject to change without notice. This
report is not an offer or the solicitation of an offer to buy or sell securities. Additional information is available
upon request.
Post-Secondary Education 2
From:
Sent:
To:
Cc:
Subject:
Attachments:
Yuan, Georgia
Friday, April 09, 2010 8:50AM
Fine, Stephanie; Shireman, Bob
Arsenault, Leigh
RE: meeting request
Taxes Support for Profits Bloomburg March 4 2010.doc
Bob - Charlie and I already met with Nancy and with her client Bridgepoint. I don' t know if anyone else has already met with
ITT. A reminder the attached article is very critical of ITT' s takeover of Daniel Webster in NH, and of course you are quoted in
it.
Nancy asked me to go to a luncheon of higher ed l awyers who represent for-profits, mostly. I was scheduled to attend next
Wednesday, but something el se came up and I had to cancel.
She had done the same for Charlie when he was ' new' .
Georgia
From: Fine, Stephanie
To: Shireman, Bob
Cc: Yuan, Georgia; Arsenault, Leigh
Subject: FW: meeting request
Bob,
Tony asked if you could please follow up with her.
Since she' s a lobbyist, he doesn't want this to be part of the meeting on the 15 tn.
Thanks so much,
Stephanie
From: Broff, Nancy [mailto:BroffN@DicksteinShapiro.COMJ
To: Fine, Stephanie
Subject: meeting request
Hello Stephanie -
I represent two publicly traded higher education companies - ITT Educational Services, Inc. and Bridge point Education,
Inc.
ITT operates more than 120 ITT Technical Institutes. ITT/ESI serves approximately 80,000 students at its campuses in 38
states and online, providing associates, bachelors, and masters degree programs in technology-oriented fields through six
schools of study: the School of Information Technology, the School of Electronics Technology, the School of Drafting and
Design, the School of Business, the School of Criminal Justice and the School of Health Sciences. Most ITT Technical
Institute programs of study blend traditional academic content with applied learning concepts. Advisory committees,
comprised of representatives of local businesses and employers, help each ITT Technical Institute periodically assess
and update curricula, equipment and laboratory design. In addition, ITT/ESI has a regionally accredited institution, Daniel
Webster College in Nashua New Hampshire.
Bridgepoint has two regionally-accredited institutions. Ashford University has a traditional campus in Clinton Iowa (sports
teams and all) with a broad range of undergraduate and graduate programs. Most of its 53,000 students are online but
like having the connection to the heritage of a traditional campus. University of the Rockies is a focused institution with
graduate programs in the field of psychology.
On behalf of both clients, I would like to meet with Tony to discuss concerns about the Department's proposal to define
the term "gainful employment" through the regulatory process. I was involved in the recent negotiated rulemaking as one
of the team supporting the for-profit institutions' negotiator, and have been working closely with CCA and many in the field
in the time since, so I am very familiar with the issue. I know Tony is very busy, but this issue is of critical importance to
my clients, and we would appreciate a bit of his time.
Thank you for your assistance,
Nancy Broff
Counsel
Dickstein Shapiro LLP
1825 Eye Street NW I Washington, DC 20006
Tel (202) 420-35261 Fax (202) 379-9224
broffn@dicksteinshapiro.com
IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any
tax advice contained in this communication (including any attachments) was not intended or written to be used, and
cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or
recommending to another party any transaction or matter addressed herein.
This e-mail message and any attached fi l es are confidential and are intended sol ely for
the use of the addressee(s)
named above . Thi s communication may contain materi al protected by attorney-cli ent , work
product , or other
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communication to the intended recipi ent , you have received thi s communication in error,
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2
Your Taxes Support For-Profits as They Buy Colleges {Update3)
By Daniel Golden
http://www.bloomberq.com/apps/news?pid=newsarchive&sid=aBwhXr103MHk
March 4 (Bloomberg) -- ITT Educational Services Inc. paid $20.8 million for debt-
ridden Daniel Webster College in June. In return, the company obtained an
academic credential that may generate a taxpayer-funded bonanza worth as much
as $1 billion.
ITT Educational, the U.S.'s third-biggest higher education company with a market
value of $3.8 billion, may increase it by 26 percent, or $1 billion, within five years
because of the purchase of 1,200-student Daniel Webster in Nashua, New
Hampshire, according to Michael Clifford, an investor in Del Mar, California, who has
participated in the acquisitions of four nonprofit colleges. At least 75 percent of new
revenue would come from access to the more than $100 billion a year in financial
aid the U.S. hands out to college students, he said.
Key to tapping that money is Webster's regional accreditation, which is the same
gold standard of academic quality enjoyed by Harvard University and helps
students transfer course credits from one college to another. Daniel Webster's
accreditation was its "most attractive" feature to ITT Educational, said Michael
Goldstein, an attorney at Dow Lohnes, a Washington law firm that has represented
the company.
"Companies are buying accreditation," said Kevin Kinser, an associate professor at
the State University of New York at Albany, who studies for-profit higher education.
"You can get accreditation a lot of ways, but all of the others take time. They don't
have time. They want to boost enrollment 100 percent in two years."
Exploiting Loopholes
The nation's for-profit higher education companies have tripled enrollment to 1.4
million students and revenue to $26 billion in the past decade, in part through the
recruitment of low-income students and active-duty military. Now they're taking a
new tack in their quest to expand. By exploiting loopholes in government regulation
and an accreditation system that wasn't designed to evaluate for-profit takeovers,
they're acquiring struggling nonprofit and religious colleges -- and their coveted
accreditation. Typically, the goal is to transform the schools into online behemoths
at taxpayer expense.
For-profit education companies, including ITT Educational Services, based in
Carmel, Indiana, and Laureate Education Inc., in Baltimore, have purchased at least
16 nonprofit colleges with regional accreditation since 2004, according to corporate
announcements and filings with the U.S. Securities and Exchange Commission. Jack
Welch, the former chief executive of General Electric Co., and Michael Milken, the
U.S. junk bond pioneer, have invested in for-profit companies that bought or
formed partnerships with nonprofit, regionally accredited schools.
Academic Status
By acquiring regional accreditation, trade and online colleges gain a credential
usually associated with the traditional academic culture of liberal arts, faculty
scholarship and selective admissions. Normally the accreditation process takes
about five years and requires evaluations by outside professors. The regional bodies
examine financial stability, academic rigor and commitment to "teaching, learning,
service and according to the Web site of the Commission on
Institutions of Higher Education, which accredits colleges in New England.
Enrollment at Grand Canyon University, a Christian college in Phoenix bought by
investors in 2004, has soared to 37,700, as of Dec. 31, up from 1,500, said Brian
Mueller, chief executive of Grand Canyon Education Inc. Ninety-two percent of
students now take classes online, according to the company's most recent 10-K.
Bridgepoint Education Inc., based in San Diego, has boosted enrollment of two
regionally accredited colleges it bought in 2005 and 2007 to 53,688 students as of
Dec. 31, up from 400 combined, according to a company filing. Ninety-nine percent
of those students take courses exclusively online.
Growth Potential
Daniel Webster "could parallel Grand Canyon or Bridgepoint's growth said
Clifford, who was part of the investor group that purchased Grand Canyon.
ITT Educational rose two cents, or less than one percent, to $109.80 at 4:15 p.m.
today in Nasdaq stock market trading. The company rose 2.5 percent in the 12
months ended today.
ITT Educational declined to comment for this story. The company plans to open
more Daniel Webster campuses and also expand online offerings, Kevin Modany,
ITT Educational's chairman and chief executive officer, said in a Feb. 22
presentation to analysts. The company expects to introduce programs including
accounting, education and health sciences, he said.
Daniel Webster will attract more students "a little on the higher endl/ in income
whose tuition would be paid by private employers rather than federal financial aid,
Modany said.
New Regulations
The U.S. Department of Education, which doled out $129 billion in federal financial
aid to students at accredited postsecondary schools in the year ended Sept. 30, is
examining whether these kinds of acquisitions circumvent a federal law that new
for-profit colleges cant qualify for assistance for two years, Deputy Undersecretary
of Education Robert Shireman said in a telephone interview.
Under federal regulations taking effect July 1, accrediting bodies may also have to
notify the secretary of education if enrollment at a college with online courses
increases more than 50 percent in one year.
"It's an area that we are watching Shireman said. "It certainly has been a
challenge both for accreditors and the Department of Education to keep up with the
new creative arrangements that have been developing."
Immediate Benefits
Buying accreditation lets the new owners benefit immediately from federal student
aid, which provides more than 80 percent of revenue for some for-profit colleges,
instead of having to wait at least two years. Traditional colleges are also more
inclined to offer transfer credits for courses taken at regionally approved
institutions, making it easier to attract students nationwide.
The six nonprofit regional accrediting bodies, which rely on academic volunteers,
bestow the valuable credential with scant scrutiny of the buyers' backgrounds,
Barmak Nassirian, associate executive director of the American Association of
Collegiate Registrars & Admissions Officers in Washington, said in a telephone
interview.
While accrediting bodies treat these purchases as changes of ownership, the
acquisitions, in reality, create new colleges that should be required to earn
certification from scratch, Kinser said.
Maintain Mission
For accreditation to continue once the college is sold, the buyer must promise not
to change its mission, Steven Crow, former executive director of the Chicago-based
Higher Learning Commission, the largest regional body, said in a telephone
interview. Once accreditation is maintained, the acquirer seeks permission, which is
usually granted, to start branch campuses and online programs, Crow said.
"You knew by month six they would come back to you with a new game plan," said
Crow, now a consultant to publicly traded Corinthian Colleges Inc., based in Santa
Ana, California. It acquired regionally accredited San Francisco-based Heald College
on Jan. 4.
Obama administration officials have recently questioned whether the accreditation
system is effective in protecting academic standards. Accrediting decisions lack
transparency and take too long, Undersecretary of Education Martha Kanter said in
a Jan. 26 speech in Washington to the annual meeting of the Council for Higher
Education Accreditation.
Considering Termination
The inspector general of the Education Department in December urged the agency
to consider terminating recognition of the Higher Learning Commission, which has
approved more for- profit colleges than its counterparts around the country.
The inspector general criticized the commission's decision to accredit Career
Education Corp.'s online American Intercontinental University, citing concerns about
how much time students spent in class. The approval was appropriate, the
commission and Hoffman Estates, Illinois-based Career Education said.
More vigilance by the Education Department and accrediting groups is likely to slow
enrollment growth and the share prices of higher education companies that rely on
acquisitions, said Clifford. While publicly held postsecondary education companies
rose 29.9 percent in the 12 months ended March 3, they lagged behind the S&P
500, which increased 60.7 percent over the same period, said Jeffrey Silber, an
analyst for BMO Capital Markets in New York. The shortfall reflected investors' fears
of tighter federal regulation of for-profit colleges, Silber said.
Accreditation's Worth
Regional accreditation is worth $10 million to a for-profit acquirer, Cl ifford said in a
telephone interview. That's how much it would cost to start a regionally accredited
college, a process that can take 10 years and has only a 50-50 chance of success,
he said. On top of the $10 mill ion, buyers typically pay $23,000 to $50,000 per
enrolled student, making the purchase of Daniel Webster a bargain, Clifford said.
Clifford and his fellow investors popularized the strategy of acquiring nonprofit
colleges with regional accreditation by purchasing Grand Canyon University in 2004
and building online enrollment.
Grand Canyon "is the same institution," Mueller said in an e-mail. "It was important
to the new leadership group that the mission of providing a high-quality Christian-
based education remain intact."
Grand Canyon, which went public in November 2008, derived 83 percent of its
revenue from federal financial aid in 2009, according to a company filing.
Bridgepoint, Ashford
Bridgepoint Education bought the regionally accredited Franciscan University of the
Prairies in 2005 and Colorado School of Professional Psychology in 2007. It
renamed them Ashford University and University of the Rockies, respectively, and
refocused them online. Ashford gained 86 percent of its revenue from federal
student aid in 2009 and University of the Rockies got 85 percent, according to a 10-
K fil ing by Bridgepoint, which went publ ic in April.
"There are several meaningful continuities" from the colleges before they were
acquired, including campus athletic and social events, Shari Rodriguez, a
Bridgepoint spokeswoman, wrote in an e-mail.
Clifford participated in the 2008 purchase of Myers University in Cleveland, which
was renamed Chancellor University. Chancellor attracted Welch as an investor last
year and named its new online management institute after him. Welch collaborated
with faculty in developing curricula for a master's program in business
administration, Cl ifford said.
'Something New'
"We chose to work with Chancellor University because it gave us the flexibil ity to
start something new," Welch said through a spokeswoman, Betsy Linaberger. "As a
for-profit venture, we have the resources to invest in the student experience and
the very best faculty, and we want to provide a high quality business education."
Knowledge Universe Learning Group, chaired by Milken, entered into a partnership
in 2007 with regionally accredited Sierra Nevada College in Incline Village, Nevada,
agreeing to provide as much as $15 million in return for an opportunity to share in
onl ine revenue, Geoffrey Moore, a senior adviser to Milken, said in an e-mail. The
company is a unit of Santa Monica, California-based Knowledge Universe Inc., of
which Milken is co-founder and chairman. Knowledge Universe Learning Group has
three seats on the nonprofit college's nine-member board, Moore said.
'Existing Character'
"This partnership preserved the existing character of Sierra Nevada College," he
said. "That was important to us and the college."
A 2006 regulatory change fostered online growth and made takeovers more
attractive, said Silber, the BMO analyst. That year, Congress eliminated a rule
prohibiting colleges that offered more than half of their courses online from
receiving federal financial aid.
ITT Educational Services Inc. didn't buy Daniel Webster just for its 52-acre red-
brick campus and science and technology programs including training pilots and air
traffic controllers.
"Regional accreditation was very important" to the company, said Goldstein, co-
leader of the higher education practice at Dow Lohnes. "I don't think there's any
question that was the most attractive element."
Of the $20.8 million purchase price, $20.6 mi ll ion went to pay off the college's debt,
according to an ITT Educational 10-Q filing.
Making Changes
ITT Educational Services, which was spun off from ITT Corp. in the 1990s, wasted
no time making changes at Daniel Webster. It renovated a main building and razed
a dilapidated dormitory. It also dismissed one fourth of the staff, fired President
Robert Myers, and has been accused by faculty members of misleading the New
England accreditor, the Commission on Institutions of Higher Education, based in
Bedford, Massachusetts.
"ITT didn't really have much interest in anything other than having acquired a
regionally accredited institution," said Myers, now president of the New England
Culinary Institute in Montpelier, Vermont. "If I had it to do all over again, I wouldn't
have gone anywhere near ITT. The fundamental nature of the college has
changed."
"We're making fantastic progress with the cultural assimilation" of Daniel Webster,
Modany said in a Jan. 21 call with analysts. "Things are going really well there,
great group of staff and faculty, and everybody is getting on board."
'Something Different'
Barbara Brittingham, director of the Commission on Institutions of Higher
Education, declined to comment on its approval of the Daniel Webster sale.
In general, "when these institutions are bought, they are not at the moment
successful in the financial sense or they wouldn't be for sale," Brittingham said.
"There's an understanding that whoever buys them is going to want to do
something different."
Accreditation is higher education's way of regulating itself. The nonprofit
associations set standards on financial stability, governance, faculty and academic
programs and use volunteers from college presidents to professors to assess
quality. It is a peer review system: a marketing professor is more likely than a poet
to evaluate a business school.
For more than a century, regional organizations have evaluated most publ ic and
private universities. Starting in the 1950s, leaders of for-profit colleges, which were
then ineligible for regional approval, established seven national accrediting bodies
for career education and training. The regions dropped their for-profit ban in the
1960s.
Cachet, Credits
Apollo Group Inc.'s University of Phoenix, whose enrollment of 455,600 makes it
the nation's second-largest university behind the State University of New York
system, is accredited by a regional body, the Higher Learning Commission.
Students enrolled at both regionally and nationally accredited colleges can receive
federal grants and loans.
Regional accreditation is important to for-profit colleges because students are
attracted to its cachet and can t ransfer course credits more easily. Only 14 percent
of nonprofit universities accept credits t ransferred from nationally certified schools,
according to a 2006 study by the University Continuing Education Association, in
Washington.
The six regional associations scrutinize takeovers of nonprofit colleges in advance,
and then follow up afterward, accrediting officials said in telephone interviews. They
could cite few, if any, cases in which they refused to continue accreditation, they
said.
Heald Purchase
Corinthian Colleges' past difficulties with California state regulators didn't matter to
accreditors when it purchased Heald Capital LLC, parent company of Heald College,
for $395 mill ion. Corinthian, the country's seventh-largest higher education
company by market value, has more than 100 campuses in North America, and had
106,052 students as of Dec. 31, including Heald, said Anna Marie Dunlap, a
Corinthian spokeswoman.
Corinthian paid a $6.5 million settlement in July 2007 to the California attorney
general's office, over allegedly misrepresenting graduates' job placement rates and
salaries. It also agreed to cease enrolling students in 11 programs at nine
campuses. The Santa Ana, California-based Corinthian said in a 10-K fil ing that it
didn't admit wrongdoing.
"We strongly disagreed with the Attorney General's conclusions, but we are pleased
to have settled the matter /' Dunlap said in an e-mail.
Exclusively Online
Regionally accredited Heald College had 11 campuses with 12,900 students,
primarily in two-year health-care and business programs, as of Dec. 31. The college
was nonprofit before its purchase in 2007 by Palm Ventures LLC, a Greenwich,
Connecticut, investment company. Heald expects to start enrolling exclusively
online students this year, Corinthian Chief Executive Peter Waller wrote in an e-
mail.
The Accrediting Commission for Community & Junior Colleges in Novato, California,
which certifies two-year institutions in California and Hawaii, approved the change
in Heald's ownership.
"We judge the college we accredit," said Barbara Beno, president of the
commission. "It would be unfair to say, 'Heald, you've been bought by a parent
corporation that doesn't have as fine a track record as you do. Therefore, we'll
condemn you,"' she said in a telephone interview.
Heald will "continue to meet ACCJC's accreditation standards and eligibility
requirements," Waller said.
The scrutiny "doesn't remotely satisfy the sloppiest of due-diligence requirements,"
said Nassirian of the American Association of Collegiate Registrars & Admissions
Officers. "There is no methodical review of who has bought the college. If the Cosa
Nostra applied, you would think you'd take a look."
'Same Animal'
The nation's biggest regional accreditor is starting to take a closer look. The Higher
Learning Commission, which certifies more than 1,000 colleges from Arkansas to
Wisconsin, stiffened its rules on ownership changes last year.
Buyers must wait from one to four years to reapply for accreditation if the college
won't stay "the same animal," President Sylvia Manning said in a telephone
interview. The commission now charges $10,000 for ownership changes to pay for
more extensive research. New owners must be approved by its board, rather than
at the staff level, Manning said.
The commission applied its newfound rigor to Mayes Education Inc.'s purchase of
Waldorf College in Forest City, Iowa, putting the brakes on online expansion. A
subsidiary of online privately held Columbia Southern University in Orange Beach,
Alabama, Mayes agreed in May to buy the assets of Waldorf, an Evangelical
Lutheran college with 500 students, for an undisclosed sum. The deal closed on
Jan. 8.
Approval Condition
As a condition of approval, the commission stipulated that Waldorf can't offer
online-only degrees at least until 2011- 2012. Mayes Education plans to boost
Waldorf's enrollment to 2,300 students in three years through programs combining
online classes with face-to-face instruction at temporary sites around the country,
Jessica Brown, a spokeswoman for Columbia Southern, said in a telephone
interview.
The sale "barely made it through" the commission, former Waldorf president
Richard Hanson said in a telephone interview.
"Columbia Southern wanted to ramp up the online program quickly. The
commissioners said, 'If we maintain accreditation, Waldorf has to remain the
college we know."'
Columbia Southern wasn't the only for-profit that expressed interest in buying
Waldorf, Hanson said. Another company that lacked regional accreditation also
contacted him: ITT Educational Services.
ITT Educational, runs 120 nationally accredited technical institutes with 80,000
students, most of whom pursue associate degrees.
Graduation Rate
The cost of attending an ITT Technical Institute, including tuition, fees and off-
campus room and board, was $26,775 in 2008-09, according to the National Center
for Education Statistics. Of students who entered ITT's two-year schools in 2004, 29
percent graduated. ITT derived 70 percent of its 2009 revenue from federal
financial aid, according to a company filing.
ITT Educational is in the preliminary stages of seeking regional accreditation for its
technical institutes through the Higher Learning Commission, which sent a team to
visit the company in late 2009, a commission spokeswoman, Susan Van Kollenburg,
said in an e-mail. The commission hasn't acted on this evaluation, she said.
Daniel Webster is ITT Educational's first regionally accredited campus. Founded in
1965 as the New England Aeronautical Institute, the college is tucked beside
Nashua's municipal airport, and keeps its fleet of Pipers and Cessnas there. The
campus includes an aviation center, a library, an administration building,
classrooms, dormitories, and a student center called the Common Thread.
'Good Reputation'
Over the years, the college expanded from flight instruction into training air traffic
controllers and airline managers, as well as teaching computer science,
engineering, and business.
It has "a longstanding good reputation/' said Gary Kiteley, executive director of the
Aviation Accreditation Board International in Auburn, Alabama, which l icenses the
college's aviation programs.
Financially, Daniel Webster never enjoyed a cushion. With an endowment that
peaked at about $3 million in 2008, it rel ied on tuition revenue, Myers said. The
airline industry's decline after 9/11 and the collapse of Internet stocks hurt
enrollment in aviation and computer science, said former provost Michael Fishbein,
who said he suffered a heart attack from the stress of keeping the college alive.
Red Ink
Just as trustees reached consensus on a strategic plan in 2008, fuel costs
skyrocketed, and "we were running red ink again," Rodney Conard, the former
chairman of the board, said in a telephone interview.
The Commission on Institutions of Higher Education and the U.S. Department of
Education expressed concerns that Daniel Webster didn't meet their financial
standards, placing its accreditation and eligibility for federal aid in jeopardy,
according to a filing last April 23, by the college in a New Hampshire court.
ITT Educational contacted Myers in December 2008, he said. Modany visited Daniel
Webster the next month, and the parties reached agreement in April. The
acquisition would enable the company to target a more upscale audience, Modany
told Wall Street analysts on April 23.
While ITT Educational's institutes drew unskilled "career changers," the regionally
accredited college would appeal to "career advancers" seeking to enhance their
capabilities, Modany said.
The Commission on Institutions of Higher Education approved the sale that same
month.
'Public Interest'
"It's in the public interest to have these small institutions continue to function," said
Bruce Mallory, a commission member and education professor at the University of
New Hampshire in Durham. "If a proprietary school can come in, continue to
provide the same level of education and assure viability, that's all for the better."
Modany promised to leave Daniel Webster's administrators in charge because they
were experts in running a four-year residential college, Myers and Fishbein said. At
a campus event introducing the ITT Educational chief executive to the college
community, Modany said the company was growing and there would be ample job
opportunities, said Myers.
Growing Suspicions
As Myers negotiated the sale, he came to suspect that the company wasn't being
forthright about its intentions, he said. When he and Conard, who chaired the
college's board of trustees, worked out at a YMCA a week before the June closing,
they discussed canceling the deal, Myers said. Only after consulting colleagues did
they decide to go through with it, he said.
"We had lots of conversations when it was on the table," said Conard, a
management consultant. "Should we take it? We didn't have to take it. There was a
point where we real ized, they were going to be more businesslike about it. It didn't
feel as comfy as we were hoping."
Going through with the sale was the right decision, Conard said.
"ITT is in this for the long haul, and I'm very comfortable with where they plan to
take Daniel Webster," Conard said.
Another former trustee, Cathy Trower, went along with the sale as a last resort to
save the college and honor commitments to students, she said.
"A for-profit should not be able to buy accreditation," Trower, a research director at
Harvard University's Graduate School of Education in Cambridge, Massachusetts,
said in a telephone interview. "To me, that's almost like buying a degree and not
actually earning it."
Duplicating Functions
In July, ITT Educational dismissed more than 20 Daniel Webster employees, Myers
said. It believed they were duplicating functions that the company's corporate
offices in Indiana could provide, two people familiar with the company's thinking
said. ITT Educational also replaced Conard, Trower and the other trustees.
Appointees to the college's new board included Charles Cook, former director of the
Commission on Institutions of Higher Education, which accredits Daniel Webster.
Cook soon resigned because of a potential conflict of interest with his position as a
director of Corinthian's Heald College, he said in a telephone interview.
"I was never substantively involved with Daniel Webster/' Cook said.
Questioning Changes
At the time of the firings, Myers was circulating a draft report questioning whether
some of ITT Educational's changes were in accord with the standards of the
accreditation commission, which call for a faculty role in curriculum and
governance, he said.
"ITT came in and said, 'We only want faculty to teach, "' Myers said. "We'll develop
curricula in Carmel, Indiana, and give them to you."
On August 5, ITT Educational ousted him, Myers said. Nadine Dowling, director of
the Woburn, Massachusetts, campus of ITT Tech, became interim president.
In an unusual move in credential-conscious academia, ITT Educational also named
an assistant professor without an advanced degree to a deanship. When Triant
Flouris, who has a doctorate and has written four books, resigned as dean of
aviation sciences, he was replaced by David Price, who only has a bachelor's
degree.
Price is weeks away from completing a master's degree at Daniel Webster, and will
enroll in a doctoral program in the coming academic year at President Dowling's
request, he said in a telephone interview. "ITT has continued the strong emphasis
we've always had on getting a higher degree," he said.
Fewer Worries
The biggest difference at Daniel Webster under new ownership is "worrying less,"
Price said.
"There are a lot of schools that would just go under, students would be out of a
school, faculty and staff would be out of a job that they love passionately. I'm
allowed to stay in the position I'm in because of ITT."
In November, faculty members told a team from the New England commission
visiting the campus that ITT Educational had rewritten a college self-study report
prepared by professors and staff for the accrediting group. Faculty members
complained that the company's revisions glossed over inadequacies in such areas
as governance, according to two people who attended the session.
When asked about the allegations concerning the self-study report, Richard
Schneider, president of Norwich University in Northfield, Vermont, who chaired the
team, said that in his experience colleges don't try to deceive accrediting bodies.
Facebook Group
About 450 people have joined a Facebook group entitled, "I went to Daniel Webster
before it sold out," including Chad Los Schumacher, 20. After his sophomore year
at Daniel Webster, where he majored in homeland security and joined the paintball
club, Los Schumacher transferred for the current academic year to Saint Leo
University in Saint Leo, Florida.
"It was a very hard decision to come to, but I knew I could not stay there," Los
Schumacher said.
Los Schumacher was bothered by an ITT Educational policy that students receiving
financial assistance through work-study programs sign an agreement that the
company owned their intellectual output, he said.
"If I created the next Facebook or Twitter, it would be theirs," Schumacher said.
Matthew Mcinnis, a flight operations major, stayed at Daniel Webster.
"A lot of big names in aviation have come through here and taught here," the
senior from Beverly, Massachusetts, said as he headed to the aviation center on
Jan. 27. "Looking in the long term, the ITT buyout should add value. Hopefully, it
will attract better professors and more students."
Personnel Moves
The personnel moves took New Hampshire regulators aback, the officials said.
ITT Educational "did give me the sense they would continue as before," said
Kathryn Dodge, executive director of the New Hampshire Postsecondary Education
Commission, in Concord, which approved the sale in May. "We did not expect to see
the turnover in staffing happen when it happened."
As a result of the Webster case, Dodge said, she is proposing to require colleges in
ownership transition to outline plans for faculty and staff contracts and internal
governance.
"It's a cultural issue," Dodge said. "Unless we're extremely specific in our requests,
for-profits aren't as forthcoming as nonprofits."
To contact the reporter on this story: Daniel Golden in Boston at
dlgolden @bloom berg . net
Last Updated: March 4, 2010 17:02 EST
From:
Sent:
To:
Cc:
Subject:
Attachments:
Manheimer, Ann
Friday, April 02,20101 :50 PM
Harris Miller
Brian Moran; Tammy Halligan; Bergeron, David; Madzelan, Dan; Kanter, Martha; Shireman,
Bob; Wolff, Russell; Jenkins, Harold; Madzelan, Dan; Picoult, Francine; Finley, Steve; Yuan,
Georgia; Smith, Kathleen; Arsenault, Leigh
RE: Request for Follow Up Meeting This Week to Discuss Gainful Employment
image001 .jpg
I have an update on attendees- Steve Finley will be present from General Counsel and possibly Harold Jenkins; the OPE
folks may not attend
From: Harris Miller [mailto:HarrisM@career.org]
Sent: Friday, April 02, 2010 1:26PM
To: Manheimer, Ann
Cc: Brian Moran; Tammy Halligan; Bergeron, David; Madzelan, Dan; Kanter, Martha; Shireman, Bob; Wolff, Russell;
Jenkins, Harold; Madzelan, Dan; Picoult, Francine; Finley, Steve; Yuan, Georgia; Smith, Kathleen; Arsenault, Leigh
Subject: RE: Request for Follow Up Meeting This Week to Discuss Gainful Employment
Ann: Thank you very much. Attached is the full research report for which I sent you and your colleagues the Executive
Summary yesterday. I realize it is a holiday weekend, but I encourage those attending the meeting to read it, if at all
possible. It is excellent work done by top notch scholars. I look forward to seeing you Monday. Harris
Sent: Friday, April 02, 2010 8:56AM
To: Harris Miller
Cc: Brian Moran; Tammy Halligan; Bergeron, David; Madzelan, Dan; Kanter, Martha; Shireman, Bob; Wolff, Russell;
Jenkins, Harold; Madzelan, Dan; Picoult, Francine; Finley, Steve; Yuan, Georgia; Smith, Kathleen; Arsenault, Leigh
Harris- from the Office of the Under Secretary, Bob Shireman, Leigh Arsenault and I will be attending; from the Office of
Postsecondary Education, Dan Madzelan and David Bergeron will be attending, and from the Office of General Counsel,
Harold Jenkins, Steve Finley, Russ Wolff, Steve Finley, and possible, Georgia Yuan, will be attending. We look forward to
hearing your presentation - Ann Manheimer, 260-1488
To: Shireman, Bob; Kanter, Martha; Madzelan, Dan; Bergeron, David
Cc: Brian Moran; Tammy Halligan; Manheimer, Ann
Bob, et.al.: We look forward to the meeting Monday morning at 9 AM at the Department to discuss the gainful
employment issue. Attending as part of the CCA delegation will be, in addition to me, Brian Moran, CCA' s Executive Vice
President for Government Relations, Dr. Jonathan Guryan, University of Chicago, and Dr. Matthew Thompson of Charles
River Associates, the leads on the research we will be presenting, Rebecca Campoverde from Kaplan, Anthony Guida
from EDMC, and Tom Babel from Devry.
If you could please let me know who will be in attendance from the Department, that would be appreciated.
Attached you will find three documents. The first is the Executive Summary of the research findings. I will send you the
full report tomorrow, Friday. Last minute editing on the full report was delayed by the Passover holiday.
Second is the proposal CCA is putting forward as an alternative to the gainful employment proposal put forth by the
Department during the negotiated rulemaking.
Third is a document that summarizes the extensive tools the government already has to take actions against "bad
actors" in our sector.
Please let me know if you have any questions or comments. I look forward to a productive conversation Monday. Enjoy
the spectacular weather.
Harris
From: Shireman, Bob [mailto:Bob.Shireman@ed.gov]
Sent: Monday, March 29, 2010 10:48 AM
To: Harris Miller; Kanter, Martha; Madzelan, Dan; Bergeron, David
Work with Ann Manheimer on arranging the meeting. Please send your research and alternative prior to the meeting
so we can get concrete and specific in the discussions.
Thanks,
-Bob
Sent: Monday, March 29, 2010 10:04 AM
To: Kanter, Martha; Shireman, Bob; Madzelan, Dan; Bergeron, David
Cc: Brian Moran; Tammy Halligan
Subject: Request for Follow Up Meeting This Week to Discuss Gainful Employment
Martha/Bob/Dan/David:
CCA would like to have a follow on meeting with you this week to the one Brian Moran and I had with Dan and David ten
days ago to discuss a) the results of our research (which was not complete when we met) on the impact of the
Department's gainful employment proposal on students in higher education, and b) an alternative (which we discussed
in general concept with Dan and David) to the Department of Education proposal. We can make ourselves available at
almost any time starting tomorrow. Please let me know whom I should contact to arrange a meeting. Thanks in
advance.
Harris
*****************************************************************
Harris N. Miller
CEO/President
harrism@career.org
+ 1 202 336 6754
Executive Assistant: Jackie McWilliams
jackiem@career. org
+1 202 336 6706
www.career.org
2
Save The Dat e
2010 Annual Convention
and Exposition
June 9-11, 201 o
The Palazzo. Las Vegas. NV
Leadership Inst itute
July 15-20. 2010
The Bolger Center
Potomac, MD
3
From:
Sent:
To:
Cc:
Subject:
Attachments:
Kanter, Martha
Saturday, April 03, 201 o 6:00 PM
Private - Duncan, Arne
Yuan, Georgia
FW: Request for Follow Up Meeting This Week to Discuss Gainful Employment
image001 .jpg; CRA-GainfuiEmployment 04021 O.pdf
Here's Thursday's controversial research report from the Career College Assn. done by
Parthenon under contract and reviewed by other 'top-notch' scholars in this week's Chronicle
of Hi her Educatio
From: Harris Miller [Harr isM@career.org]
To: Manheimer, Ann
Cc: Brian Moran; Tammy Halligan; Bergeron, David; Madzelan, Dan; Kanter, Martha; Shireman,
Ann: Thank you very much. Attached is the full research report for which I sent you and
your colleagues the Executive Summary yesterday. I realize it is a holiday weekend, but I
encourage those attending the meeting to read it, if at all possible. It is excellent work
done by top notch scholars. I look forward to seeing you Monday. Harris
Sent: Friday, April 02, 2010 8:56 AM
To: Harris Miller
Cc: Brian Moran; Tammy Halligan; Bergeron, David; Madzelan, Dan; Kanter, Mart ha; Shireman,
Harris - from the Office of the Under Secretary, Bob Shireman, Leigh Arsenault and I will be
attending; from the Office of Postsecondary Education, Dan Madzelan and David Bergeron will
be attending, and from the Office of General Counsel, Harold Jenkins, Steve Finley, Russ
Wolff, Steve Finley, and possible, Georgia Yuan, will be attending. We look forward to
hearing your pr esentation - Ann Manheimer, 260-1488
Sent: Thursday, April 01, 2010 6:04PM
To: Shireman, Bob; Kanter, Martha; Madzelan, Dan; Bergeron, David
Bob, et.al . : We look forward to the meeting Monday morning at 9 AM at the Department to
discuss the gainful employment issue. Attending as part of the CCA delegation will be, in
addition to me, Brian Moran, CCA,s Executive Vice President for Government Relations, Dr.
Jonathan Guryan, University of Chicago, and Dr. Matthew Thompson of Charles River Associates,
the leads on the research we will be presenting, Rebecca Campoverde from Kaplan, Anthony
Guida from EDMC, and Tom Babel from Devry.
4
If you could please let me know who will be in attendance from the DepartmentJ that would be
appreciated.
Attached you will find three documents. The first is the Executive Summary of the research
findings. I will send you the full report tomorrowJ Friday. Last minute editing on the full
report was delayed by the Passover holiday.
Second is the proposal CCA is putting forward as an alternative to the gainful employment
proposal put forth by the Department during the negotiated rulemaking.
Third is a document that summarizes the extensive tools the government already has to take
actions against "bad actors in our sector.
Please let me know if you have any questions or comments. I look forward to a productive
conversation Monday. Enjoy the spectacular weather.
Harris
From: ShiremanJ Bob [mailto:Bob.Shireman@ed.gov]
Sent: MondayJ March 29J 2010 10:48 AM
To: Harris Miller; KanterJ Martha; MadzelanJ Dan; BergeronJ David
Cc: Brian Moran; Tammy Halligan; ManheimerJ Ann
Work with Ann Manheimer on arranging the meeting. Please send your research and alternative
prior to the meeting so we can get concrete and specific in the discussions.
ThanksJ
-Bob
Sent: MondayJ March 29J 2010 10:04 AM
To: KanterJ Martha; ShiremanJ Bob; MadzelanJ Dan; BergeronJ David
Cc: Brian Moran; Tammy Halligan
Subject: Request for Follow Up Meeting This Week to Discuss Gainful Employment
Martha/Bob/Dan/David:
CCA would like to have a follow on meeting with you this week to the one Brian Moran and I
had with Dan and David ten days ago to discuss a) the results of our research (which was not
complete when we met) on the impact of the DepartmentJs gainful employment proposal on
students in higher educationJ and b) an alternative (which we discussed in general concept
with Dan and David) to the Department of Education proposal. We can make ourselves
available at almost any time starting tomorrow. Please let me know whom I should contact to
arrange a meeting. Thanks in advance.
Harris
*****************************************************************
Harris N. Miller
CEO/President
1101 Connecticut AvenueJ NWJ Suite 900
WashingtonJ DC 20036
harrism@career.org<mailto:harrism@career.org>
+ 1 202 336 6754
Executive Assistant: Jackie McWilliams
jackiem@career.org<mailto:jackiem@career.org>
+1 202 336 6706
5
www.career.org<http://www.career.org>
[cid:image001.jpg@01CAD267.F04D6970]<http://www.career.org/>
6
C
D A ( River
l'C"\.. As .sou at n
Prepared For:
Harris N. Miller
1101 Connecticut Ave. NW, Suite 900
Washington DC 20036
Report on
Gainful Employment
Prepared By:
Jonathan Guryan, Ph.D.,
Associate Professor of Economics, University of Chicago Booth School of Business
Matthew Thompson, Ph.D.,
Vice President
Charles River Associates
1545 Raymond Diehl Road, Suite 260
Tallahassee, FL 32308
Date: April 2, 2010
Report on Gainful Employment
April 2, 2010
Disclaimer
This report was prepared at the request of Harris Miller and the Career College Association. It is
based on data and information that were available at the time of the analyses. If additional data
or information become available we may update or modify our report.
Page i
April 2 , 2010
Table of Contents
1. WHAT ARE POSSIBLE RATIONALES FOR THIS PROPOSAL? WHAT PROBLEM IS
THE PROPOSED REGULATION AIMING TO SOLVE? .... .... .... .... .... .... .... .... ..... .... .... .... 1
2. ARE THE PROBLEMS AS SEVERE AS ASSUMED? .................................................... ?
2 .1. COMPARING STUDENT CHARACTERISTICS .... .... .... ..... ... .... .... .. .. .... .... .... ..... ... .... .... .. .. .... .... .... 8
2 .2. DEFAULT RATES 14
3. WHAT IS THE RATIONALE FOR SUBSIDIZING LOANS FOR HIGHER EDUCATION?16
3.1. WHAT ARE THE BENEFITS OF HIGHER EDUCATION? .. .... ..... ... .... .... ..... .... ..... ... .... .... .. .. .... .... .. 17
3.2. PRESIDENT 0BAMA RECOGNIZES THE IMPORTANCE OF EDUCATION BOTH AS AN ENGINE OF
ECONOMIC GROWTH FOR THE COUNTRY AND AS A SOURCE OF ECONOMIC PROGRESS FOR
INDIVIDUALS FROM ALL CORNERS OF THE U.S. SOCIAL STRUCTURE ... .. .. .... ..... ... .... .... .... .... ... 18
4. WHAT ARE THE BENEFITS OF AN ASSOCIATE DEGREE EDUCATION IN
PARTICULAR? ... ..... ..... ... .... .... .... .... .... ..... .... .... .... ... ..... ..... .... .... .... .... ..... ..... ... .... .... .... ... 20
4 .1. THE PROPOSAL'S FOCUS ON ANNUAL INCOME IGNORES THE OTHER BENEFITS OF EDUCATION:21
5. WHAT EFFECTS MIGHT THE PROPOSED REGULATION HAVE? .... .. ..................... 24
5 .1. WHAT ARE THE EFFECTS OF INCREASED ACCESS TO FUNDING FOR HIGHER EDUCATION AND HOW
DO THESE VARY ACROSS DIFFERENT TYPES OF STUDENTS? .. .... .... .. .. .... .... .... ..................... .. 24
5.2. HOW TO MEASURE THE 25 PERCENTILE OF EARNINGS? .... .. .. .... ........... ............ ... .. .... .... .... . 24
5.3. PRELIMINARY ANALYSIS BASED ON DATA SUBMITTED BY CCA MEMBER INSTITUTIONS .... .... ... 30
6. WHAT ALTERNATIVE REGULATIONS OR POLICIES MIGHT BE SUGGESTED TO
ADDRESS THE PROBLEM AT HAND? ...... ........ ...... .................................. ........ .......... 36
6 .1. FURTHER CRITICISMS OF THE PROPOSED REGULATION ........................................................ 36
6 .2. TO DIRECTLY ADDRESS THE PROBLEM, REGULATION SHOULD FOCUS ON DISCLOSURE AND
ENSURING THAT STUDENTS MAKE INFORMED DECISIONS .... .... .... .. .. .... ..... .................... ..... .... 37
7. CONCLUSION .... .... .... .... .... ............. .... .... ........ ..... .... .... .... .... .... .... ..... .... .... .... .... ......... ... 38
8. APPENDIX A ...... .... .... ..... .... .... .... .... .... .... .... .... .... .... .... ..... .... .... .... .... .... .... .... .... .... .... .... . 39
Page ii
April 2, 2010
This report addresses the definition of"gainful employment" proposed by the U.S. Department of
Education as a part of negotiated rulemaking. At present the proposal would define gainful employment
so that a program's students would be required to have a median debt level no greater than 8 percent of
the 25th percentile of annual earnings among individuals working in occupations for which that program
prepares students. The 25th percentile of earnings would be calculated from Bureau of Labor Statistics
(BLS) data, and is presumably meant to be an estimate of the typical starting annual earnings for
someone finishing that program. Annual loan payments would be calculated from the median debt level
based on a 1 0-year repayment plan using the interest rate on unsubsidized Stafford loans. For programs
that do not meet the 8 percent loan-to-income cut-off, an alternative is to have a 90 percent repayment
rate for recent graduates.
In this document, six basic areas are covered:
1. What are possible rationales for this proposal? What problem is the proposed regu-
lation aiming to solve?
2. Are the problems as severe as assumed?
3. What is the rationale for subsidizing loans for higher education?
4. What are the benefits of an Associate degree education in particular?
5. What effects might the proposed regulation have?
6. What alternative regulations or policies might be suggested to address the problem
at hand?
1. WHAT ARE POSSIBLE RATIONALES FOR THIS PROPOSAL?
WHAT PROBLEM IS THE PROPOSED REGULATION AIMING TO
SOLVE?
Presumably, the motivation behind the proposed regulation is to protect students from taking on "too
much debt". Taking on excessive debt may lead to an inability to repay the debt, resulting in default.
There may be a belief that some students agree to borrow so much there is little chance they will be able
to repay the loan in the future. There may also be a belief among policymakers that, regardless of
whether the loans are eventually paid back, some amounts of debt are too high per se.
1
The proposal's focus on for-profit schools implies that there is a belief that the problems of excessive debt
burden and high default rates are either specific to, or more severe at, for-profit schools. There has been
no analysis of whether differences in debt levels or differences in default or delinquency rates across
types of schools are the result of actions by the schools or due to differences in the types of students that
the schools serve.
1
Further, the proposed legislation assumes that individuals do not have the ability to determine appropriate levels of personal debt without
government guidance. One argument that the Department of Education may advance is that students do not have all of the
necessary information to make informed decisions, and thus government guidance is necessary.
Page 1
April 2, 2010
Later in this document, we address whether in fact it appears that default rates are higher at for-profit
schools, and whether some of this difference is a result of serving students from different backgrounds.
The focus on for-profit schools suggests that another possible motivation for the proposed regulation is
that the Department of Education believes the cost offor-profit programs is too high. This sense that the
cost to students is greater at for-profit programs is surely based almost exclusively on a comparison of
tuitions. However, the full cost of schooling must also include foregone earnings if the student must
cease working to attend school, and other less obvious but very real costs. Since for-profit programs tend
to offer more flexibility both in terms of the timing and location of schooling, these types of costs tend to
be lower. Compare the costs for a student currently earning $30,000 per year who could continue to work
while completing a 2-year for-profit program, but who would have to stop working to attend a community
college program because it conflicts with his work schedule. Even if the tuition at the community college
were significantly less, the total cost to the student (tuition plus any foregone earnings) is likely lower at
the for-profit program.
It may be useful to discuss why policy makers should think of high default or debt levels as being
something students should be protected from. Consider high default rates. The negative effects of loan
default may include future difficulty securing loans. Without these costs, a defaulted loan is similar, from
the student's standpoint, to a grant. If there were no long-term penalty from defaulting it would be in the
student's interest to borrow monies he will not pay back. Thus, to the extent that the regulation's intent is
to protect students, it should be made clear that it should protect students from the penalties associated
with default, not from the funding stream that makes an education possible. One might imagine an
alternative regulation that was aimed at reducing the number of students who strategically take out loans
with no intention of repaying. But, it would seem that such a regulation would focus on the process by
which students are approved for loans, and on lenders rather than schools.
Next consider the concept of "too much debt". It is important to consider the purpose of the debt before
deeming it excessive. As we will discuss later in this document, the standard economic analysis of higher
education treats it as an investment. Since education so consistently yields high returns in the form of
increased earnings, lower unemployment rates, lower crime rates and even better health and longevity, it
can be a smart worthwhile investment to borrow even large amounts to be educated.
The question of how much debt is too much can be answered in different ways. The Department of
Education proposal focuses on the ability to make the associated loan payments relative to annual
income. Another way to view the decision is to ask whether taking on the debt and getting the education
increases the present value of a student's lifetime earnings. Those with more education tend to earn
more per year. This is of course a benefit.2 This benefit should be weighed against the costs. A
significant cost of education typically is to forego earnings while in school. The other main cost is tuition.
In Table 1 below, we calculate how much debt a student can take on such that comparing all of the costs
and benefits getting more education leads to an increase in lifetime earnings net of the debt costs.
Before we turn to these calculations, it may be helpful to consider both the benefits of education and the 8
percent proposed debt limit together. It is widely accepted among academic economists that each
2 There are other benefits of education that will be discussed later. The following calculation is conservative in that it ignores non-income
benefits of education.
Page2
April 2, 2010
additional year of education increases earnings by some percentage. This percentage has varied from
about 7 to 15 percent over the past 40 years. Recent estimates peg this number currently near 15
percent. This means each year of schooling causes a student's annual earnings to be higher by 15
percent every year that she works. In the first year after school, her earnings are 15 percent higher than
they would be if she had not gone to school.
It cannot make sense to have a limit on debt payments that is less than the earnings return to
education. It does not make logical sense to say that she cannot afford to spend more than 8 percent of
her earnings to have that 15 percent bump in pay. If the government "protects" her from making these
debt payments, she loses the 15 percent annual bonus, and her expenditures are 8 percent lower. It
does students no favors to decrease their earnings by more than you decrease their required
expenditures. If she could not afford to make the debt payments, she certainly cannot afford not to make
them. She has less discretionary income in the world without the debt payments than she does in the
world with the debt payments.
This argument ignores the other costs of education, namely the foregone earnings while in school. Thus,
this argument does not imply that it is always a good investment to pay up to 15 percent of your income
per year to finance the tuition for a year of schooling. However, it very clearly shows that it is wrong to
say that someone is unable to pay more than 8 percent of her annual income to finance schooling. Thus,
to the extent that the proposal is meant to protect students from taking on debt payments they cannot
afford, it is misguided.
Here we consider not just whether students can afford these levels of debt, but how much one should be
willing to borrow to finance a 2-year program if the goal is to maximize lifetime earnings net of costs.
Each row of Table 1 shows the calculation for slightly different situations. In all cases, we consider a
student deciding whether to get two additional years of schooling at age 18. Consider the first row. Here
we evaluate the choice of a student who would earn $30,000 per year with a High School Degree, and
$34,992 per year if she spends two years earning her Associates Degree. This corresponds to an 8
percent increase in earnings for each year of schooling (i.e. an 8 percent "return to education"). This is a
fairly conservative estimate that may have been appropriate 30 years ago before returns to education
increased so dramatically. Column 2 denotes the rate at which the student discounts earnings and costs
that will come in the future. Much of the benefits of education come far in the future so how much these
are discounted are important. Column 3 shows the increase in lifetime earnings associated with the extra
education, in net present value. In other words, this is how much more someone with an Associate
Degree will earn over her lifetime than someone with a High School Degree, properly discounting to
account for the fact that much of the benefits will come many years in the future. Column 4 shows the
annual loan payments associated with the maximum debt someone could take on to cover tuition costs
and still not erase the amount in column 3. Column 5 shows the ratio of that annual debt payment to
annual earnings with an Associate Degree.
The calculation is repeated for more appropriate 1 o and 15 percent schooling returns, and for a 3 percent
discount rate. A 1 o percent return to schooling is closer to estimates of the return per year to a 2-year
Page 3
April 2, 2010
college education (e.g. Kane and Rouse, 1995)3 which are based on the experiences of people who
graduated high school in the 1970s and 1980s. Estimates of contemporaneous returns to schooling tend
to be closer to 15 percent per year of education (e.g. Goldin and Katz, 2008).
Table 1: How much is really too much debt?
(1) (2) (3) (4) (5) (6) (7)
Maximum
annual debt
payments
Net present for 10 years Debt to
Return value of such that income% Annual Debt to
per year lifetime education a with max- payments if income%
of school- Discount earnings good in- imum 10 paid off over if paid in
ing rate difference vestment year loan 20 years 20 years
8% 5% $24,696.74 $3,135.44 9.00% $1,904.92 5.40%
10% 5% $45,783.80 $5,812.60 16.00% $3,531.42 9.70%
15% 5% $100,194.22 $12,720.42 35.00% $7,728.23 21 .30%
8% 3% $57,967.21 $6,786.99 19.40% $4,471.15 12.80%
10% 3% $88,196.71 $10,326.35 28.40% $6,802.83 18.70%
15% 3% $166,197.14 $19,458.89 53.60% $12,819.19 35.30%
Note: The calculations are for an individual who would earn $30,000 per year with a high school degree and $34,992, $36,300, or
$39,675 with a 2-year associate degree and an 8, 10, or 15 percent return to education per year of schooling.
A number of things should be noted from the calculations:
The increase in lifetime earnings associated with two additional years of education can be quite
large, even for someone who would have earned $30,000 per year without that schooling. For a 10
percent return to education, using a 5 percent discount rate, the lifetime earnings benefit is more
than $45,000. This number is net of the cost of foregone earnings during the two years while she is
in school.
4
This calculation implies that someone who is trying to maximize her lifetime earnings should be
willing to pay $45,000 for those two years of education. Paying anything less than that in tuition, the
schooling will benefit her over the course of her life.
3 This paper, co-authored by current member of the President's Council of Economic Advisors (CEA) Cecilia Rouse, shows that community
college and other 2-year programs yield approximately the same returns per credit hour as 4-year colleges.
4 If an individual is able to continue working while completing her two year education this benefit increases by as much as $60,000, the current
cost of foregone earnings.
Page 4
April 2, 2010
The net present value of the increase in lifetime earnings depends significantly on how future
earnings streams are discounted. The more the future is discounted, the lower the benefits of
education are. Using a 3 percent discount rate, the lifetime earnings benefit of a 2-year degree is
almost $90,000 if the return is 1 o percent per year of schooling.
The return to education matters enormously in determining how much individuals should be willing to
pay for schooling. If the return is 15 percent per year, the present value increase in earnings from a
2-year program is more than $100,000 even using a 5% discount rate.
The Department of Education proposal essentially almost completely discounts (i.e. ignores) all
future benefits of education by focusing on the ability to pay in the years immediately following the
finish of school. This is present in the choice of estimated starting salary (i.e. the 25
1
h percentile
annual earnings) as the ability to pay, in the focus on repayment rates among recent graduates, and
in the use of the 10-year repayment schedule to calculate loan payments. The proposed regulation
is misguided in that it is not a function of the benefits of education. If the returns to education were to
continue to rise, as they have for the past 30 years, students would be restricted from borrowing
more to get this valuable training. Only the children of the rich (i.e. those who could afford to pay
tuition without borrowing) would be able to get this valuable education.
Using a 5 percent discount rate, and assuming a 10 percent return to schooling, a student who would
earn $30,000 per year with a high school education would earn $45,784 more over her lifetime if she
gets an Associate Degree. This calculation accounts both for the fact that she would spend two
years early in her life earning nothing while she is in school, and that the higher earnings associated
with education will come in the future. If she is able to work while in school then the increase in
lifetime earnings is even greater.
The student described above could pay close to $45,000 in tuition for the two years of schooling and
still end up ahead. If she borrowed to cover all of these tuition costs, her annual loan payments
would be $5,813 for the ten years she spends repaying, and in this time her loan payments would be
16% of her annual earnings (double the Department of Education limit).
While it would surely be difficult to make the payments during the 1 0-year repayment period, the
calculation shows that even taking on this high level of debt is a good investment for the student.
Any restriction on borrowing that is more stringent than the levels shown in Table 1 will lead the
student described to earn less over her lifetime.
One reason the loan payments in the table may appear high, even though taking on this much debt
is a good investment for the students, is that the repayment horizon is shorter than the time during
which the benefits of education accrue. The proposed regulation's use of a 1 0-year repayment rate
is another way in which it ignores the future benefits of education. If the student were to pay back
over 20 years instead of 10, the loan payment to income ratio for the student described above would
be 9. 7 percent rather than 16 percent. For the 8 percent return to education calculation, the 20-year
loan payment to income ratio would be 5.4 percent rather than 9.0 percent.
For a 15 percent return to education, the calculations indicate that one should be willing to pay
approximately 20 percent of his income for a 20-year repayment period. The reason this increases
lifetime earnings is that 15 of that 20 percent is accounted for by the earnings increase resulting from
Page 5
April 2, 2010
the schooling. For the working years after the loan is repaid, the 15 percent benefit is enjoyed with
no cost.
A major part of the costs of education considered in the calculation is the foregone earnings the
student gives up if she attends school full-time. Schools that allow students to work and earn money
while in school are therefore less costly, even if the tuition charged is the same. The calculations
above would indicate a higher debt ceiling if foregone earnings were not considered as a cost.
The calculation above assumes that the difference in earnings between college and high school
educated individuals is the same at all ages. If instead the earnings of college educated students
start similar to those of high school educated students but grow faster, the role of discounting the
future is even more important.
Illustration: If the 8 percent loan limits were applied to medical school
Doctors spend much of their early years earning pay that is lower than they will earn in the long run, but
continuing to train on the job. Much of the earnings benefits of a medical education come when doctors
are far into their career. For such occupations, restricting debt levels to an amount that can be repaid
given early-career earnings would preclude borrowing for extremely valuable investments. Furthermore,
the lifetime benefits of a medical degree are quite large. Thus, for many it is worth making the investment
of time and large sums of money to obtain the degree. This is the case even though it is typical for
doctors to leave medical school with significant debt.
Here we show that if loan payments for medical school were limited to be 8 percent of the early earnings
of doctors, medical education would be largely restricted to students who could pay tuition costs without
much borrowing. In this case doctors would largely be drawn from wealthy families. The vast majority of
racial minority students and students whose parents have less than a college education would not be
allowed to become doctors. In fact more than half of the households in the U.S. do not have a net worth
high enough to pay the amount of medical school tuition that would not be covered by loans.
To complete the calculation, we use the median medical school tuition for non-resident programs from the
Association of American Medical Colleges web site. We ignore the costs of a medical education incurred
during residency years. The median four-year tuition at medical school is $168,840. If someone financed
80 percent of this, it would require borrowing $135,072. To pay this loan back over the 1 0-year horizon at
the unsubsidized Stafford loan rates would require an annual loan payment of $19,054 (or $1 ,588 per
month). To satisfy the proposed 8 percent criteria, someone would have to earn an annual salary of
$238,173. Payscale.com indicates that the typical annual salary of a doctor with 1-4 years of experience
is, in fact, $140,000. Given these calculations, the median medical school would not meet the proposed
standards.
We can also ask who would be able to afford medical school tuition if borrowing were only allowed up to
the limit implied by the 8 percent standard. Using the $140,000 annual salary, the maximum debt that
leaves annual payments no more than 8 percent of annual earnings is $79,397. Thus, to be able to
attend medical school, students and their families would have to find the funds to cover more than half of
the tuition costs, or $89,443.
Page6
April 2, 2010
Table 2: Paying for Medical School
Median non-resident medical school tuition, 2009-10
Total tuition, 4 years non-resident
Debt required to pay 80 percent of tuition
Annual loan payment with 10 year repayment
Annual earnings required to satisfy 8 percent rule
Median salary of Doctors with 1-4 years experience
Maximum allowed debt to satisfy 8 percent rule
Remaining tuition that would have to be paid without borrow-
ing
Source: AAMC.org, Payscale.com.
(http :1/services.aamc.org/tsfreports/report_ median .cfm?yea r _of_ study=201 0)
$42,210
$168,840
$135,072
$19,054
$238,173
$140,000
$79,397
$89,443
How many families in the U.S. have the ability to pay nearly $90,000 without borrowing? The Survey of
Consumer Finances, sponsored by the Federal Reserve Board, indicates that in 2007, about one-third of
U.S. households had total net worth less than $90,000. This means that students living in about this
fraction of households would be precluded from becoming doctors. Many households who have slightly
more than $90,000 in net worth hold a good deal of that wealth as housing equity, meaning that they
would have to choose between owning a home and allowing their child to become a doctor. For minority
students, the problem would be even worse. The median net worth of non-whites and Hispanics in 2007
was $28,200. Thus, the vast majority of non-white and Hispanic students would likely not be able to
become doctors, regardless of their potential for success.
2. ARE THE PROBLEMS AS SEVERE AS ASSUMED?
The Department of Education's proposal presumably aims to address a specific perceived problem. In
this section we explore whether that problem is as severe as might be thought given summary measures
comparing for-profit and not-for-profit schools.
What is the problem that the proposal aims to address? We suspect that the Department of Education
sees the following problem: (a) a significant number of students take on more debt than they can afford to
repay upon entering the labor force and (b) this problem is more severe for students who attend for-profit
schools. We infer the latter because the proposed regulation treats for-profit schools differently than not-
for-profit schools. Here we address whether it is the case that default rates are strongly related to the for-
profit status of schools. The data strongly suggest that a large portion of the difference in default rates
between for-profit and not-for-profit schools is because for-profit and not-for-profit schools serve very
different student populations. For-profit schools are more likely to serve low-income, minority students.
Page?
April 2, 2010
without parental support. They are more likely to serve students who are the first in their families to
attend college. Because of their access to outside resources, these groups of students are more likely to
default at both for-profit and not-for-profit schools. We estimate that if for-profit and not-for-profit schools
served the same population of students that the default rates would be significantly closer across the
types of schools. One might effectively argue that it is bad public policy to punish institutes of higher
education for serving students from groups who historically have not had wide access to schooling.
Furthermore. in part because the student populations are different, persistence rates at for-profit and not-
for-profit schools are different. Students who complete higher education programs are more likely to find
the jobs for which those programs prepare students. Some of the difference in default rates across types
of schools is accounted for by the higher completion rates at not-for-profit schools (particularly 4-year
programs). It would also seem to be bad policy to punish schools for the decisions by students not to
complete. At the very least, such a policy punishes the students who work to complete the program by
restricting access for all students, not just those who fail to complete.
Here we lay out the data on which the former conclusions are based. First, consider the difference in
characteristics of students by the type of school attended. Specifically, the data below come from the
Beginning Postsecondary Students Longitudinal Study, 1996 cohort. This is a survey administered by the
U.S. Department of Education that follows a nationally representative sample of students who entered
postsecondary education for the first time in 1996. We focus on this cohort of students rather than more
recent data because a follow-up survey has been done that allows for measurement of default rate by this
cohort.
2.1. COMPARING STUDENT CHARACTERISTICS
A series of figures shows that the demographic and socioeconomic background of students attending for-
profit and not-for-profit are different in systematic ways. All comparisons are based on the fi rst institution
attended, so those who begin at community college and transfer to a 4-year institution are categorized as
community college students. We first examine the characteristics of students who entered postsecondary
education in 1996, because these are the students for whom we can track default rates in the NCES data
(BPS) . For comparison, we also show comparable figures (Appendix A) calculated from the 2008
National Postsecondary Student Aid Study (NPSAS:08).
Figure 1 below shows the average age at which students begin postsecondary schooling. Beginning
students at for-profit schools are on average 25 years old. Students at not-for-profit public and private
programs of 2 years or less are on average 22-23 years old. In contrast, students entering 4-year not-for-
profit colleges are significantly younger, less than 19 years old on average. This difference shows that
the set of students entering these different programs are not the same. Though most of the differences
between for-profit and not-for-profit college students have held up since 1996, this is one that has
changed. While for-profit students continue to be older when they begin, the average age difference is
much closer today than it was in 1996.
Page 8
April 2, 2010
Figure 1:
Average age at which students first enroll in postsecondary schooling
26.0
25.0
24.0
(!) 23.0
0>

22.0

<(
21.0
20.0
19.0
18.0
For-profit Private not-for- Private not-for- Public <=2 Public 4-year
profit <=2 profit 4-year
Age first enrolled
Notes: Calculated from the Beginning Postsecondary Students Longitudinal Survey, 1996 Cohort.
Next, we tum to the average income of students and/or their parents (Figure 2) . Specifically, we consider
the total income of either parents (for those who are dependents) or students (for those who are
independent at the time they apply) . Students at for-profit schools have the lowest income, prior to
entering college, of any group. VVhereas the average prior family or individual income of students
entering for-profit schools was $22,165 (in 1996 dollars) , it was 71 percent higher among public 2-year-or-
less students, 154 percent higher (i.e. more than 2 %times) among public 4-year students, and 178
percent higher (i.e. close to 3 times) among private 4-year students.
Page 9
April 2, 2010
Figure 2:
Average income of parents or independent students prior to school entry
$70.000 ~
$60.000
$50.000
Q)
E
0
$40.000
(.)
c
Q)
0'1
!
$30.000
,_
~
<{
$20.000
$10.000
$0
For-profit Privat e not- Privat e not- Publi c <=2 Publi c 4-year
for- profit <=2 f or-profit 4-year
Average income. parents or independent. 1994
For-profit students do not just come from families with lower average income, they are also more likely to
come from families that are quite poor. Consider the percent of students whose families collected AFDC
(Aid for Families with Dependent Children, the precursor to TANF, and commonly known as "welfare").
Figure 3 shows a full 16 percent of students who began at for-profit schools in 1996 came from families
collecting AFDC. This was more than double the rate of students attending not-for-profit 2-year-or-less
programs. At publ ic and private not-for-profit 4-year programs the corresponding rates are 2.6 and 1.6
percent.
Page 10
April 2, 2010
Figure 3:
Percent of students from families who received AFDC prior to school entry
18
16
14
12
- 10 c
<1>
0
lii
8 a..
6
4
2
0
For-profit Private not-for- Pri vate not-for- Public <=2 Publi c 4-year
Percent receieved AFDC. 94-95
Students attending for-profit schools are also significantly more likely to be single parents at the time they
begin school. A full 28.5 percent of for-profit students were single parents prior to beginning school in
1996. At not-for-profit 2-year-or-less programs, less than 12 percent were single parents upon entering.
At 4-year programs single parents were extremely rare, less than 2 percent of students (Figure 4 below).
One interesting thing that has changed is that single parents are more likely today to attend college than
they were in 1996, but they are still significantly more likely to attend for-profit schools.
Page 11
April 2, 2010
Figure 4:
Percent of students who were single parents prior to school entry
30 ~
25
20
c
<ll
15
0
....
<ll
Q_
10
5
0
For-profit Private not-for- Private not-for- Publi c <=2 Public 4-yeal'
Percent single parent. 1995-96
Students at for-profit schools are also the first in their immediate family to attend college. Figure 5 shows
the fraction of students at each school type who have at least one parent with at least some college
education. The figure shows that these rates are lower at for-profit schools, particularly when compared
with 4-year not-for-profit schools.
Page 12
April 2, 2010
Figure 5:
Percent of students whose parents attended at least some college
60.0
For profit
Notfor p r ~ f i t
70 0
soo .:.
50.0
c
.,
40.0 ~
.,
a.
300 .:
20.0
100
00
Prrvate for Pnvate for Private fot Public less- Pub he 2-year Pubhc4year Prrvale not-for- Pnvate not-for
profi1,1ess-lhao- prol rt, 2-year profrt, 4-year lhan-2-year profll.2year profn 4-year
2-year
Percent whose parents have some college or more
Finally, Figure 6 shows that for-profit schools are much more likely to serve students from racial and
ethnic minority groups. The fraction of students at for-profit schools who are either Black or Hispanic was
43.9, 37.2 and 51.4 percent at less than 2-year, 2-year and 4-year programs respectively. Private not-for-
profit less-than-2-year programs also are likely to serve Black or Hispanic students (35.9 percent) .
However, the share of students who are Black or Hispanic at all other not-for-profit school groups was
less than 25 percent.
Page 13
April 2, 2010
Figure 6:
Percent of students who are Black or Hispanic
60 0
For profit
500
40 0
c;
~ 300
.,
a.
20.0
10.0
00
Puva1efor Privatefor
prol'lt, tess-than. profrt. 2-year
1,year
Not for profit
Private for Puvate noHor Prrvate not-for Ptrva!e not-for Publrt less-
flolit, 4-year profittess-tha.-.. profit 2year profil4-yea than. 2-year
2-year
2.2. D EFAULT RATES
Public 2-year Pubht .t-yaar
Using the same Beginning Postsecondary Students Longitudinal Survey data, we also compared 6-year
default rates of students at different types of schools. The default rate is computed as the fraction of
students in the 1996 entering cohort with any student borrowing who ever default by 2001. This is
calculated in the same way as Mark Kantrowitz did in his recent report.
The light blue bars in Figure 7 below show the raw default rates of students starting in different types of
schools. All for-profit students are considered together. Because sample sizes are small in particular
groups, less-than-2-year and 2-year schools are combined. Without adjusting for the differences in
student background across the different school groups, the 6-year default rate is significantly higher at
for-profit schools than at not-for-profit schools. At for profit schools, almost 25 percent of the 1996 cohort
borrowers defaulted on at least one loan at some point by 2001. The default rate is 17.1 percent at
private not-for-profit 2-year-or-less programs, and 8.5 percent at public not-for-profit 2-year-or-less
programs. The rates at not-for-profit 4-year programs are both around 6.3 percent.
Page 14
April 2, 2010
Figure 7:
6-year default rates by type of school, controlling for student characteristics
25.0%
20.0%.
15.0%
10.0%
5.0%
0.0%
For-profit Private NFP 2- Private NFP 4- Public 2-year or Public 4-year
year or less year less
Default rates
Default rates. controlling for race. gender. family income. persistence. Peii/AFDC receipt. single
parenthood
Notes: Calculations from the Beginning Postsecondary Students Survey: 1996 cohort and 2001 follow-up. The light bars show the
fraction of students beginning in each type of school in 1996 who ever defaulted by 2001 . The dark bars show the default rates after
controlling for race, gender, persistence and completion, Pell grant receipt in 95-96, family AFDC receipt in 94-95, parent or own
income (if dependent), and dependency status.
The dark blue bars show our estimates of what the default rates would be if all schools had similar
entering student bodies. To estimate this, we run a regression of individual students' default status on
controls for their race/ethnicity, gender, family income, dependency status, whether they persisted or
completed their program, and whether they received a Pell grant. The dark blue bars show what we
estimate the default rates would be if all schools served white male students who are dependent, whose
parents earn between $60-75K per year, who completed their programs and who did not receive a Pell
grant.
The estimates show that if all schools served similar students with similar backgrounds and who
completed their programs, the differences in default rates between for-profit and not-for-profit schools
would narrow considerably. Whereas the difference in 6-year default rates between for-profit and public
4-year schools is 18.3 percentage points (24.6- 6.3) without controlling for the differences in student
characteristics, this difference is almost cut in half to 9.6 percentage points (12.2- 2.6) when adjustments
for student characteristics are made. This measure of default also overestimates the difference because
students in shorter programs have more time to default by 2001 . Furthermore, this narrowing is what
Page 15
April 2, 2010
happens when adjustments are made for the characteristics that are observed in the BPS data. One
might suspect that there are other dimensions along which for-profit and not-for-profit students are
different. It is possible that if we had data on those characteristics and were able to adjust for them that
the difference in default rates would narrow more.
In addition to narrowing the difference in default rates between for-profrt and not-for-profit students,
adjusting for student characteristics also lowers the default rate at for-profit considerably. These
estimates imply that the default rate at for-profrt schools would be cut in half (from 24.6 to 12.2 percent) if
for-profit schools served wealthier non-minority students, and students who were more likely to complete.
3. WHAT IS THE RATIONALE FOR SUBSIDIZING LOANS FOR
HIGHER EDUCATION?
The standard economic analysis of education considers the choice of an individual whether to get an
additional year of schooling.
5
In this standard way of thinking, individuals weigh the costs and benefits of
schooling. The costs are the earnings foregone if one attends school full time, and tuition/fees. The
benefits include increased earnings in future years. Individuals choose to get more education so long as
the benefits are larger than the costs.
Education is an investment, meaning that the costs are paid up front and the benefits come in the future.
To properly weigh the costs and benefits, one must discount benefits that will not be realized for many
years. To simplify things, use the interest paid on savings accounts or the expected return on personal
investments as the discount rate.
Now consider the education choice of two students: one who has enough personal or family wealth to pay
tuition costs out of savings, the other who must borrow to finance the tuition costs.
For someone who would pay tuition costs out of savings, the decision comes down to comparing the
present value of increased lifetime earnings (the benefits) to the foregone earnings while in school and
the tuition (the costs) . If the benefits are greater than the costs, then the student should continue in her
schooling. If the costs are larger than the benefits, she should end her schooling and begin working.6
Compare this decision with someone who must borrow to pay the tuition costs. This student must
consider as costs the additional interest payments associated with the loan. Those payments must be
paid in the future. If the interest rate on the loan were equal to the interest rate used for discounting (in
this case the interest paid on savings) , then the decision would be the same for both students. Since the
unsubsidized interest rate charged on student loans is typically higher than the interest rate paid on
savings accounts, the cost of furthering education is higher for this student.
5 The standard reference is Human Capital by Gary Becker (University of Chicago), who won the Nobel Prize in Economics for this and other
work.
6 Vllhile it is necessary to consider as a cost the interest she does not earn on the money she takes out of saving to pay tuition, these interest
payments are discounted because they would have happened in the future. If we use the savings account interest rate as the
discount rate, the discounting eliminates this from consideration.
Page 16
April 2, 2010
In short, because borrowing interest rates are higher than savings interest rates, the cost of schooling is
higher for those who must borrow to pay for higher education. Because these students almost by
definition come from poorer families, this problem creates access differences that relate to wealth,
socioeconomic status, and race. Subsidies for student loans are meant to narrow the difference between
borrowing and saving interest rates so that the costs of education are less related to family wealth.
Any restriction of access to debt financing for higher education will have the effect of decreasing access
more for poor and minority students. This is completely at odds with the intent and spirit of the Higher
Education Act.
Notice that the economic analysis of the schooling decision does not depend on the level of earnings.
Instead, it focuses on the increase in earnings resulting from the schooling. The proposal's focus on the
ability of students to pay back their loans quickly leads it to focus on the level of earnings.
This will have the effect of differentially punishing students with poor labor market prospects and who
would gain the most from higher education. Students with poor labor market prospects would have low
earnings, and likely high unemployment rates, without any higher education. Among these students, the
ones who would benefit greatly from additional focused schooling may end up in occupations with low
earnings. But, these earnings may be much higher than the student's personal alternative. The proposal
would limit how much this student could borrow based on the low level of earnings, and not based on the
large gains that would be realized from the doors opened by education.
3.1. WHAT ARE THE BENEFITS OF HIGHER EDUCATION?
Education is widely recognized as a source of social mobility. Though the US is regarded as a "land of
opportunity," correlations in earnings between fathers and sons are actually quite high. To understand
how much social mobility there is in the U.S., consider a family of four right at the poverty threshold.
Based on the best current estimates, it would on average take the descendants 5 or 6 generations before
their income is within 5 percent of the national average.?
What's more, studies find less social mobility among families with low net worth, suggesting that the
inability to borrow restricts social mobility. In other words, restrictions on borrowing (coming from poorly
functioning credit markets and high interest rates) makes being bom into wealth or poverty quite
determinative of earnings in adulthood.
One large reason for the effect of net worth and borrowing constraints on intergenerational mobility is
likely access to schooling. As an example consider the economic progress made by African Americans
during the past century. While legislative changes such as the Civil Rights Act of 1964 have led to
significant progress in reducing discrimination, economic research suggest very strongly that
improvements in educational opportunities for blacks have been more important. Until recently
successive cohorts of blacks have obtained progressively more education, and in turn their earnings have
caught up to whites.
7 Mazumder, Bhashkar, "Fortunate Sons: New Estimates of lntergenerational Mobility in the United States Using Social Security Earnings
Data," Review of Economics and Statistics 2005.
Page 17
April 2, 2010
One of the most important ways in which the labor market in the U.S. has changed in the past 30 years is
that the benefits of education have increased dramatically. Those with more education have always
earned more on average than those with less. But, the difference in earnings between those with and
without a college education has increased sharply since 1980. In 1980, 4-year college graduates earned
about 40 percent more (about 1 o percent per year of additional schooling) than comparable high school
graduates. By 2005, the benefit of a college education was more than 70 percent (almost 18 percent per
year of schooling) . It is more important than it has been since the 1920s to be educated, and more
important than ever to get education beyond high school.
The changes that have led to this dramatic increase in the monetary benefits to education have also led
to very high levels of inequality. The difference in earnings and economic well-being between the rich
and the poor is also as large as it has been since the early part of the 20
1
h century. And, how much
education you have is significantly determinative of which side of that inequality you lie on. Those with
more education have benefited from the rich getting richer in the past 30 years. Those with less
education have been hurt terribly by the poor getting poorer during that same time.
All of this argues strongly that is as important as it has ever been to assure that all students who will
benefit have access to higher education. The social costs of restricted access are larger than they have
been in almost a century.
3.2. PRESIDENT 0BAMA RECOGNIZES THE IMPORTANCE OF EDUCATION BOTH AS AN ENGINE OF
ECONOMIC GROWTH FOR THE COUNTRY AND AS A SOURCE OF ECONOMIC PROGRESS FOR
INDIVIDUALS FROM ALL CORNERS OF THE U.S. SOCIAL STRUCTURE.
In a Washington Post column, published on July 12, 2009, President Obama called for increase in 5
million students with certificate or associate degree in the next 1 o years. Here are two quotes from what
he wrote:
"In an economy where jobs requiring at least an associate's degree are projected to grow twice as fast as
jobs requiring no college experience, it's never been more essential to continue education and training after
high school. That's why we've set a goal of leading the world in college degrees by 2020. Part of this goal
will be met by helping Americans better afford a college education." Barack Obama, The Washington Post,
July 12, 2009.
we believe it's time to reform our community colleges so that they provide Americans of all ages a chance
to team the skills and knowledge necessary to compete for the jobs of the future. Our community colleges
can serve as 21st-century job training centers, working with local businesses to help workers team the skills
they need to fill the jobs of the future. We can reallocate funding to help them modernize their facilities,
increase the quality of online courses and ultimately meet the goal of graduating 5 million more Americans
from community colleges by 2020." Barack Obama, The Washington Post, July 12, 2009.
What the President calls for cannot be done without increasing the capacity of community colleges and
for profit schools. Even with increased federal support, community colleges will face funding problems as
states continue to deal with severe fiscal problems. By decreasing access to the specific programs the
President wants to increase, the proposal will make the President's goal almost surely unattainable.
The for-profit education sector will be essential in helping the President to achieve this goal. For
example, consider that enrollment at for-profit colleges has grown significantly more than at non-profit
Page 18
April 2, 2010
schools. In other words, as the demand for higher education has increased in recent years- likely as a
response to the increased returns described above- the non-profit sector has not been able to meet that
need. The for-profit sector has. Consider the growth rates of enrollment in public, private not-for-profit
and private for-profrt colleges over the past 5, 1 o and 20 years.
Overall enrollment in higher education has grown by more than 2 percent per year during the past 10
years. Capacity at neither public nor private not-for-profit colleges has grown fast enough to keep up with
this increased demand. Note that some of this demand comes from natural population growth, while
some comes from an increased desire to get a college education due to the high returns. Capacity
growth in the not-for-profit (public or private) sectors has not matched the overall increase in demand for
higher education over either the last 5, 10 or 20 years.
Table 3: Five, ten and twenty year enrollment growth by type of
institution, through 2007
Private Private
Not-for- For-
Total Public profit profit
Total percent growth in enroll-
ment:
20 years
39.78% 32.80% 33.60% 438.23%
10 years
25.79%
21 .10% 18.80% 225.60%
5 years
9.85% 5.80% 9.40% 99.60%
Average annual growth rate:
20 years
1.70%
1.40% 1.50% 8.80%
10 years
2.30%
1.90% 1.80% 13.70%
5 years
1.90% 1.10% 1.80% 14.80%
Source: Digest of Education Statistics, 2008, Table 188.
During that same time, the private for-profit sector has grown to meet the needs of students not-for-profit
schools cannot serve. Enrollment growth rates have been significantly higher. Though the private for-
profit sector is smaller than the other two sectors, the significantly higher growth rates have ensured that
overall enrollment could increase.
To meet President Obama's call for 5 million more Associate degree or certificate holders from 2-year
programs, capacity will have to increase in some or all of these sectors. Fiscal difficulties in the states are
likely to restrict community colleges and state colleges from meeting this need, even with increased
funding called for by the President. Given the historical role of for-profit schools in meeting increased
demand, it is likely that these schools will be the most able to expand quickly in response to this need.
Restrictions on student borrowing will curtail the for-profit sector from meeting these needs, and will make
it less likely that the President's goal will be met.
Page 19
April 2, 2010
4. WHAT ARE THE BENEFITS OF AN ASSOCIATE DEGREE
EDUCATION IN PARTICULAR?
The Bureau of Labor Statistics administers a survey each month called the Current Population Survey.
This is the survey that is used to calculate the official unemployment rate that is released each month as
a barometer of the health of the economy. In that survey, individuals are asked questions about their
employment status, earnings, educational attainment and demographic information. Since 1996,
individuals have also been asked about their access to health insurance.
The following table presents estimates of the difference in various outcomes between those with an
Associate degree and those with exactly a high school education. We look separately at "academic" and
"vocational/occupational" Associate degrees. All estimates control for individuals' years of labor market
experience, and for changes over time in the outcomes that affect all individuals in the same way.
Positive effects on annual earnings: The way to read the table is the following. The first row shows
how much more those with an Associate degree earn on an annual basis than those with a high school
degree. For example, males with a Vocational/Occupational Associate degree earn 23.2 percent more
each year than males with a high school degree. If the average Associate program were 2 years, this
would correspond to an 11 .6 percent earnings return to each year of schooling.
Table 4: The Benefits of an Associate Degree Education
Benefit of Associate degree or some college,
relative to a high school education for:
Annual earnings
Percent employed full time
Percent employed
Percent with employer sponsored health insurance
Percent with any health insurance
Males
Associate:
Vocational/ Associate:
Occupational Academic
23.20%
3.50%
2.60%
10.10%
9.10%
27.40%
2.10%
2.50%
8.70%
9.30%
Females
Associate:
Vocational/ Associate:
Occupational Academic
27.20% 30.30%
-2.00% -0.70%
0.20% 0.50%
6.40% 8.40%
5.30% 6.70%
Note: Regression estimates from the Current Population Survey. The table shows the difference in various outcomes between those with an
Associate degree and those with exactly a high school education. Two types of Associate degrees are considered, vocational/occupational and
academic. These self-reported by the respondents to the Current Population Survey according to the guidelines described by the Bureau of
Labor Statistics.
Men who go on to get a vocational Associate degree earn 23.2 percent more each year than comparable
high school graduates. The return to an academic Associate degree is slightly larger for men -a
27.4percent increase in annual earnings. For women, the returns are even higher. Women who get a
vocational Associate degree earn 27.2 percent more than high school graduate women, and women who
Page 20
April 2, 2010
get an academic Associate degree earn 30.3 percent more than women who stop schooling after
completing high school.
Positive effects on employment for men: The benefits of an Associate degree extend beyond the
earnings of those who work. Men with a vocational Associate degree are 3.5 percent more likely to be
employed than high school graduates. Men with an academic Associate degree are 2.1 percent more
likely to be employed than high school graduates. For women, there is no corresponding effect on
employment. Women with Associate degrees are actually less likely to be employed full-time than high
school graduates, but equally likely to be employed. Though there is no effect on employment for
women, it appears (based on the earnings effects and the health insurance effects discussed below) that
those who work are in better jobs than they would be if they did not get the additional education.
Positive effects on health insurance: An Associate degree education also helps to reduce the number
of uninsured. There is of course great interest currently in access to health insurance. For both men and
women, those with an Associate degree are significantly more likely to have health insurance. As
compared with high school graduates, men with a vocational Associate degree are 10.1 percent more
likely to have employer provided health insurance and 9.1 percent more likely to have health insurance of
any kind. Men with an academic Associate degree are 8.7 percent more likely to have employer provided
health insurance and 9.3 percent more likely to have health insurance of any kind. Women with a
vocational Associate degree are 6.4 percent more likely to have employer provided health insurance and
5.3 percent more likely to have health insurance of any kind. Men with an academic Associate degree
are 8.4 percent more likely to have employer provided health insurance and 6.7 percent more likely to
have health insurance of any kind.
4.1. THE PROPOSAL'S FOCUS ON ANNUAL INCOME IGNORES THE OTHER BENEFITS OF EDUCATION:
Academic research has shown that there are many benefits of education beyond the large increases in
annual income.
Reduced unemployment: The proposed regulation is based on the 25
1
h percentile of earnings among
those working. But, individuals with more education are less likely to be unemployed. It is perfectly
rational for a student to be willing to pay more than 8 percent of her annual income to avoid joblessness.
Insulation from recessions: Recessions typically hit the least educated the most severely. Consider the
current recession and the unemployment rates of people with different levels of education, in January
2008, January 2009 and January 2010, shown below.
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April 2, 2010
Table 5: Unemployment Rates by Schooling Level
Jan- Jan- Jan-
08 09 10
Less than HS 7.7% 12.4% 15.2%
High School 4.6% 8.1% 10.1%
Associate or Some College 3.6% 6.4% 8.5%
Bachelor or more 2.1% 3.9% 4.9%
Source: The Employment Situation, Bureau of Labor Statistics.
First, notice that even in normal economic conditions, such as January 2008, unemployment rates are
strongly related to schooling levels. In addition to earning less, those with fewer years of schooling are
much more likely to experience unemployment. This is true when comparing students with a high school
education to students with some college and/or an Associate degree.
Second, notice that the increase in unemployment rates that has happened during the current severe
recession has impacted all groups, but the less educated more than others. Those with a high school
education saw their unemployment rates increase from 4.6 to 10.1 percent over the last two years, a 5.5
percentage point increase. In comparison, those with some college or an Associate degree saw their
unemployment rate increase by 4.9 percentage points. It is typical that recessions are differentially
burdensome on the least educated.
Furthermore, the most recent employment numbers for February 201 o show that while the overall
unemployment remained steady at 9.7 percent, this obscures very different experienced for more and
less educated Americans. For those with less than a high school degree and high school graduates, the
unemployment rate rose by 0.4 percentage points (15.2 to 15.6 percent for high school dropouts; 10.1 to
10.5 percent for high school graduates) . For those with a Bachelor's degree or more, the unemployment
rate remained essentially unchanged, rising from 4.9 to 5.0 percent. The only education group for which
the unemployment rate fell significantly this month was those with an Associate degree or some college.
For this group, the unemployment rate fell by 0.5 percentage points, from 8.5 to 8.0 percent).
Increased access to health care and health insurance: As shown above, those with more education
are more likely to have both employer-provided health insurance and any health insurance at all. This
relationship is partly explained by the positive effect of schooling on the likelihood of being employed, and
partly explained by the effect of education on income. Those with more income are more likely to be able
to afford health insurance.
For this reason, and possibly because more educated people make more informed decisions regarding
the management of their own health, individuals wffh more education tend to be healthier. Their mortality
rates are lower, they are less likely to smoke, more likely to exercise, more likely to engage in
preventative care, more likely to properly manage chronic conditions such as diabetes.
Page 22
April 2, 2010
"In 1999, the age-adjusted mortality rate of high school dropouts ages 28-64 was more than twice as
large as the mortality rate for those with some college (Lyert et al. 2001 , table 26)."8
Comparing across countries, those with higher average education levels have longer life-expectancy
at birth (i.e. people live longer in countries with more educated populations) .
Some argue that this relationship is just an association, that either health causes people to get more
education, or that there is a third factor that causes both health and education to rise together. There are,
however, policy experiments that suggest this relation may be causal -that increasing education may
cause improvements in health.
Various studies show that laws that require children to complete more years of schooling (increases in the
compulsory schooling age) lead to improvements in health when those kids become adults.9
Educated mothers also have healthier babies: One study shows that increases in the number of
colleges nearby increases the likelihood that women attend college, and in turn makes them more likely
to have healthy babies. The study finds that the women were more likely to obtain prenatal care, and less
likely to smoke and drink alcohol during pregnancy. They were also more likely to be married at the time
they gave birth and had fewer children.10
Reduced criminality: There is evidence that obtaining more education makes it less likely that someone
will engage in crime. A study by Lochner and Moretti (2004) finds that compulsory schooling laws reduce
the likelihood that people become incarcerated. The effect is large for whites, and even larger for blacks.
They estimate that there is an additional15-25 percent benefit to each year of education in the form of
reduced crime that is not accounted for by the increased earnings that educated people enjoy. In other
words if we consider the reduced cost of crime imposed on society because of education, the total benefit
of education should be 15-25 percent larger than the increase in earnings that results from the additional
schooling.
General fulfillment: In addition to the benefits of education that are easily measurable, surely education
and learning brings some direct satisfaction. To the extent that students enjoy learning new ideas and
new skills, these are real benefits and they are not accounted for as a benefit of education if we just focus
on monetary earnings. People buy things all the time that bring them pleasure but no monetary return.
For example, consider vacations, televisions, tickets to sporting events, clothing, food. None of these
purchases increase earnings, but no one would dispute that these are reasonable things to buy.
To point out that the proposed regulation is misguided as a way to protect students from borrowing too
much, consider the following. Would there be support for a regulation that restricted individuals from
spending more than 8 percent of their annual earnings on food? This may sound ridiculous, but the logic
is quite similar to the proposal's. Through its effects on schools, the proposed restriction intends to
protect students from spending more than 8 percent of their annual earnings to be educated. Put this
8 Quoted in "Education and Health: Evaluating Theories and Evidence" chapter 2 in Making Americans Healthier: Social and Economic Policy
as Health Policy, ed. Robert F. Schoeni, James S. House and George A. Kaplan, Russell Sage Foundation, 2008.
9 See e.g. Lleras-Muney, 2005; Oreopolous, 2003; Arendt, 2005; Spasojevic, 2003.
10 Currie and Moretti, 2003.
Page 23
April 2, 2010
way, the declaration that this is too much to spend on education is not very different logically from a
declaration that it would be too much to spend on any other good that people need or enjoy, such as food
or clothing.
5. WHAT EFFECTS MIGHT THE PROPOSED REGULATION HAVE?
5.1. WHAT ARE THE EFFECTS OF INCREASED ACCESS TO FUNDING FOR HIGHER EDUCATION AND
HOW DO THESE VARY ACROSS DIFFERENT TYPES OF STUDENTS?
There is relatively good scientific evidence of how college costs and the ability to borrow affects access to
higher education. The evidence is divided into two types: (1) estimates of the effect of reducing the price
of higher education, e.g. through grants, on college attendance, and (2) estimates of the effect of
increasing access to borrowing, e.g. through subsidized loans, on college attendance.
While estimates of the effect of eligibility for Pell grants are mixed, various studies of other sources of
grants find a significant effect of reducing the cost of college on college attendance. Studies of the G.l.
Bill and the Social Security student benefit find large effects of these grants on the likelihood that those
who are eligible go to college. Dynarski (2003) for example finds that an extra $1 ,000 grant (i.e. reduction
in tuition) increases college attendance by 4 percentage points.
There are fewer good studies of the effect of access to loans on college attendance. Reyes (1995)
shows that when loan eligibility changed differentially across income groups in the early 1980's, college
enrollment rates increased for the groups for whom loan eligibility increased. Dynarski (2005) finds
positive but smaller effects of loan eligibility on college attendance based on a study of changes in
eligibility induced by the Higher Education Amendments of 1992.
A more recent experimental study may be directly relevant.11 A group of researchers simplified the
FAFSA and worked with H&R Block to automatically fill out the form using information already entered
from individuals' 1040 tax forms. For randomly selected households, H&R Block pre-populated the
FAFSA form and offered to assist the family in filling out the form. Relative to a randomly selected
comparison group, the assistance increased college enrollment significantly both for recent high school
graduates and for older independent students with no college experience. There was no effect on a
second treatment group who were just given information about the FAFSA but no assistance. These
results show that barriers to the availability of financing restrict access to higher education. Based in part
on this research, the President and Secretary of Education recently announced that the FAFSA form will
be drastically simplified.12
5.2. HOW TO MEASURE THE 25TH PERCENTILE OF EARNINGS?
The proposed regulation places a limit on the median debt among students at a program. This limit is
based on the 25
1
h percentile of earnings in occupations for which that program prepares students.
11 Bettinger, Eric, Bridget Terry Long and Philip Oreopolous, "Increasing Postsecondary Enrollment Among Low-Income Families: A Project to
Improve Access to College Information and Financial Aid" (http://gseacademic.harvard.edul-longbr/FAFSA_Project_-
_Bettinger _Long_ Oreopoulos_ -_Description_1-09.pdf)
12 http://www2. ed .gov /news/pressrelea ses/2009/06/06242009 .html
Page 24
April 2, 2010
Presumably, the 25th percentile is meant to be an estimate of the typical starting salary of graduates of the
program. However, it is clear that the proposal has the potential to act as a limit on tuitions that for-profit
schools will be able to charge. The extent of these limits will depend on how the 25th percentile of
earnings for a given area of study (CIP code) is determined. In Appendix A of the proposed regulations,
the Department of Education has provided a step-by-step method for calculating what it considers to be
the 25th percentile of earnings for a particular CIP code.
The Department proposes using the wage, earnings and employment data that are regularly collected by
the Bureau of Labor Statistics. However, since the employment information is reported by occupation
based on the Standard Occupational Classification (SOC) system, rather than area of study (CIP codes) ,
areas of study must be linked to one (or more) occupations. According to the Department's methodology
the 25th percentile of earnings for each program (based on the 6-digit CIP code) can be calculated using
the following method:
First, determine all occupations based on the SOC codes available from the 0-Net crosswalk
(http://online.onetcenter.org/crosswalk/CIP/) that are associated with each 6-digit CIP code.
Next, for each soc code determine employment and annual 25th percentile wages using data
from the Bureau of Labor Statistics (BLS) available at http://www.bls.gov/oes/current/oes_stru.htm.
Finally, based on the above values calculate for each CIP code the weighted average of the
annual 25th percentile wages using the total employment of each soc code as the weights.
According to the Department, this weighted average represents the 25th percentile of earnings for
each 6-digit CIP code.
While the Department's calculations are clear and concise, they are neither simple nor correct. The
Department's choice of how to calculate the 25th percentile is also far from innocuous. Below, we
describe three ways in which the calculation of expected earnings can be quite sensitive to choices
concerning the method. All of these choices are made either explicitly or implicitly, and all of them can
have significant effects both on the earnings levels and on the ultimate impact of the proposed regulation.
These examples also point out that future changes in seemingly technical inputs, such as which
occupations are matched in the CIP to soc crosswalk, have the potential to have large impacts on
programs and students.
In calculating the earnings measure the Department makes assumptions regarding the occupations for
which a graduate is likely to enter and the relative importance of each of these occupations in determining
earnings. In addition, the calculated earnings measure is not the 25th percentile across the SOC codes.
Modifying either the assumptions or the method for calculating earnings can have substantial impacts on
whether a program meets the 25th percentile/8 percent rule. Even without explicit changes from the
Department, programs may change from meeting the proposed regulation to not meeting the proposed
regulation because of future changes in BLS coding or employment patterns.
The correspondence between CIP codes and BLS occupation codes is important:
Table 6 below shows the weighted average for the Culinary Arts/Chef Training area of study based on the
25th percentiles of the occupations that are assigned to that CIP code. According to the CIP to SOC
crosswalk that is used by the Department to determine the "25th Percentile" this area of study includes
four occupations: Chefs and Head Cooks; Cooks, Private Household; Cooks, Restaurant; and Cooks, All
Page 25
April 2, 2010
Other. While Culinary Arts programs are designed to train Chefs as defined in the first occupational
category, the Department's definition appears to include those individuals working as cooks at fast food
restaurants and cafeterias, and short order cooks. While the majority of students who complete Culinary
Arts/Chef Training programs do not work at fast food restaurants, these workers' low earnings would be
used to estimate graduates' ability to afford student loan payments.
Table 6: Department of Education
Calculation of the 25th Percentile
Weighted 25th Number
Area of Study Average Percentile Employed
12.0503 Culinary Arts/Chef Training $19,278
35-1011.00 Chefs and Head Cooks $29,050 98,040
35-2013.00 Cooks, Private Household $19,030 960
35-2014.00 Cooks, Restaurant $18,230 899,620
35-2019.00 Cooks, All Other $18,390 17,340
52.0201 Business Administration/Management $62,379
11-1011 .00 Chief Executives $102,080 301 ,930
11-1021.00 General and Operations Managers $62,900 1,697,690
11-2022.00 Sales Managers $65,350 333,910
11-3011.00 Administrative Services Managers $52,240 246,930
11-3051 .00 Industrial Production Managers $64,390 154,030
11-3071 .01 Transportation Managers $59,830 96,300
11-9021.00 Construction Managers $60,650 220,550
11-9151 .00 Social and Community Service Managers $42,110 117,150
11-9199.00 Managers, All Other $64,440 365,460
13-1051 .00 Cost Estimators $42,720 218,400
13-1111.00 Management Analysts $54,890 535,850
25-1011 .00 Business Teachers, Postsecondary $46,400 69,690
51.3501 Massage Therapy/Therapeutic Massage $45,777
25-1071 .00 Health Specialties Teachers, Postsecondary $54,850 125,100
31-9011.00 Massage Therapists $23,630 51 ,250
The choice to use a weighted average of 2S
1
' percentiles is important:
More general areas of study are mapped to many occupations. To calculate the 25th percentile of
earnings among graduates of a program, the Department's method takes a weighted average of the 25
1
h
percentiles in each of the assigned occupations. Taking a weighted average of 25th percentiles within
occupations does not, however, give the 25th percentile of earnings among the workers in those
occupations. Take, for example, the case of Business Administration/Management (shown in the table
above). One of the occupations for which that area of study prepares students, according to the
Department of Education, is Chief Executive. Thus, the Department of Education's method bases the
Page 26
April 2, 2010
early career earnings of students finishing with Business Management degrees in part on the 25th
percentile of earnings of Chief Executives. We suspect that a recent college graduate has a vanishingly
small chance of earning a Chief Executive salary in the first few years after finishing school , though some
will become Chief Executives later in their careers. An important implication of this example is that the
allowable debt levels would be very sensitive to future decisions concerning which occupations match to
each CIP code. Removing 'Chief Executive' from the set of occupations for which a Business
Administration/Management program prepares students, for example, would significantly lower the
estimated earnings, and in turn the allowable debt.
As another example, consider trying to calculate the 25
1
h percentile of earnings among workers in two
equally large states: a very high-wage state and a very low-wage state. To make the illustration clear,
imagine the extreme situation in which the lowest-paid worker in the high wage state earns twice as much
as the highest-paid worker in the low-wage state. The average of the 25th percentiles will fall somewhere
in the range between the highest-paid worker from the low-wage state and the lowest-paid worker from
the high-wage state. However, the 25
1
h percentile earner among all the workers in both states is
someone in the middle of the pack in the low-wage state.
The choice to take a weighted average of percentiles may be appropriate in some situations, and the
determination depends on the way the relevant occupations are defined. Consider, for example, that a
student leaving a program has a 50 percent chance of entering occupation X and a 50 percent chance of
entering occupation Y. This student will remain in either of these parallel occupations for his career. In
this case, the average of the 25
1
h percentiles in occupations X and Y may be an appropriate estimate of
his early career earnings experience.
In contrast, consider a student leaving a program who will enter the entry-level occupation A after which
he will eventually progress to occupation B. In this case, the weighted average of 25th percentiles does
not tell us about his experience early in his career.
In some cases occupations are defined by the Bureau of Labor Statistics to correspond to a typology
represented by occupations X andY, and in other cases (as illustrated by some of the examples in the
table above) occupations are defined to correspond more closely to occupations A and B.
The estimate of earnings does not distinguish by degree level:
Furthermore, the CIP code is not specific to a level of degree, but rather just to the area of study.
Therefore, an individual with an Associate's degree in Business Administration/Management will have the
same CIP code as an individual with a Master' s degree in Business Administration/Management. Thus,
the Department's assessment of earnings (and measure of affordable debt) will be the same for these two
individuals.
How to weight information from different occupations is important:
Assuming the Department's goal is to generate an estimate of the early earnings of a program's
graduates given that they may be prepared for multiple occupations, a weighted average of percentiles
may make sense. Even when a weighted average may be appropriate, how to weight is an important
question that must be addressed. The Department's current approach of using total employment in the
full labor market (and not specific to either degree earners or for-profit students) is likely inappropriate in
many situations. For example, the table above shows the occupations associated with Massage
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April 2, 2010
Therapy/Therapeutic Massage. In this case the teachers of health specialties (which includes Massage
Therapy and other health specialties) receives more than 70 percent of the weighted average when it
likely represents a much smaller percentage of Massage Therapy graduate placements.
From a mathematical point of view, the problem is that percentiles are not linear. As a result the average
of percentiles within groups is not the percentile of the full population. It is therefore possible that the
Department of Education's method for calculating the 25th percentile of earnings would not survive the
rulemaking process. For this reason, in our calculations of impact below we present estimates that are
based on an alternative method of calculating the 25th percentile among the workers in the occupations
that match to an area of study.
What is the 2Sh Percentile?
As noted above the Department's calculated earnings measure is not the 25
1
h percentile of the
occupations that are assigned to a CIP code. An arguably more appropriate measure of the 25th
percentile can be obtained by sorting the individual earnings information of all individuals in occupations
assigned to a given CIP code and determining the earnings at the 25th percentile of that set of workers.
To do this, we first obtained a crosswalk between CIP codes and BLS occupation codes from the National
Center for Education Statistics (NCES), a division of the U.S. Department of Education. We then merged
this information with earnings data from the Current Population Survey (CPS) March Annual Demographic
File. Each March, the CPS includes more-detailed questions about annual earnings and demographics.
For each CIP code, we sorted the annual earnings of individuals in the occupations that were matched to
that CIP code, and calculated the 25th percentile of annual earnings. The table below compares the
difference in "25th percentiles" based on the alternative methods of selected CIP codes. In addition, for
each CIP code we have computed the implied maximum debt allowed based on an 8 percent limit on
annual loan payments (assuming a 1 0-year repayment schedule at 6.8 percent interest). As is clear from
the table, the maximum debt can vary substantially depending on the calculation of the 25th percentile.
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April 2, 2010
Table 7: Comparison of 25m Percentile Earnings and Maximum Debt Level f or
Selected CIP Codes
Full-Time Earners De artment of Education
CIP 25th Maximum 25th Maximum
Code CIP Description Percentile Debt Percentile Debt
10.0202 Radio & Television Broadcasting $27,000 $15,312 $27,207 $15,430
Technology/Technician
12.0503 Culinary Arts/Chef Training $14,000
$7,940 1
$19,278 $10,933
14.0901 Computer Engineering, General $48,000 $27,222 1 $73,752 $41 ,826
14.0903 Computer Software Engineering $47,000 $26,655 ' $73,791 $41 ,848
(New)
14.1001 Electrical, Electronics & Communi- $45,000 $25,520 $75,437 $42,782
cations Engineering
15.1301 Drafting & Design Technolo- $35,000 $19,849 $35,266 $20,000
gy!Technician, General
15.1399 Drafting/ Design Engineering Tech- $35,000 $19,849 $35,130 $19,923
nologies/Technicians, Other (New)
31.0501 Health & Physical Education, Gen- $32,000 $18,148 $19,927 $11 ,301
era I
31 .0504 Sport & Fitness Administra- $32,000 $18,148 $18,989 $10,769
lion/Management
43.0203 Fire Science/Firefighting $45,000
$25,520 1
$31 ,532 $17,883
47.0201 Heating, Air Conditioning, Ventilation $29,700 $16,843 $31 ,070 $17,620
& Refrigeration Maintenance Tech-
nology!Technician
51 .2001 Pharmacy (PharmD, BS/BPharm) $41 ,000 $23,252 1 $80,585 $45,701
51.3501 Massage Therapy/Therapeutic Mas- $36,000 $20,416 j $45,777 $25,961
sage
$25,520 I 52.0201 Business Administra- $45,000 $62,379 $35,376
!ion/Management
52.0408 General Office Occupations & Cieri- $23,000 $13,044 $23,239 $13,179
cal Services
52.1902 Fashion Merchandising $35,000 $19,849 I
$36,460 $20,677
52.1904 Apparel and Accessories Marketing $35,000 $19,849 $36,460 $20,677
Operations
As shown above, the particular way to calculate the 25th percentile is not innocuous. Small changes in
the way one calculates this number causes large differences in the estimate of early career earnings.
One concern would be that future changes in the method of calculating this number could have serious
consequences. We estimate that differences in earnings levels resulting from changes in how the 25th
percentile is calculated would lead to large differences in the number of students impacted by the
proposed regulation. This suggests that further consideration should be given to: (a) whether the 25th
percenti le concept is appropriate, and (b) whether the method of calculating the student's estimated
ability to pay is overly sensitive to small changes in the future and valid from a scientific standpoint.
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April 2, 2010
5.3. PRELIMINARY ANALYSIS BASED ON DATA SUBMITTED BY CCA MEMBER INSTITUTIONS
To estimate the impact of the proposed regulation on the Title IV eligible for-profit postsecondary
institutions, we collected data from Career College Association (CCA) member institutions. Specifically,
we collected student/loan level data from each institution based on the population included in their 2006,
2007 and 2008 Cohort Default Rate calculation. These data include information on student loans and
default status on all students entering repayment during a given cohort year for 3 years after entering
repayment, and are the actual data that the institution's cohort default rate is based upon. We also
received individual level demographic data from each institution including race, gender, program of study
(CIP code) , OPEID, campus information, total loan amounts (both public and private) , and length of
program. In all, we received data from 17 different institutions, representing approximately 450
campuses, 640,000 students and over 10,000 separate programs from institutions ranging from very
small to very large.
In order to determine the impact of the proposed regulation on the CCA schools for which we received
data, we calculated both the 25th percentile of earnings based on the methodology used by the
Department of Education, and the median debt of graduating students from each of the schools and
programs with available data. In addition, we calculated the 25th percentile of earnings for each CIP
code based on full-time earners in the CPS data. This alternative 25
1
h percentile of earnings calculation
was done according to the method described in the previous section.
The median total loan amounts (public and private) accrued by graduating students were calculated for
each school, OPEID, campus, program length, and 6-digit CIP code. The Department of Education's
methodology requires that students who do not take any loans (public or private) should be included in
the median calculation as having accrued o loans. Since the data we have available for the CCA schools
only include students who have taken some form of government loan, we needed to impute the number of
students not taking any loans. Also, some schools did not provide data on the private loans taken by
students so we needed to impute the value of private loans in these instances. We do not have data on
students who do not take any public loans, but take private loans. We have not included any adjustment
for these individuals.1 3
In order to account for students not taking any loans, we used I PEDS data to calculate the average
percent of students in private, for-profit institutions that do not take any loans (approximately 20 percent).
Since the population that we observe in the data are only 80 percent of the total population that should
be included in the calculations we use the 37 .5th percentile of total loans amounts instead of the 50th
percentile as this would impute a total of 20 percent of the total population as having o loans (since they
would all be below the median).
In cases where no data was available to assess the amount of private loans taken, we multiplied the
value of public loans by 1.47 since the average percent of total loans that were public (based on
NPSAS:2008 data from the NCES) was approximately 70 percent.
13 For most schools we do not have information on loans students took at prior postsecondary institutions. As a result, we underestimate
median total debt, thus possibly underestimate the fraction of programs that would be impacted by the proposed debt limit rule.
Page 30
April 2, 2010
Based on the 25th percentile of earnings determined above, we calculated the maximum amount of debt
that could be accrued using the 8 percent rule proposed by the Department of Education (assuming a 10-
year repayment schedule at 6.8percent interest). Comparing the maximum debt value with the median
debt actually accrued from the students in each program, we determined the programs which would
currently be impacted by the proposed regulation (i.e. the programs whose median debt was higher than
the maximum allowed under the regulation's guidelines).
As shown in Table 8, our analysis implies that approximately 18 percent of the programs we examined
would be impacted by the 8-percent/25
1
h-percentile rule when using the Department of Education's
income calculation. Using the CPS full-time earners results in nearly 25 percent of the programs being
impacted. The impact is disproportionately on larger programs as nearly 34 percent of students are
impacted using the Department's approach, and almost 50 percent are impacted using the CPS full-time
earners. In the sample of students analyzed, approximately 29 percent of black students and 35 percent
of Hispanic students would be in programs impacted by the proposed regulation. In addition, 25 percent
of women are in programs that would be affected. All of these percentages are higher when the
alternative measure of the 25
1
h percentile of earnings is used to evaluate programs.
Table 8: Percent of CIPs Impacted by Proposed Regulation
(Assuming 8 Percent Debt Ratio Using the 25th Percentile of Income)
Median Loan Based on Graduates
Total Percent of Percent of Percent of Percent of
Number of Programs Students Females Blacks
Programs Impacted Impacted Impacted Impacted
Department of Education 25
111
Percentile 10,725 18.19% 33.72% 24.79% 28.91%
CPS 25
111
Percentile 10,695 24.58% 49.10% 39.95% 44.91%
Source: Data provided by CCA member institutions.
Percent of Percent of
Hispanics Asians
Impacted Impacted
34.89% 44.26%
47.40% 65.14%
As shown in Table 9 below, if the sample of schools and programs used in the analysis is representative
of the full set of for-profit schools and programs- and we caution that not enough analysis has been done
yet to ascertain whether this is a reasonable assumption- these estimates imply that each year 361 ,000
students, including 68,300 non-Hispanic black students, 78,500 Hispanic, and 179,000 women, would
Page 31
April 2, 2010
enter for-profit postsecondary programs that would lose eligibility for participation in the federal Title IV
financial aid programs.14
While some capacity may exist in other sectors of higher education to absorb these students, recent
reports indicate that the most likely alternatives-community colleges-are already oversubscribed in
many cases, and are facing further financial cutbacks as the states that provide much of their funding
face severe financial challenges. Given recent growth rates at for-profit postsecondary institutions, we
estimate that by 2020 approximately 1 million non-Hispanic black students and an additional 1 million
Hispanic students are on track to attend programs that would be adversely affected, and would be denied
access as a result.15
14
The annual flow of students in for-profit programs is estimated from the 12-month enrollment reported in the IPEDS. Since the IPEDS
figures provide the stock of students enrolled at a given point in time we divide the number of students enrolled in a 4-year program
by 4, the number of students enrolled in a 2-year program by 2, and then add those results to the number enrolled in less than 2-
year programs to obtain an estimate of the flow of students Into for-profit schools. This is likely an underestimate of the flow
because all students do not stay enrolled for the full length of the program and institutions are categorized base on the longest
program offered (so, some students recorded in a 4-year program are enrolled in something less than four years).
15 Estimates based on the CPS full-time earners and estimates of impacted students by state are provided in the appendix.
Page 32
April 2, 2010
Year
Table 9: Estimated Number of Students Impacted by 2020
25th Percentile Based on Department of Education Calculation
Number of
Total Number of African- Number of
Number of Female American Hispanic
Students Students Students Students
Impacted Impacted Impacted Impacted
Number of
Asian
Students
Impacted
Using the Department of Education's 25th percentile of annual earnings and 8% Debt-to-Earnings Ratio
2011 361,172 179,149 68,348 78,545
2012 392,955 194,914 74, 363 85,456
2013 427,535 212,066 80,907 92,977
2014 465,158 230,728 88,027 101,159
2015 506,092 251,032 95,773 110,060
2016 550,628 273,123 104,201 119,746
2017 599,084 297,158 113,371 130,283
2018 651,803 323,307 123,347 141,748
2019 709,162 351,759 134,202 154,222
2020 771,568 382,713 146,012 167,794
Total Students Impacted 5,435,157 2,695,948 1,028,550 1,181,990
Note: The number of impacted students assumes that the CCA data is representative of all for-profit
schools, that for-profit schools will cont inue to grow at 8.8% per year (the growth rate over the last five
years), and the relat ive student composition does not change during this period.
15,875
17,272
18,792
20,445
22,245
24,202
26,332
28,649
31,170
33,913
238,895
Based on our estimates, the impact of the regulation would vary across types of programs. Because the
limits on borrowing do not vary with the length of program, longer programs would be more severely
impacted. Whereas approximately 18 percent of students in less than 2 year programs would be
impacted, we estimate that approximately 40 percent of students in 2- and 4-year programs would be
impacted. Table 10 below shows the percent of programs and students impacted by program length. the
results based on the CPS 25
1
h percentile are also provided in Table 10 below.
Page 33
April 2, 2010
Table 10: Percent of CIPs Impacted by Proposed Regulation
Total Percent Percent Percent Percent Percent Percent
Number of of of of of of
of Programs Students Females Blacks Hispanics Asians
Program Type Programs Impacted Impacted Impacted Impacted Impacted Impacted
Department of Education 25
1
h Percentile
Less than 2
Years 2,335 10.66% 18.79% 7.94% 17.06% 13.43% 18.08%
2 Year 4,493 18.52% 39.04% 27.86% 35.71% 52.76% 56.35%
4 Year 2,892 22.23% 40.93% 39.19% 34.98% 53.71% 51 .43%
CPS 25
1
h Percentile
Less than 2
Years 2,335 15.59% 25.88% 16.22% 24.84% 17.65% 31 .86%
2 Year 4,494 24.81% 50.03% 37.95% 49.88% 68.54% 74.62%
4 Year 2,853 28.74% 68.79% 68.47% 65.58% 76.91% 78.01%
We also estimate that the impact would not be limited to a few areas of study, but would impact a wide
variety of programs. Table 11 below reports the results aggregated to general CIP categories for
categories for which we have data on at least 1 oo programs. For example, we estimate that nearly 14
percent of Health Professional and Related Clinical Sciences, including Nursing, programs and more than
46 percent of Engineering Related Technologies/Technicians programs would not currently satisfy the
proposed debt limit rule as defined by the Department. If the alternative measure of 25
1
h percentile
earnings were to be adopted, the percent of impacted programs and students substantially would be
higher.
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April 2, 2010
Table 11 : Percent of CIPs Impacted by Proposed Regulation
Total Percent Percent Percent Percent Percent Percent
Number of of of of of of
of Programs Students Females Blacks Hispanics Asians
CIP CIP Description Programs Impacted Impacted Impacted Impacted Impacted Impacted
Department of Education Income Calculation
9 Communications, Journalism, & Related Fields 111 32.43% 70.89% 77.00% 68.40% 68.05% 86.67%
10 Graphic Communications 219 28.31% 51.27% 45.19% 53.47% 57.24% 55.81%
11 Computer & Information Sciences & Support 1,390 19.35% 32.80% 25.12% 35.15% 42.05% 41 .66%
Services
12 Personal & Culinary Services 542 27.31% 88.82% 85.02% 80.35% 88.81% 94.00%
13 Education 192 26.04% 51 .56% 55.46% 43.28% 26.43% 30.10%
15 Engineering Related Technologies/Technicians 535 46.73% 81 .70% 66.91% 80.37% 75.63% 91.35%
22 Law, Legal Services, & Legal Studies 331 9.97% 21 .91% 22.36% 8.37% 5.28% 2.56%
42 Psychology 185 33.51% 70.71% 69.90% 75.13% 54.15% 78.81%
43 Protective Services 806 9.43% 13.97% 13.79% 11.48% 26.57% 18.02%
47 Mechanic & Repair Technology 160 39.38% 80.84% 73.46% 77.70% 77.64% 87.86%
50 Visual & Performing Arts 1,342 22.35% 56.10% 57.61% 50.60% 58.39% 63.86%
51 Health Professions & Related Clinical Sciences 2,322 13.48% 15.31% 15.57% 14.54% 7.43% 17.53%
52 Business, Management, Marketing, & Related 2,356 11.50% 9.31% 9.24% 9.83% 12.59% 13.52%
Support Services
CPS Full-Time Earners
9 Communications, Journalism, & Related Fields 111 31.53% 71.84% 76.45% 69.71% 71.25% 86.67%
10 Graphic Communications 219 39.27% 84.21% 84.07% 80.68% 91 .13% 91 .73%
11 Computer & Information Sciences & Support 1,390 29.57% 62.37% 57.27% 64.20% 74.15% 75.99%
Services
12 Personal & Culinary Services 537 32.03% 92.81% 89.96% 88.14% 94.45% 96.90%
13 Education 192 32.29% 60.30% 55.85% 95.85% 93.21% 90.29%
15 Engineering Related Technologies/Technicians 535 48.79% 84.17% 68.27% 82.38% 78.42% 94.01%
22 Law, Legal Services, & Legal Studies 356 14.89% 28.66% 28.87% 22.11% 14.76% 7.69%
42 Psychology 185 36.22% 73.48% 72.81% 77.02% 56.45% 81 .78%
43 Protective Services 806 18.24% 39.90% 40.76% 38.17% 54.61% 70.43%
47 Mechanic & Repair Technology 160 41.88% 81 .05% 73.72% 77.85% 77.82% 88.04%
50 Visual & Performing Arts 1,342 26.01% 66.07% 68.47% 68.60% 66.59% 75.50%
51 Health Professions & Related Clinical Sciences 2,322 20.24% 26.89% 26.89% 24.38% 13.56% 38.07%
52 Business, Management, Marketing, & Related 2,298 18.41% 32.04% 30.91% 36.13% 38.00% 44.06%
Support Services
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April 2, 2010
6. WHAT ALTERNATIVE REGULATIONS OR POLICIES MIGHT BE
SUGGESTED TO ADDRESS THE PROBLEM AT HAND?
6.1 . FURTHER CRITICISMS OF THE PROPOSED REGULATION
Thus far this report has focused primarily on the first provision of the Department of Education's proposal,
which would limit median debt to be no more than 8 percent of the 25th percentile of earnings in specified
occupations. Programs that fail this test could retain gainful employment status by meeting alternative
tests.
Schools would be allowed to show that the graduates of the program at their school in particular earn
more than the 25th percentile upon entering the workforce. This provision would seem to address some
of the concerns raised above. However, to properly conduct a survey of graduates would be costly, and
some of these costs would be passed on to students. Furthermore, there is no guidance as to how such
a survey would need to be conducted. Would schools be required to show that the respondents were a
representative sample of all graduates? How would this be determined? How large a sample would the
estimated earnings need to be based on? Should the survey focus on the earnings in the appropriate
occupations, as specified by the Department of Education, or would earnings in other occupations count?
How would students who chose to take jobs in other higher-paying occupations be treated? How would
students who chose to take jobs in other occupations because they were unable to find work in the
specified occupation be treated? These and other questions would need to be answered. Many of these
questions highlight that the implementation of this part of the proposal would be messy at best, and quite
possibly arbitrary.
Programs that failed the 8 percent test could also retain gainful employment status by showing that they
maintained 90 percent repayment rates. As others have noted, this would not be based on default
behavior as defined in the Cohort Default Rate calculation. Students who are not current in their
payments, even though they have not yet reached the point of default, would count against a school 's
clean record. Students in deferment or forbearance would also apparently count against a school's
repayment rate. It is difficult to know how many programs would satisfy this standard. Most problematic,
the data necessary to calculate this rate is not readily available to schools. It is therefore almost
impossible to analyze whether the 90 percent standard is appropriate. Furthermore, without the data
underlying this calculation, it is not possible for schools to monitor problems, or to affect the behavior that
leads to low repayment rates. It is also not clear whether the Department of Education based the
standard on any analysis of data.
One argument described above is that it cannot be good policy to have limits on student loan payments
that are less than the benefits to earnings from schooling. The argument is the following. Standard
estimates of the return to education suggest that a student who completes a 2-year program earns 20
percent more per year, every year she works. If the debt payment limit were less than 20 percent, she
could make the loan payments out of her 20 percent schooling bonus, and still have money left over.
Page 36
April 2, 2010
If the Department of Education were to consider a debt limit that is approximately equal to the return to
education, several additional factors would need to be considered. For example:
Programs are different lengths. Longer programs have larger returns. Would the department
institute different loan limitations for 1-, 2- and 4-year programs? How would the limit be set if
there were variation within a program in how long students attended (or how many credits
students earned)?
The return to education changes over time. It has risen dramatically in the past 30 years. How
would the Department of Education decide what the return is in each year?
6.2. To DIRECTLY ADDRESS THE PROBLEM, REGULATION SHOULD FOCUS ON DISCLOSURE AND
ENSURING THAT STUDENTS MAKE INFORMED DECISIONS
A comparison of expected returns to education with the costs of education is what students are doing
when they decide whether to get a higher education, and whether to take on loans to finance that
education. If the problem the policy is trying to solve is that students are not doing this well- that they
are not making informed, considered decisions based on comparisons of expected benefits and costs-
then the regulation should address this problem.
To make this case, it may be necessary first to refocus the discussion on which problem is in need of
solving. Whereas the current proposal appears to be based on the perception that students take on too
much debt, we bel ieve this is misguided. As argued above, standard economic analysis clearly indicates
that the amount of debt should be dictated by the benefits of the investment, not by the level of income. It
may not be in the students' interest to be restricted from taking on large amounts of debt; that debt may
be the key to a better future. The important thing is to make sure that students make informed and
intelligent decisions about whether loans are right for them, and whether the benefits of the schooling
they wish to finance are large enough to repay the debt they take on.
This focus on making smart informed decisions leads directly to a policy based on provision of
information, and assistance analyzing the consequences of borrowing.
One way that this problem could be addressed directly is through different forms of disclosure and
education:
Increased scrutiny could be placed on lenders to ensure that every student who takes on a loan is
made aware ofthe costs associated with the loan, the magnitude of the annual or monthly payment,
and the length of the payback period.
Disclosure could also include mandated information regarding typical earnings of workers in the
occupation for which the student is preparing. For example, lenders could be required to show
students the 25
1
h percentile or median of annual earnings in the appropriate occupation.
This could be extended further so that students would be shown a mock budget based on an
estimate of their earnings in the appropriate occupation, their loan payments, and a standardized set
of necessary expenses. This could be done either in a standardized paper form, or an online
application could be developed to allow students to enter various earnings and expense values to
see how they fit into the budget.
Page 37
April 2, 2010
7. CONCLUSION
In summary, the proposed regulation is not currently formulated to address a specific problem effectively.
Secretary of Education Arne Duncan has stated publicly that he wants to ensure that the Department
understands its proposal thoroughly so that it prevents any "unintended consequences." Our analysis
suggests that the "unintended consequences" -cutting off access to hundreds of thousands of students
who want postsecondary education-will be much more substantial than the intended consequence,
which we believe to be-though we are not certain-reducing the number of students who over borrow.
To start, the Department of Education has not clearly defined what the problem is that the regulation aims
to address. As discussed above, some perceived problems the regulation may intend to address are not
problems at all but rather a reflection of the fact that for-profit postsecondary schools serve a very
different population than not-for-profit postsecondary schools. If the Department of Education wishes to
address the problem that some students take on excessive debt, the proposed regulation is not well
designed to do so. By applying a rule at the school or program level, many other students would be
negatively affected. Our analysis suggests that 33 percent of students currently in for-profit
postsecondary schooling would be denied access. Many more students would be denied access to
postsecondary schooling than would be protected from excessive borrowing.
Furthermore, it should not be assumed that public postsecondary institutions, particularly community
colleges, would absorb these students. Given the fiscal conditions of the states, it is not obvious that
community colleges will be able to increase capacity to meet the increasing demand for postsecondary
schooling.
Finally, because for-profit schools disproportionately serve racial and ethnic minority students and
students from low-income family backgrounds, the regulation would have the effect of reducing access to
higher education to groups of students that have historically had the lowest levels of access.
Page 38
April 2, 2010
8. APPENDIX A
Appendix Figure 1 :
Average age at which students first enroll in postsecondary schooling, 2008
23
22.5
22
21.5
Q)
21 0)
ro
Q)
0)
20.5
ro
.....
Q)
>
20
<(
19.5
19
18.5
18
For-profi t Private not-for- Private not-for- Publi c <=2 Publi c 4-year
Age first enroll ed
Notes: Calculated from the National Postsecondary Student Aid Study, 2008.
Page 39
April 2, 2010
Appendix Figure 2:
Average income of parents or independent students prior to school entry, 2008
90,000.00
80.000.00
70.000.00

60.000.00
E
0
(.)
50.000.00
c

Ol
40.000.00
ttl
...
~
<(
30.000.00
20.000.00
10.000.00
0.00
For-profit Private not-
for-profit <=2
Private not-
for-profit 4-
year
Public <=2
Average income, parents or independent. 2007
Public 4-year
Page 40
April 2, 2010
Appendix Figure 3:
Percent of students from families who received AFDC prior to school entry, 2008
18
16
14
12
c
<IJ
10
0
.....
<IJ
8 a..
6
4
2
0
For-profit Pri vate not-for- Private not-for- Publi c <=2 Publi c 4-year
Percent receieved Food Stamps. 2007-08
Page 41
April 2, 2010
Appendix Figure 4:
Percent of students who were single parents prior to school entry, 2008
35 ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
30
25
c 20
Q)
()
....
Q)
a. 15
10
5
0 r
For-profit Pri vate not-for- Private not-for- Publi c <=2
Percent single parent. 2007-08
Publi c 4-year
Page 42
April 2, 201 0
Appendix Figure 5:
Percent of students whose parents attended at least some college, 2008
900
For profit
eoo
700
60.0
E

ct
400
300
200
Prrvale for-prolll PrCate lo .. proltl Public
less-thllfl-2yea. 2 yelifs or moe 2-year
Not for profit
Publlc2yea
1\0!\dOCIO<lllt
Pubhc 4yeat PrN&le not-fo ..
doc tome pro!n 4
year
Prwate notfOI'-
P<Olrl4y
1\0ndOCIOiile
Ptl'late notlo
prole 4-year
doctorate
Page 43
April 2, 201 0
Appendix Figure 6:
Percent of students who are Black or Hispanic, 2008
60.0 ~
50.0
40.0
c
~ 30.0
"' Q.
10 0
0.0
For ~ r o f i t
Not for profit
Prhtatefor- Private for- PriVate not-for- Private not for- Puvalt> not-for- Publitless- Public 2year Public 4-year Public 4-year
profitless-than- prof1t 2years or Poft less than prorrt4-yr profit 4-year than-2-year nondoctorate docto1ate
2-year more 4-year nondoctorate doctorate
Percent Stack or Hispanic
Notes: Calculated from the National Postsecondary Student Aid Study, 2008
Page 44
April 2, 201 0
Appendix Table 1
Estimated Number of Students Impacted by 2020
25th Percentile Based on Full-Time Earners (CPS)
Number of
Total Number of African- Number of Number of
Number of Female American Hispanic Asian
Students Students Students Students Students
Year Impacted Impacted Impacted Impacted Impacted
Using the 25th percentile of annual earnings and 8% Debt-to-Earnings Ratio
2011 525,924 288,663 106,169 106,729 23,365
2012 572,206 314,065 115,511 116,121 25,421
2013 622,560 341,703 125,676 126,340 27,658
2014 677,345 371,773 136,736 137,458 30,092
2015 736,952 404,489 148,769 149,554 32,740
2016 801,803 440,084 161,860 162,715 35,621
2017 872,362 478,811 176,104 177,034 38,756
2018 949,130 520,946 191,601 192,613 42,167
2019 1,032,653 566,790 208,462 209,563 45,877
2020 1,123,527 616,667 226,807 228,004 49,914
Total Students
Impacted 7,914,462 4,343,989 1,597,695 1,606,132 351 ,613
Note: The number of impacted students assumes that the CCA data is representative of all for-profit
schools, that for-profit schools wi ll continue to grow at 8.8% per year (the growth rate over the last five
years), and the relative student composition does not change during this period.
Page 45
April 2, 201 0
Appendix Table 2
Estimated Annual Number of Students Impacted by State
25th Percentile Based on Department of Education Calculation
Number of
State lmeacted lmeacted lmeacted lmeacted lmeacted
AL 1,134 630 470 13 11
AR 1,204 718 297 22 19
AZ 33,998 15,928 3,377 3,160 924
CA 44,910 22,958 3,935 16,101 6,713
co 7,593 3,363 981 1,004 248
CT 5,648 2,169 870 1,015 120
DC 4,681 2,266 2,150 368 172
FL 25,202 12,307 5,601 7,738 487
GA 10,324 5,727 4,979 491 242
lA 6,684 3,705 292 117 50
IL 18,988 9,294 4,290 2,372 677
IN 4,978 2,732 1,115 195 37
KS 1,681 893 270 108 58
KY 3,292 1,865 574 41 41
LA 3,885 2,242 1,581 57 42
MA 5,765 2,893 520 742 240
MD 4,297 1,960 2,155 188 94
Ml 8,949 5,099 3,043 232 109
MN 9,406 5,038 1,309 325 365
MO 5,510 2,953 1,349 106 80
MS 1,111 667 576 7 23
NC 2,307 1,116 863 69 44
NH 1,284 760 17 55 18
NJ 9,118 4,366 1,969 2,294 430
NM 1,612 926 102 650 27
NV 2,722 1,344 411 472 265
NY 18,845 8,797 4,928 4,439 1,129
OH 11,686 6,147 3,401 291 129
OK 2,456 1,273 417 163 49
OR 2,901 1,579 107 183 148
PA 16,909 7,653 3,334 896 299
Rl 1,839 936 189 324 38
sc 1,523 878 655 46 19
TN 5,682 2,911 1,848 124 67
TX 29,176 14,832 5,846 12,457 718
UT 2,675 1,380 33 231 83
VA 7,032 3,720 2,854 328 250
WA 3,964 2,107 269 261 490
WI 2,004 1,116 707 100 46
wv 3,226 941 321 215 80
Total Students Impacted 361 ,172 179,149 68,348 78,545 15,875
Note: The number of impacted students assumes that the CCA data is representative of all for-profit schools. States
with less than 1,000 students who are impacted and Puerto Rico are not reported above.
Page 46
April 2, 201 0
Appendix Table 3
Estimated Annual Number of Students Impacted by State
25th Percentile Based on Full-Time Earners (CPS)
Number of
State lmeacted lmeacted lmeacted lmeacted lmeacted
AL 1,652 1,016 730 18 17
AR 1,753 1,157 461 29 28
AZ 49,506 25,665 5,246 4,294 1,360
CA 65,396 36,992 6,113 21,879 9,881
co 11 ,056 5,419 1,525 1,364 365
CT 8,224 3,495 1,351 1,379 177
DC 6,816 3,650 3,340 500 253
FL 36,698 19,830 8,700 10,515 717
GA 15,034 9,228 7,733 667 355
HI 1,029 548 23 27 1,002
lA 9,733 5,970 454 158 74
IL 27,650 14,976 6,664 3,223 996
IN 7,249 4,402 1,732 265 54
KS 2,449 1,438 420 146 86
KY 4,794 3,005 892 56 61
LA 5,657 3,613 2,455 78 62
MA 8,395 4,662 808 1,008 353
MD 6,256 3,159 3,348 256 139
ME 1,279 924 26 13 19
Ml 13,032 8,217 4,727 315 161
MN 13,697 8,118 2,033 441 538
MO 8,024 4,759 2,095 144 117
MS 1,618 1,075 895 10 34
NC 3,359 1,798 1,341 94 64
NE 1,181 739 149 41 15
NH 1,870 1,224 26 74 26
NJ 13,277 7,036 3,058 3,117 633
NM 2,347 1,492 158 884 39
NV 3,964 2,166 638 641 391
NY 27,441 14,174 7,654 6,031 1,662
OH 17,017 9,905 5,283 395 189
OK 3,576 2,051 647 222 72
OR 4,225 2,544 166 249 218
PA 24,622 12,331 5,179 1,217 441
Rl 2,679 1,507 293 440 55
sc 2,217 1,415 1,018 62 28
TN 8,274 4,691 2,871 168 99
TX 42,485 23,899 9,081 16,926 1,057
UT 3,896 2,223 52 314 123
VA 10,239 5,994 4,434 446 369
WA 5,773 3,395 418 354 722
WI 2,918 1,798 1,098 135 68
vw 4,697 1,517 499 292 118
Total Students Impacted 525,924 288,663 106,169 106,729 23,365
Note: The number of impacted students assumes that the CCA data is representative of all for-profit schools. States
with less than 1,000 students who are impacted and Puerto Rico are not reported above.
Page 47
From:
Sent:
To:
Subject:
Attachments:
Sarah Bianchi [Sarah.Bianchi@Etonpark.com]
Friday, April 02, 2010 9:25AM
Dannenberg, Michael
overview pieces
sternagree.pdf; BMO Education Industry 2009 Report.pdf; webush.pdf; 2010.04.02_
0921 AM_FBR_DV _Proprietary%20Schools%201 01 %20Coverage%
201nitiation_etonpark01 [1].pdf
These are a few very thorough (and long) overview pieces. You probably know all the stuff in here but in case it's
interesting to flip through, there are some cool data/charts
This communication may contain privileged or confidential information of Eton Park Capital Management, L.P. or its affiliates in the UK or Hong Kong.
If you have received this communication in error, please delete it and notify the sender immediately. Any unauthorised review, dissemination,
distribution or copying is strictly prohibited. We do not waive confidentiality by mistransmission. This communication is not investment advice, an
offer, or solicitation of any offer to buy or sell any security, investment or other product.
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EDUCATIONAL SERVICES
STERNE AGEE EQUITY RESEARCH
JULY 2009
ARVlND BHATIA, CFA
MANAGING DIRECTOR
(214)-702-4001
LUKE SHAGETS
ANALYST
(214)-702-4030
July 31 , 2009
Industry Report
EDUCATION
Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification, Investment
Banking, Ratings Definitions, and potential confl icts of interest begin on Page I of the Appendix Section.
800 Shades Creek Parkway Suite 700 Birmingham. AL 35209 205-949-3500
Sterne, Agee & LeQCh, Inc. Is Member FINRAISIPC
Education July 31, 2009
TABLE OF CONTENTS
EXEctJTNE SUMMARY 3
PRESIDENT OBAMA'S VISION ... ..... ......................................... .... ... ...... .................. ...... .. 4
DEFINING THE MARKET, TilE SIZE & GROWTH POTENTIAL .... 5
FACTORS SUPPORTING THE GROWTH .............................................................................. 7
TIIE FOR-PROFIT (PROPRIETARY) POST-SECONDARY EDUCATION SPACE ................................. 11
DEMOGRAPffiCS . 14
WHY ARE CAREER COLLEGES GROWING FASTER THAN TRADITIONAL ..................................... 16
ONLINE POST-SECONDARY EDUCATION .......................................................................... 20
REGULATION AND FuNDING ......................................................................................... 21
INvESTMENT DISCUSSION . ..... . . .. ....... .. . .......... . . .. ....... .. . .......... . . .. ....... .. . ... . .. . ........ . .. . .... 25
How BIG ARE THE PuBLIC COMPANIES ........................................................................... 26
VALUATION ............................................................................................................ 27
STOCK PERFORMANCE ..... .. . .......... . . .. ....... .. . .......... . . .. ....... .. . .......... . . .. .... . ........ . .. . ........ 31
INlTIATING COVERAGE ON APOL, DV, CECO, AND APEI ................................................... 34
C O M P ~ G THE CO:MPANIES ...... 35
SHORT INTEREST BY COMPANY .................................................................................... 39
APOLLO GROUP REPORT 40
AMERICAN PUBLIC EDUCATION REPORT ...... ...... ...... ...... .................. ...... .................. ........ 64
DEVRY REPORT ....................................................................................................... 81
CAREER EDUCATION REPORT ...................................................................................... 98
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EXECUTIVE SUMMARY
Initiating Coverage: We are initiating coverage of the proprietary (for-profit) post-secondary education space 'Arith Buy
ratings on Apollo Group (APOL-$69.40 BUY: Target:$81) and American Public Education Inc. (APET-$35.02-BUY:
Target: $42) and Neutral ratings on DeVry Inc.(DV -$48.18-Neutral) and Career Education (CEC0-$23.01-Neutral).
President Obama's Vision - The American Graduation Initiative - President Obama has proposed a plan to
strengthen the higher education pipeline to ensure that more students succeed and complete their dejpee. In fact, the
President the US to have the world' s highest% of graduates by 2020. Currently tl1e U.S. rcmks 7
1
'.
Size of the Madi.et and Growth. The U.S. spends approximately $410B (3% of GDP) on post-secondary education
annually currently tllere are about 18M students enrolled in post-secondary education in the US. Enrollment is
expected to !,'TOW at - 1.2% a year over the foreseeable future. 39% of all post-secondary students enrolled are considered
non-tmditional (over the age of 24, independent working full time) and tllis part of tl1e market is expected to grow at a
faster pace versus the overall market. In fact, tl1e 25-34 year old post-secondary population is e>.'Pected to grow at a
CAGR of 2.7% or twice as fast. For profit colleges focus on tllis sector of tl1e market. As a percentage of tl1e overall
market (traditional and non-traditional), the proprietary (for-profit) education space currently has - 9% share (l.5M
students). Enrollment at for-profit colleges is growing at an estimated rdte of 5% to 10% a year or 5x to lOx faster
the overall market. As a result, for-profit colleges are expected to reach - 14% market share in less tlJaU 10 years at tlle
expense of public and private not-for-profit colleges.
The Bulls: The bulls generally argue that the for-profit education space is attractive as 1) ongoing secular shifts in the
economy (more service based versus manufacturing based) wi ll continue to drive strong future growth (publ ic companies
revenue and EPS are expected to grow at 18% and 20% CAGRs for tJ1e foreseeable future); 2) the industry is counter-
cyclical in nature; 3) belief that regulatory concerns are overdone and; 4) margins are attractive (16% TIM), valuation is
attractive.
The Bears: The bears essentially argue 1) the quality of education is somewhat questionable (in some cases); 2) if high
unemployment rates continue, concerns on the value proposition of these schools will be heightened; 3) regulatory ri sks
are real and result in slowdown in enrollment and margin compression and: 4) current valuation does not fully
capture these risks.
Sterne Agee Take: We believe tl1e bulls and tl1e bears in the education space. particularly tl1ose with long-held views.
sometimes tend to paint individual companies witl1 a very broad brush when clearly not all companies are created equal.
Some companies are more focused on tl1e quality of education and the outcomes and appear ready to forgo short-term
margins, if needed. These companies deserve premium valuation. in our opinion. There are other companies that are akin
to marketing machines (i.e. , too aggressive in enrolling such tl1at product quality can take a back seat). These companies
deserve to trdde at a discount, in our opinion. When considering our rdtings and target prices on individual companies.
we took into accotmt botl1 qualitative (intangible) and quantitative factors. Our net bias towards the group ended up
being more positive than we had originally anticipated.
Risks: The biggest near-term risk to the group, in one word, is regulatory. Investors are greatly worried big regulatory
changes are coming potentially devastating growth and profitability. Otlter concerns revolve around a deceleration in
industry growth as the economy recovers (counter-cyclical argument). In our checks. we did not find evidence that big
regulatory changes are likely. Our sense is that some change is coming but is likely to be manageable for most of the
companies. especiaJi y those that have stayed focused on education quality.
Valuation: We believe the group is currently trading close to all time low valuation primarily due to 1) regulatory
concerns discussed above: 2) worries of decelemting growth and: 3) sector rotation earlier in the year.

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President Obama's Vision
Education is a big priority of President Obama. He has proposed a plan referred to as The American Graduation Initiative to
strengthen the higher education pipeline to ensure tbat more students succeed and complete their degree. In fact, the President
wants tbe US to have tbe world' s highest % of graduates by 2020. Although the majority of the President' s plan is aimed at
community colleges and may facilitate couunmuty college growth, we feel it also displays their commitment to education and we
feel it is unJikel y that l11e Administration would subnut policies to undennine any institution providing quality education. Key
components of the plan include:

Direct Lending: The President' s Budget asks the Congress to end the entitlements for financial institutions that lend to
students. The Administration wi ll instead take advantage of low-cost and stable sources of capital so students are ensured
access to loans, while providing high-quality services for students by using competitive, private providers to service loans.
The approach in the Budget, originating all new loans in the direct lending program, saves more than $4B a year that is
reinvested in aid to students. The Budget also makes campus-based, low-interest loans more widely available through a new
modenuzed Perkins Loan program which will overhaul current Perkins program. Direct lending is expected to be the
standard beginning with the 2010-2011 year.
Have tbe World's Highest% of Graduates by 2020: President Obama is committed to ensuring that America will make up
lost gratmd and will have the lughest proportion of students graduating from post-secondary in the world by 2020. Obama
believes that regardless of tl1e educational path or career intentions following high schooL all Americans should be prepared
to enroll in at least one year of Jugher education. To aclueve this goal tl1e President will e>..'})and financial aid, and simplify
federal aid programs. According to the National Report Card on Higher Education. the U.S. is 7tll in the world for college
participation. behind Korea. Greece. Poland. Ireland, Belgium and Htmgary. but the nmks 15th for tl1e number of degrees
completed per 100 students enrolled. According to the study. tl1e United States graduates 18 out of every 100 students who
enroll in a college or university. compared to 26 per 100 students for the leading countries. Australia, Japan and Switzerland.
St>end $12B over 10 years to imtH'Ove programs, courses, and facilities at two-year institutions: The federal funding
would support grants that reward innovation and results. partnerships between community colleges and t11e private sector. and
research center that would lry to monitor and research what works in public education and what does not. Anot11er $2.5B
would be used to repair colleges and to upgrade their facilities. The Obama Administration estimated that t11e money would
spark a total investment of $lOB in construction at two-year institutions because the federal funds would be used to support
other spending on facilities. The federal dollars could pay interest on bonds or loans. start fund raising projects. or function
as revolving loans. Another $500M would be used to bring together experts to develop online course materials designed to
improve learning.
Community Colleges to Pmducc SM more graduates by 2020: The President and Jus admilustration have outlil1ed a plan
that they feel would result inlus goal of having 5M more American graduates from cmmnt11uty colleges by 2020. Currently,
community colleges enroll approximately 6M students nationwide but graduation rates are poor- at best. SpecificalJy. it's
estimated that only 15% of students tl1at enroll attain an Associate's degree. A large portion of tl1e President's plan centers
on increasing that number.
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Defining the Market, the Si7,e & Growth Potential
The post-secondary education market in the US is comprised of both not-for profit (traditional) private and public colleges as well
as for-profit (proprietary) colleges. In total, as of t11e ' 07-' 08 school year, there were approximately 6,873 Title IV eligible post-
secondary institutions in t11e United States, of which 31% were Public not-for profits. 28% were private not-for profits, and 41%
were career schools and colleges.
Type of lnstitu.tions, '07-'08
l'ropriet>u-y, 41%
Source: Do, Imagine America Factbook
[ Public, 31%
I
. J>rivatt>, N'ot-f01
Profit,28%
For Profit Schools Currently Make U1J AJJproximately 41 o/o of the Market
In terms of enrollment, public colleges have the highest percentage of students (73%) while private, not-for-profit colleges enroll
the ne,_'t highest (18%) while proprietary colleges currently enroll about 9% of the post-secondary students.
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Annual By Sector '07-'08
Source: DoE, Imagine America Factbook
Caner Co ..... ,
9.&%
Career Colleges Make up Ap1>roximately 9% of the Market
Page 5
Size of the Market: The National Center for Education Statistics (NCES) estimates that the US spends approximately $410 B
(3% of GDP) on post-secondary education annually and currently there are about 18M students enrolled in post-secondary
education in the US. As shown above. within tllis. the proprietary (for-profit) education space bas share (1.5M students)
willie public and private, not-for profit colleges combined have about 91% share.
Growth in the post-seconda1' education Market: Total post-secondary enrollments in the US have grown in 1990
to in 2008 or a CAGR of 1.4%. Going forward. it is expected tlte post-secondary enrollment will grow to by 2017 or
a relatively steady CAGR of 1.2% over the foreseeable future.
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Total Postseeondars EnroUment (In Millions)
25
CAGR 2008 to 20l7E""'
----
20
CAGR 1990 to
--
18
-
20
IS
14
10
5
0
1990 2008 2017E
Actual :rnd Ptojcctcd Gtowth in Postsecondmy Eruollmcnt (OOOs)
Source: Department of Education
i'

Page6
Factors Supuorting the Growth:
Service Based Economy. The shift toward a service-based economy increases tJ1e demand for higher education. Tt is
expected that the trend toward tJ1e "service-based" economy continues due to a number of factors including 1) the
growing importance of services and of innovation in services 2) the growing interest in competence-based approaches of
strategy and innovation 3) the role of technology in innovati.on processes and 4) the increasing importance of knowledge
management in innovation management. As once can see from the below chart (Figure 1), current expectations are for
these trends to continue {particularly in Health and Human services (Figure 1 and 2)) or at least remain stable.
According to a recent report prepared for the President by the Council of Economic Advisors. the employment
environment in 2016 will largely resemble that o:f2008 with a few important tJ1emes. These include:
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o Healthcare to remain large source of job growtl1
o Share of workers that are employed in manufacturing to modemte
o Constmction industry ex-pected to recover
o Employers to value workers who can think criticallv
o Occupations tlmt employ large share of emplovees with post-secondarv education are growing faster than otl1ers
o Post High School education and training svstem provides valuable skills to tl1ose who complete programs in
high growth fields
Fi.gure 1: Projected Distribution of Workers Across Major I ndustries,
2008 and 2016
25
% Percent of year 10tms
2008
02016
l ilinlng and Manufaaunng Retail 6vsiness Health nnd Olber Government
Nntural Consltudlon Transport.'l!ioo and SeMces
Resource$ Wholesafe 3nd Frnanaal SeMCes
Utifities Setvtces
Source CEA aggregations of lnforum LIFT Model Industry ProJectons
Note T olals do not include pbs 10 agncvlture. forestry. and f.sheoes
Page 7
Education
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July 31 , 2009
Figure 2: Projected Employment Changes in Industries Addi ng t he Most
Jobs. 20082016
Annu;J! number of 3ddiuon"t jobs proJected
0 500.000 1,000 000 1.500.000 2.000.000 2.500.000
Source: lnlorvm LIFT Model Industry ProjectJons. NPO 3re nonprofit organ!ZaiJofiS.
The below chart shows how from 1992-2002, the occupations that have grown the most requi re a greater intensi ty of
non-rout ine analytic and interacti ve task, such as frequent use of mathematics and hi gh executive functioning, than do
occupations that have been in decline, whi ch are more reliant on manual and roul1nc tasks
Figure 5: Task Intensity of Declini ng vs Gr owing Occupations, 1992 . 2002
6
Task intensrty SC3Ie
5
3
2
Non-rootme
mterncblle
Rouune cognitive NotHouune manual Rootme manual
SOOI'ce: CEA calculations using data on task intensity from Autor, Lavy, and Mum31'1e (2003) and CPS d3;a.
Page 8
More Job OpJlOrtunities. Occupations that require post-secondary education are expected to grow by from 2006
to 2016, doubling t11e growth rate expected for occupations that do not require post-secondary education.
20.0%
18.0%
16.0%
14.0%
12.0%
l ().Oo/o
8.0%
6.0%
4.0%
2.0%
0.0%
Exr>ecte(l% Increase in Jobs by Education
I
i
18.7%
I
16.So/o
I
j
13.6% I
I
r----l
r
-----
J
- l
Postset"ondal) Vocadonal
Award
Assodatl' 0l'gree Bachl'lor's
Source: DoE. Imagine America Factbook
Higher Education Will Be in Demand in Coming Years
Higher Income Jobs. Economic incentives are favorable for post-secondary graduates. The U.S. Census Bureau
estimates that individuals aged 25 and older with a Bachelor' s degree earn appro>.:imately 63% more than high school
graduates the same age with no college ex-perience.
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Source: U.S. Census Bureau
Average Income Increases Dramatically with Education Level
Page 9
Lowe1 Unemployment. According to a recent article published by The Orlando Sentinel. unemployment for those with
Bachelor's Degree is roughly balf that of the national rate and less than a third of those that did not finish High School.
0%
Unemployment (College Degree, National, Higb Scbool Dropout)
April-09
High School Dropout,
15%
National Ratt>, 9%
Bachelo's Degree,
4%
2% 4% 6% 8% 10% 12% 14%
Source: The Orlando Sentinel
16%
Financial Aid. Financial aid, whether through a government subsidy or through private loans, has continually increased
over the years and is ex'Pected to further increase in the future. For example, the House of Representatives as recently as
7/24/09 passed a $160.7B bill that would increase the maximum Pell Grant in t11e FYl O year by $200 to$5,550. The bill
would increase support for the Adult Basic Literacy Education State Grants by $74M, to $628M, and raise funds for the
TRIO and Gear Up programs for disadvantaged students by $20M each., to $868M and $333M, respectively. Senate
discussed the bill on Tuesday (7/28/09) and their version of tJ1c bill, which is very similar to the House version, is
schedu.led to head to the Senate Appropriations Conmlittee on 7/30/09.
Ri sing % of High-School Students Attend College. The % of high school students attending co!Jege has consistently
increased over the last few decades. We expect this to continue as a result of a number of factors including 1) tJ1e trend
to a more service based economy and the corresponding demand for higher level jobs 2) availability of funding and 3)
continued disparity in incomes relative to education attainment.
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%Or High School Graduates Enrolled in Postsecondary Education Institut ions
Source: U.S. Census Bureau. Current Population Swvey. 1970-2006.
Average Percentage of High School Students Attending Post-secondary Scboolls Increasing
Page 10
The For-Profit (Pronrietarv) .Post-secondarv Education Snace-Growing Sx to lOx Faster Than the Tmditiomll Marl<et:
According to the Department of Education, of the roughly 18M students currently enrolled in post-secondary education,
about 39% are non-traditional-- largely made up of working adults who are over the age of 24 and who are
pursuing fmther education in t11eir current career or are preparing for a new career. This is in contrast with the tmditional
post-secondary student population t11at ty pically comprises individuals 18-24 years old. living on campus. supported by
parents and not working full time.
Enrollment in degree granting institutions for students 25 to 34 is ex-pected to !,'TOW at a CAGR of 2.7% between 2006
and 2016 or twice the rate of enrollment growth for t11e traditional population.
For-profit colleges are focused on and cater to the non-traditional student population. Current student enrollment in for-
profit is but is growing at an even faster 5% to 10% a year (5x to lOx faster than overall growth of 1.2% a year)
and could reach 2.7M over tJ1e next 10 years enabling the industry to grow its market share from today to - 14% by
2017.
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For-Profit Postsecondary Enrollment (In Millions)
3.0

CAGR 2008 to 2017E= 7%

-

CAGR2003 to2008=9o/o

1.5
.....-
2.5
2.0
1.5
1.0
1.0
0.5
0.0
2003 2008 20l7E
Source: DoE, Imagine America Factbook, SAL estimate
Enrollment in the For-Profit Education Space is Growing at 5x-10x faster than overall industry
Page 11
Other.9l%
Source: DoE. Imagine America Factbook. SAL estimate
Other.
R6.0%
2017E
....._ __ Proprietary,
14.0%
Market Sh:ue of Pro1nietary Colleges is EX11ectcd to Increase Significantly over the Focsecable Future
Total Enl'ollment at Cal'eer Schools lllld Colleges- '07-'08
Falll.nrllllllle.-.
1,488.425
AdditionaJ
Annual
About l.SM students enrolled in Pro1>rietay Colleges in the Fall of '07-'08
The chart above below shows an estimated breakdown of enrollment in proprietary colleges by type of institution. We
note that enrollment at the 4 Year-or-More Colleges is growing faster (11% CAGR) than both the 2-to-4-Year (5%
CAGR) and Less-than-Year (6% CAGR).
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Education
Annual Enrollment in Title IV Eligible Career Colleges
1,600.000
1.400.000
1.200.000
1.000.000
800,000
600,000
400,000
200.000
0 ~ - - - - - - - - - - - - - - ~ - - - - - - - - - - - - - - ~ - - - - - - - - - - - - - - ~
Less-Than-2-Year 2-to-4- Year 4 Year-or-More
0 2003-2004 lil 2007-2008
Source: DoE, Imagine America Facfbook
Enrollment at 4-Year-Or-More Prot>rietar-y Colleges is Growing Faster Than Others
July 31, 2009
The chart below shows the degree distribution at proprietary colleges. Short-tenn, certificate programs represent more
than half of the degrees granted followed by Associate, Bachelor' s and Master's. Doctoral progr<11ns are a small part of
the overall mix.
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Degree Distribution at Proprietary CoUeges, '04-'05
Associ.ate,
Certificates, 56.8%
Bachelor's, 12.7%
Doctorate, 0.3fci
Source: DOE, Imagine America Factbook
Degree Distribution Mix
Page 13
Demographics:
Traditional colleges typically cater to the 18-24 year old. In comparison, proprietary colleges cater to the working adults.
l}'picaiJy over 25 years old. At many of tJ1ese colleges, the average age of students is in the rnid-30s.
Additionally, Enrollment at proprietary colleges consists of a larger mix of the female and minority population.
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70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
80.0%
70.0%
60.0%
50.0%
4Q.O%
30.0%
20,0%
10.0%
0.0%
%of Students Over25
:%
./

L ..

4l.O'o
7
33.0%
%
v
/
Than-4-Y car 4-Y
0 Other Institutions O}'roprietary Colleges
Source: DoE. Imagine America Factbook
./
/
Proprietary Colleges Catering to Working Age Ad ults
-
%of Minority and Female Students Enrolled Annually, Fall '07
Public Private, Not-tor-Profit Career Colleges
loMinority li Female I
Enrollment at proprietary colleges consists of a larger mix of the female anti minority I>OJml ation.
Page 14
Education
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Annual Enrollment at Career Colleges by Race, '07-'08
Non-resident Alien.
2.0%
African-Anterican, non-
Hispanic, 26.0%
Asian,
Native
/
American! Islander, /
Hispanic, 20.00-o.l
V.'hite. non-Hispanic.
25.0%
Career Colleges Have a Diverse Student Mix
%of Associate Degrees Awarded to Minorities ('07-'08 at -' yr o1 more insitutions)
14.0%

/ /
14.00/o

_,.---
/ /

./ ..a
9.0%
IIi""
/ 8.(1"4
8.0%
7.0%

//
/
1/
/ /
12.0%
8.0%
6.0%

2.0%
0.0%
African-American Hispanic
0 Public 0 Private, Not-for-Profit 0 Career colleges
Career Colleges Catc1 to More Minorities the Tradi tional Schools
July 31, 2009
Page 15
Whv are Career Colleges Growing Faster than Traditiomtl'!
Career coiJeges otfer students more flexibility. The flexibility that most of the programs have with both online and
on-campus classes offer working adults and adul ts with other priorities the flexibility to lake classes while maintaining a
full/part time job, tending to their families. and maintaining other priorities.
Less Expensive tban Some Traditional. As one can see from the below charts, career colleges offer an education that
is cheaper than certain traditional alternatives. Career Colleges are on Average Less Expensive than Public ( 4-Year Out
of State) and Private (4-Year).
Average Tuition and Fees, '06-'07
/
Private, 4- Year Not-ibr-Profit.
$25, 143
Public, 4-Year0ut-ofState, ,.,.- .-"
$17,452
1-----1
!"' . / Career Colleges, $13,046 _..
// Public, 4-Year In-Stale, _..
/ / $6.585
_.,- -
$5.0:: .1; / ____ f ___ :_-=._-:._-:_-:_-=:-- _ -_ -_ _ __c,//
$30.000
$25,000
$20.000
$15, 000
$10,000
Somewhat easier admission standards. Many career colleges put less emphasis on admission requirements such as test
scores, high school GPA, etc than traditional colleges but instead put emphasis on the students desire to work toward
achieving a degree. Regardless of previous education, a student is likely able to be granted admission to a career college.
Job Enhancement: The below chart shows job enhancement differences between public and career colleges with career
colleges exceeding tlmt of public universities on all fronts:
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Able to Earn Higher
Salary
Able to Take More
Responsibility
Have Better Job
Opportunities
I
I
I
I
Job Enhancrncnts Rep01-ted by Students
I I I I I I
75.0% I
56.0% I
I I I I I
7-t.O% I
6s.o% 1
I I I I I
78.0%
I
70.0%
I I I I I 1
0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%
OPublic 0 Career Colleges
Page 16
Less Time to Degree: Compared to Public Colleges, Career Colleges allow students to complete their education at a
significantly faster pace.
Average Numbc1 of Months to Completion
Certificates Associate
OPublic 0 Career Colleges
Source: DoE, Imagine America Fact book
Financial Aid Available: As we mentioned at the beginning of the report, financial aid programs are growing and the
Obama administration bas expressed its intention to further e>.lJand pro!,>nuns. We note (as can be seen in the
demographics section) that career colleges cater more heavily (than traditional schools) to low income and minorities
that are often the recipients of financial aid.
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66% 42% 33% 14%
78% 33% 47% 37% 33%
1% 70% 34% 27% II %
78% 43% 52% 28% 27%
87% 35% 59% 33% 71%
54% 6%
68% 16% 7%
69% 15% 14%
Careet College Students are Receiving More Federal Aid than Ttaditional Schools
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Education
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Di stribution of Federal Aid Funds by Sector, '06-'07
Pell Grants Campus- Subsidized Unsubsidized PLUS Loans
Based Aid Stafford Stafford
Loans
0 Public, 2-Year II Public, 4-Year 0 Private, Not-lor-Protit 0 Career Colleges
Tbe Above Cha1i Sbows How Federal Funds Are Distributed
July 31, 2009
Page 18
Countet Cyclicality
Enrollment Growth Vs. GDP Growth
6.0%

3.0%
2.0%
1.0%
0.0%
-1.0%
$
t?
"'
{Y

....
'V
1--+- GDP Growth __._Enrollment Growth I
Source: FactSet, Department of Education
Emollment Growth Has Been Somewhat Counter Cyclical to GDP Growth
Enrollment Growth vs. Unemployment rate
8.0% .---------------------------------------------------------------------------,
7.2%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
--+- Unemployment __._Enrollment Growth, All
Source: FactSet, Department of Education
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.Emollment Growth Has Been Somewhat Counter Cyclical to UnemJ>Ioyment Growth
Page 19
s
Online Post-Secondarv Education:
In addition to having on-campus classes, many companies in the educational services space are increasingly taking advantage
of offering the flexibility of online programs. As t11e demand for post-secondary education among working adults increases.
many of the schools/programs are offering the flexibility and convenience of being able to take classes via tmditional
campuses and/or via online courses. Online enrollment continues, albeit at a slower rate than in the recent past. to post
positive growth year after year. Overall online enrollment has experienced considerdbly stronger growth in recent years tl1an
fue overall post-secondary industry. According to Eduventures. a higher education research and consulting fmn. online
enrollment grew at a CAGR from ' 02-' 07 from 0.5M to 1.8M students. We expect online enrollment to continue
relative outperformance compared to total post-secondary t:,rrowtlt Specifically, we expect online enrollment to grow at
approximately 3x U1at of total post-secondary from ' 02-' llE,
25
20
IS
10
5
0
2.0
1.8
1.6
L4
1.2
1.0
0.8
0.6

0.2
0.0
CAGR ('02-'07)- 29.2%
/
/
0.5
CY02
Online EmoRt.>ment Growth (Millions)
""""
/ 1.8
/
L
/
/
CY07
Total Postsecondaty Enrollment (In Millions) For-Pl-ofit Postst.>Condary Enrollnwnt (In 1\>WUons)
CAGR 2008 to 2017'Ji:= 1.2%
3.0
....

--
20
18
t-
2.5
2.0
14
1.5
t- t-
1.0
-- t- 0.5
0.0
2003 2008 2017E
1990 2008 2017E
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Online Enrollment Growth is out1>acing that of Total Post-secondary and For-Profit Aggregate
Page 20
Regulation and Funding:
Education is a highly regulated industry. In particular, the for-profit education companies are regulated even more heavily.
The Higher Education Act. The Higher Education Act of 1965, as reauthorized on August 14, 2008 by the Higher
Education Opportunity Act, governs all post-secondary education insti tutions participating in TiUe TV federal financial
aid programs. The Act has been reauthorized through September 30, 2013.
Accreditation. Institutions that participate in federal funding proe,rrams must be accredited by an accrediting body that is
recognized by the Deprutment of Education. The DOE has this policy to help ensure consistency in quality of post-
secondary education.
Standitrds of Financial responsibility: According to Title IV regulations, each eligible higher education institution
must satisfy tl1e minimum standard established for tlrree tests which assess the fmancial condition of the institution at the
end of the institution' s fiScal year. This fmancial responsibility test is based upon a composite score of tlle following
tllree different ratios: <m equity ratio that measures the institution' s capital resources, a primary reserve mtio that
measures an institution' s ability to fund its operations from cmrent resources, and a net income rdtio that measmes an
institution' s ability to operate profitably. A minimtun score of 1.5 is necessa.l)' to meet tl1e DOE' s financial st.:wdards.
Recent Negotiated Rule Making Discussion - the U.S. Department of Education recently (5/26/09) announced its
intention to establish a negotiated mlemaking committee to prepare proposed regulallons under Title IV of the Higher
Education Act of 1965. The Department intends to develop re!,'lJlations to maintain/improve Title IV a.t1d HEA pro6>rams
and to discuss topics such as:
Incentive compensation to recruiters
Gainful employment in a recognized occupation
State authorization as a component of institutional eligibility
Definition of a credit hour
Verification of information included on student aid applications
Definition of a high school diploma as a condition of receiving student aid.
Financial Aid Pograms. Financial Aid under the Higher Education Act Title TV program is awarded every academic
year to students on the basis of financial need, generally defined under t11e Higher Education Act as the difference
between tl1e cost of attending an educational institution and the an1otmt the family can reasonably expect to contribute to
the that cost. The amount of financial aid awarded per academic year is based on many factors, including student
program of study, student grade level. US federal annual loan limits, and expected family contribution. Also, recipients
of Title IV funding have to maintain satisfactory academic progress.
Title IV Loans: The non-traditional schools typically receive approxinllitely 75CXr-80% of revenues from
Title IV funds. In 2007, Congress passed legislation that reduced interest mtes on Title IV loans and
reduced government subsidies to private lenders tlllit participate in Title IV programs.
);> Stafford Loans -Federal Stafford Loans are the most significant source of tl1e fedeml student aid
and are characterized by being low interest, fedemUy guaranteed loans made by private lenders.
Stafford loans are both subsidized and unsubsidi zed. Stafford loans are not based on the credit
worthiness of the borrower. Repayment of Stafford Loans begins six months after enrollment
ends. Loans may be paid back for 10 years or more. Effecllve July 1, 2008, under U1e Federal
Stafford Loan Program, a dependent llndergraduate student can borrow up to $5,500 for the first
academic year, $6,500 for the second academic year, and $7,500 for each the third and fourth
academic years. Additionally, students that are independent (or dependents where parents l1ave
been denied PLUS loans) can obtain an additional $4,000 for each of the first and second
academic years and an additional $5,000 for each of the third and fourth academic years.
Gmduate students can borrow up to $20,500 per academic year.
o Subsidized- based on the U.S. fedeml statutory calculallon of student need. The U.S.
govenunent pays interest on tl1e loan while student is emolled.
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o Unsubsidized - not based on financial need. Student is responsible for the interest
regardless of attendance.
)> Federal Perkins Loan - provides low-interest loans to students with "exceptional" financial
needs. The school acts as the lender using a pool of funds provided by the govermuent. The
Perkins loan is the most attractive loan from the borrower' s perspective as interest is paid by the
federal government during the in-school and 9 month !,'lllce period. There are no origination fees
and interest rates are at 5% with 10 year repayment period.
)> Parent PLUS Loan - low interest student loan for parents of tmdergraduate, dependent students.
With a Parent PLUS loan, families can fund t11e entire cost of a child' s education.
)> Gnmts
o Fedeal Pell Gnmts- designed to service low and moderate income students who do not
have a bachelor' s or professional degree. Pel! grants do not have to be repaid.
o FSEOG -awarded only to undergraduate students who have exceptional financial need
(as determined by the institution). Priori ty is given to students who have received a
Federal PeU Grant. Other detennining factors include level of need. tl1e amount of
FSEOG fi.mding available to the Ins6tution, and the policies of t11e financial aid
department. FSEOG are subject to a maximwn yearly amount.
o SMART - The National SMART Gmnt is for students enrolled in a four-year degree
pro!,'T'clill a11d are majoring in math, science, teclmology, engineering or a critical foreign
language and have at least a 3.0 GPA. The gmnt is available for 3rd and 4th year
students.
o Academic Com1>etitiveness Grant (ACG) -a merit-based grant to qualified Pell Grant
recipients that have completed "rigorous academic curriculum" in high school and are
enrolled in a two year or four year degree program. Tlus !,>Taut is available for 1st and 2nd
year students.
Student-Right-To-Know and C<tmpus Security Act- requires that universities produce statistics and/or infommtion on
the following subjects: 1) retention and graduation rates: 2) fmancial assistance available to students and requirements
and restrictions imposed on Title IV aid; 3) crime statistics on campus: 4) athletic program participation rates and
financial support; and 5) other institutional information including: the cost of attendance, accreditation and academic
program data. facilities and services available to disabled students, and withdn1wal and refund policies.
Shifts in the Private Lending Marl<et - some students also use private loans to make up any shortfall between financial
aid and tuition/living expense cost. Private loans are typically higher interest than other fedemlly backed financial aid
loans. Additionally, credit standards in the private loan market have traditionall y been more stringent- partjcuJarly over
the last few years resulting in fewer private educati.on l.oans being offered.
90/10 RuJe -A requirement of the lligher education Act applies only to for profit institutions of lugher education. Under
the rule, a for profit institution wi ll be ineligible to participate in the Title IV programs if it derives more than 90% of its
cash basis revenue from Title IV programs for any two consecutive years. An institution that derives more than 90% of
its revenue for any one fiscal year will b place on provisional certification and be subject to possible sanctions by the
DOE.
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Stimulus Bill Ovenriew:
The American Recovery and Reinvestment Act of ' 09, which was signed into law on February 17th. 09
by President Barack Obama, is aimed primarily at job stimulation. infrastructure investment, healthcare
refonn, and education. The law includes several provisions that will impact the educational sector and the
companies that operate in t11at sector. These provisions include:
Pell Grants - The new law includes $17. 1B to close the shortfall in the Pcll Grant program and increase
maximum grant amounts by $500 to $5.350 for ' 09-' 10 and to $5550 for ' 10-' 11. Combined with the other
increases enacted by Congress. the max Pell Grant award will have increased by $1,500 since ' 06-' 07.
llighcr Education Tax Cr edit - The bill includes $13.88 to replace tl1e Hope tuition tax credit of $1800
with $2500 credit for four years of college.
Cohort Default:
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Background: In order to remain eligible for the Title TV program, an institution must maintain an
appropriate student cohort (the group of students who first enter into student loan repayment in a year)
default rate. The cohort default rate is the %of students in the cohort llmt default on their loans prior to the
end of the fiscal year following t11e first fiscal year repayment is due. Cohort default rates are reviewed on
an annual basis by the Department of Education and published ~ 12 mont11s after the period that is
measured.
Previous Policy: If ~ m institution' s default rate exceeds 10% for ~ m y one of the preceding the years, it must
delay the release of the first disbursement of U.S. federal student lmm proceeds to first borrowers in the
first year of an undergraduate program by 30 days. If an instihltions default rate exceeds 25% for three
years in a row or 40% for one year. the institution will be ineligible (and thus its students) for federal
financial aid.
New Policy: The cohort default rate requirements were modified by the Higher Education Opportunity Act
in August ' 08. Effective for federal fiscal year 2009, the measuring period for the cohort default rate will
be increased to the end of the second year after a student first enters payment (as opposed to end of first
year). Additionally, the single year 10% trigger will be incre.ased to 15% ~ m d the three year 25% trigger
will be increased to 30% The single year 40% trigger is unchanged.
National DefauJt Rates By Sector, '94-'06
20.0%
18.0%
16.0%
---....._
~
14.0%
12.0%
""'
'
- ~
10.0%
....
-.....
..... ~
8.0%
--_....____,
~
............
6.0%
-------
-
......._
...... ..
:
4.0%
----
----------
2.0%
1994 1995 1996 1997 1998 1999 2000 200 1 2002 2003 2004 2005 2006
-+-Career Colleges 17.6% 17.6% 16.5% 14.3% 11.4% 9.3% 9.4% 9.0% 8.7% 7.3% 8.6% 8.2to 97%
-Public 8.4% 8.9% 8.5% 8.3% 6.9% 5.6% 5.9"A. 5.3% 5. 1% 4.3% 4. 7% 4.3% 4.7%
--Private, not-ror-profit 6.7% 7.0% 6.8% 6.0% 4.7% 3.8% 4 0% 3.5% 3.2% 2.8% 3.0% 2.4% 2.5%
Default Rates at Career Colleges are Typically Higher than TraditionaJ Colleges
Page 23
Education
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80%
70%
60%
50%
40%
30%
20%
10%
%of Students with Default Risk Factors,. '03-'04
Non-Traditional High
School Diploma
Independent Lowest Income Qu;:ntile
!o Public fJPrivate, Not-for-Profi t 0 Career Colleges I
Career Colleges - Admission Standards Result in Higher% of Default Risk Students
July 31 , 2009
Page 24
Investment Discussion:
A Controversial S1>ace when it Comes to Investor Opinion. The for-profit education space remains quite controversial
with strong arguments from bulls and bears on the various publicly-traded stocks. Below we lay out a summary of what we
believe are the most cmmnon bull and bear arguments with respect to the group. We follow it up with a quick SUlil.lllill)' of
our take followed by our recommendations on the various stocks.
The BULL argument goes something like this:
Secular Shift. The higher-education industry is poised to benefit from t11e secular shift towards a more service
based US economy versus a manufacturing based economy.
Rising Wage Gat> The existing and rising wage-gap between people with a higher education and those without
will continue to be a catalyst for enrollment growth in the future.
Counter Cyclicality. Furthennore, the post-secondary education is generally counter-cyclical i.e., rising
unemployment in the US will provide addWonal boost to enrollment.
Value Proposition of Fo-Potit Institutions is Good. The value proposition from the for-profit companies is
generally good witl1 the outcomes i.e., the quality of t11e education, placement rates etc. is good especially
relative to the alternatives. The flexibility and convenience offered especially for working adults is invaluable.
Concerns on Regulatory Risk Maybe Overdone. The regulatory risks are overblown if not downright
incorrect. Additionally, the regulatory risks being argued about by the bears are not new and have been around
for over 10 years.
Strong Growth. Enrollment growth in the for-profit space is significantly outpacing the traditional market for
post-secondary education.
Attractive Valuation. 1n generdl, the for-profit education stocks are inexpensive given their growth profiles
a11d the recent pullback. The stocks are especially favored by GARP investors focusing on PEG ratios.
The BEAR argument goes something like this:

Rising Unemployment is a Double-Edged Sword. On t11e one hand. rising unemployment is clearly
fueling recent enrollment growth in the industry. However. if we have an L-shaped recovery in tl1e
economy coupled with much higher unemployment levels, placement rates wiU go down followed by
enrollments coming down as well.
The Value Poposition is questionable in some cases. The bears rugue that tl1e value proposition offered
by for-profit schools is not very good with outcomes such as l) the quality of the education ru1d: 2)
placement rates sometimes questionable. They argue tllat tl1e placement rates mask tl1e low ROI for
students (paying $30K for a Bachelor' s degree that gets you a job paying $30K a year up from $20K a
year).
Regulatory llisli.s are Real. The bears arbue tl1at tl1e regulatory risks are now heightened under tl1e new
Administmtion. Even if tl1e industry does not actually get more regulated, tl1e mere involvement of tl1e
DOE and tl1e increased scrutiny will be a big negative for tl1e industry. Some arf.'lle tl1at tl1e increased
scmtiny will hurt tl1e reputation of tl1e industry resulting in slowdown in enrollment growth. Others argue
tl1at the industry will likely get more regulated and hurt margins.
Cohort Default Rates are Rising. Given tl1e economy and tl1e recent changes in regulation. cohort default
rates are expected to rise meaningfully. As cohort default rates rise, t11ese companies will be forced to
slowdown growth to stay within required regulation.
Current Valuation Does Not Fully Capture the Risks Inherent in the Industry. While on surface the
valuat ion of tl1e group looks attractive, it does not fully capture the risk that future growth could be slowing
down.
The STERNE AGEE TAKE is as follows:
We believe the bulls ru1d the bears in the education space, particularly tllose witl1 long-held views,
sometimes tend to paint individual companies witl1 a very broad bmsh when clearly not all companies are
created equal. Some companies me more focused on tl1e quality of education ru1d the outcomes and appear
ready to forgo short-term margins, if needed. These companies deserve premium valuation, in our opinion.
There are otl1er companies that me akin to marketing machines (i.e., too aggressive in enrolling such that
product quality can take a back seat). These companies deserve to trade at a discount, in our view. When
considering our ratings and truget prices on individual companies, we took into accotmt botl1 qualitative
(intru1gible) and quru1tit'<1tive factors. Our net bias towards the group ended up being more positive than
we bad originally ;mticipated.
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How Big are the Public Companies (In Aggregate):
As on can see from the below charts, the public companies in the educational services space have experienced
impressive growth. In U1at time frame revenues have grown at a CAGR from $1.88 to $10.98, operating income
has grown at a CAGR from $270M to $2.1B, and t11e market cap of the group has grown from to $278
(21% CAGR). Operating Margins have varied from the mid-teens to the low 20s and have been trending higher over the
last couple of years. The group' s current operating margin (on a TTM basis and using total group revenue and total
group operating income) is 20%.
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$35,000
$30,000
$25,000
$20,000
Educational Services (Revenue, Market Cap)
In Millions
$15,000
SlO,OOO
$5,000
Source: FactSet
$2,500
$2,000
$1,500
$1,000
$500
$-
Source: FactSet
C'l Q Q
C'.'
1 f.l J:
Qj
:1
Q Q
...,
....-Revenue -Market Cap
Educational Services (Operating lncome (mms), Operatingmargit;ls)
0%
.... .... M M (") (")
..,. ..,. .,., .,.,
"" ""
r-- r-- QC QC

1
er
1

1

1 J: J: f.l J:
t
J: f.l J: J:

f.l J:
::1
Qj
:1
Qj

::1
Qj
:1
Qj
:I
Qj Qj

Qj
...,
Q
...,
Q Q
...,
Q
...,
Q
...,
Q
...,
Q Q
*
Operating Income
)I(
Operating :Margin
Page 26
Valuation
As a group, education stocks are trading at a 15% to 35% discount to tJ1eir historical averages depending on which metric
one uses. On a NTM forward PIE basis. the group is trading at a discount of29%. On a PEG basis, the group is trading at
a 35% discount to its historical average PEG. Relative to tile overall market. tJ1e group is trading at a 13% discount
compared to its historical relationship. On an EV to Sales basis, the group is trading at 24% discount whiJe on an EV to
EBITDA basis, the group is trading at a 15% discount. The table below shows U1e current valuation of U1e group and
how it compares to its historical averages, highs and lows.
Proprietary Education Group Valuation Analysis
Forward PIE
Fon.vard Relative to EV to EV to
NTMP/E PEG S&P 500 Sales EBITDA
Current 19. l x 0.9x 1.4x 3.0x 12.5x
Historical A vg 27.lx. 1.3x 1.6x 4.0x 14.6x
Premium/(Disc) Vs Avg -29% -35% -13% -24% -15%
Historical Low l7.2x O.Sx 1.2x 2.2x 9.0x
Historical High 32.3x. l .Sx 2.5x 5.1x l7.9x
Souce: FactSet
Forward PIE MultiJ) Ie Trend: Looking at recent years, the forward PIE of the group of education stocks peaked at the
end of 2007. By the end of 2008/beginning of 2009, the forward PIE was a still a healthy or close to tile historical
average of 27x. Since then the group multjple has been contracting significantly. We believe regulatory concerns have
overshadowed strong enrollment growth and profitability of the group. As a result, the group is trading close to its
historical lows.
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Education Stocks- Price to Earnings- NTM
35x
31x
lOx
Dec-06 Mat-07 Jun-07 Sep-07 Dee-07 Mat-08 Jun-08 Sep-08 Dce-08 Mar..{)9 .Jun-09
-Price to Eamings- NTM - Avetage
Source: FactSet
Page 27
Education July 31 , 2009
Education Stocks Long Tetm Histoty of Forwatd P/E
-40x
39.4x
35x
30x
25x
20x
15x
1'7.4x

S I
:s
.t
s
.t
s

"-;

-Price to Earnings - NTM -Average
Source: FactSet
As a group, education stocks are trading at historical lows on a NTM P/E basis
Im1>act of unemployment on stock pertormance and PIE multi(>les: During times of rising unempl oyment, growth in
enrollment in post-secondary institutions tends to go up. In particular, for-profit education companies and their stocks
tend to benefi t even more. The chart table shows that, in general, the forward PIE of tlte education group tends to move
witJ1 unemployment. The PIE mulliple tends to move in anticipation (ahead of) of rising or falling unemployment.
35x
vs. Forward P/1!. for lndush
8.0%
30x
25x

20x

15x

lOx
2.Wo
5x
Ox
$
.....
1--Forward PIE --Unenrploymcnl I
Source: FoctSet
Group Performance
S&P500
Unemployment {at beginning of ycnr)
U""'ploymcnl (change yoy)
Sourrt: Foe/Set
YTD
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fYOO
115%
10%
4.0%
FYOI FY02
23% '25%
.I)Ob
23%
3.9% 5.7%
3% 46%
Croup Perormance vs Unemployment
FY03 f\'04 FY05 FY06
65o/o 4% -18% 16%
26% 9% 3% 14Ciib
6.0% 5.7% 5.4% 4.8%
5% -5% -I I %
FY07 FYOS f' Y09"
54% 7<}0 3%
38% 7%
4.4% 7.2%
-8% 47%
Page 28
Nea1 Risto d eal Low on NTM PEG ratio. The below chart shows that as a group, the education stocks are trading near
their historical low (7-Year) PIE to Growth ratio. The current rati o is at 0.9x and over the last 7 years has been as high as
1.8x, as low as 0.8x and has averaged 1.3x.
7-Year Educational Services NTM PIE to Growth Chart
2.0x
1.8x
1.2x ..
l.Ox
0.8x
0.8x
0.6x
0.4x
0.2x +---------------------------------------------------------------1
O.Ox
7/02 1103 7/03 7/04 1105 7/05 1/06 7/06 1107 7/07 1/08 7/08 1/09 7/09
Source: FactSet
Below Average Relative to S&P 500 on a NTM P/E Basis. The below chart s hows that educatjon stocks are trading
below their 10 year hi stori cal average relative to the S&P on a NTM PIE basis. The group is trading at 1.3x that of the
S&P 500 and over the last 10 years has traded as hi gh as 2.4x, as low as 0.75x and at an average of 1.6x.
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10-Year Education Services NTM PIE Relative to S&P 500 NTM PIE
3.0x
0.75x
O.Sx
7199 1100 7100 1101 7101 1102 7/02 1/03 7103 1/04 7104 1105 7105 1106 7106 1107 7107 1108 7/08 1109 7/09
Source: Fact Set
Page 29
Below Aveage on an EV/Sales Basis. The below chart shows that education stocks are trading below their 10 year
historical average on an EV/Sales basis. The group is trading at 3x and over the last 10 years has traded as high as 6.2x,
as low as 2.3x and at an average of 3.7x.
10-Year Education Group- Enterprise Value to Sales
7.0x ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ,
6.2x
l.Ox + - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~
O.Ox +---..-...,----,--.--.,....---.--.,..---..-...,----,-.....--.,....---,--.,..---..-....----,-.....--,---r
7/99 1/00 7/00 1/01 7/01 1/02 7/02 1/03 7/03 1/04 7/04 1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09
Source: FactSet
Below Average on an EV/EBTIDA Basis. The below chart shows that education stocks are trading below their 10 year
historical average on an EV!EBTTDA basis. The group is trading at 12x and over the last 10 years has traded as high as
23x, as low as 9x and at an average of 15x.
10-Year Education Group- Enterprise Value to EBITDA
25.0x ~ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - .
8.9x
7/99 1/00 7/00 1/01 7/01 1/02 7/02 1/03 7/03 1/04 7/04 1/05 7/05 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09
Source: FactSet
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Page 30
Stock Perl'ormance
Stock Performance Relative to S&P 500. The Proprietary Education Providers have outperfonned the S&P 500 in t11e
last 10, 5. 2, and I years. The below charts s how the indexed price perfonnance of the for-profit education and the S&P
500 over tJ1e last lO. 5, 2. and I years.
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Over the last 10 years, an investment in the education stocks composite has returned 432% whereas the
S&P 500 has returned (27%) over that time period.
10-Yea Pl'ice Pc..t'ormance (Education Composite vs. S&P 500)

$0
0\ c:> c:> ..... ..... N N M M Vl n I:' I:' 00 00 0\ 0\
0\ c:> c Q Q c:> Q Q Q c:> c:> c Q Q Q Q Q Q Q c:> c
...!. ' ...!.
I
...!.
I
...!.
I
...!.
I
...!.
I I I
...!.
I
...!.
I I I
...!.
:s
c
:s
c
:s
c
:s
c
.;
c
:s
c
:;
c
:s
c
:s
c :;
c
:s
...., ...., ...., ...., 0: ...., ...., ...., ...., ...., ....,
...., ...., ...., ...., ...., ...., ...., ...., ...., ....,
I-+- Education --S&P 500 I
Source: Factset
Over the last 5 years an investment in the education stocks composite has returned 1.5% whereas the S&P
500 has returned (10%) over that time period.
5-Year Pl'ice Pedomance (Education Composite vs. S&P 500)

n n n n I:' I:' I:' I:' 00 00 00 00 0\ 0\ 0\
Q Q Q Q Q Q Q Q c c c Q Q Q Q Q c c c c c
...!. ..:.
I I
...!. ..:.
I I
...!. ..:.
I I
...!. ..:.
I I
...!. ..:.
I I
...!.
c
""'
c
""'
c
""'
c
""'
c
""'
:s (,J

c.
:s (,J

c.
:s

c.
:s

c.
:s

<
:s

0
<

0
<
....,
0
<

0
<
....,
0
....,
....,
I-+-Education - S&P 500 I
Source: Factset
Page 31
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Over the last 2 years an investment in the education stocks composite has re11m1ed 7% whereas the S&P
500 has returned (37%) over that time period.
2-Year Price Performance (Education Composite vs. S&P 500)

1--Education --S&P 500 I
Source: Factset
Over the last year the education stocks as a group have been up 9% whereas the S&P 500 has returned
(24%) over that time period.
1-Year Pd ce Performance (Education Composite vs. S&P 500)
$140 , ------------------------------.

., "'
1---- Education Stocks --S&P 500 I
Source: Factset
Page 32
Quar1erly Stock Pertormance: Although it turned out to be somewhat inconclusive, we analyzed how the group has
historically traded on a quarterly basis over the last 10 years. As on can sec f rom the table below, the strongest
perfonnance for the stocks has been in the first half of the year and the group has average positive performance in every
quarter over the last 10 years.
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Education Stocks: Timing Model
Date Ql Q2 QJ
CY09 3% -3% -4%
CY08 -34% 23% 11 %
CY07 14% 25% 2%
CY06 0% -6% -7%
CY05 -7% 2% -10%
CY04 22% -5% -22%
CY03 13% 26% 16%
CY02 15% 7% 3%
CYOl 0% 27% -7%
CYOO 34% -1% 49%
CY99 -12% -11% -26%
Average 4% 8% 1%
Medi an 3% 2% -4%
#of Times up 8 6 5
#of Times dovvn 3 5 6
Avg% Up 13% 18% 16%
Avg%Down -1 8% -5% -1 3%
Source: FactSet
Q ~
JY%
5%
-4%
-4%
15%
0%
-2%
4%
8%
-5%
4%
2%
6
4
9%
-4%
Page 33
Initiating Coverage on APOL, APEJ, DV, and CECO
We are initiating coverdge of the J>rOilrietary (for-llrotit) !lOSt-secondary education space with Buy ratings on Apollo
Group, Inc. (APOL) and American Public Education Inc. (APEI) and Neutml ratings on DeVry Inc. (DV) and Career
Education (CECO).
APOL- Initiating Coverage with a BUY Rating
Initiating Coverage with BUY Rating and $81 target
Leading Company in the Category
Focus on Non-Trdditional Student Population
Well Positioned for the long-nm
History of Exceeding Expectations
APEI - Initiating Coverage with a BUY Rating
Initiating Coverage with a Buy Rating and $44 target.
One of the Fastest Growing Companies in the Space
Military Niche. Growth in Civilian and Online Only Are Key Dtivers
Younger, More Nimble Company
Lower Tuition Prices Means Less Regulatory Risk
Well Positioned to benefit from Industry Growth
History of Upside Surprises
The New GT BUI Should Be a Net Positive
DV -Initiating Coverage with a NEUTRAL Rating
Diversified Model Mitigates Risk and Allows Steady Growth
Recent Focus on High Growth Healthcare Segment
Margin Expansion Potential Well Beyond Historical Peak
CECO -Initiating Coverage with a NEUTRAL Rating
Growth and Focus in Health ~ m d International Likely to Lead the Way
Tmnsformation More or Less Behind Them
Stable Cash Flow to Fund Growth :md Return to Shareholders
Online Plat:fonn and Growth May Lead to Operating Mar!,>in E>.'Pansion
Recent Results Draw Some Concern
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Education
Comoaring the Comuanies:
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Qualitativ
Age ol' Operations
Typ ofProgrnm
%From Associete/Less Titan 4 Yeer
% From Bachelor's
% From Master's
%From Doctoml
Online or Onsite
of if
Otho1 n.raull Ratos
Student 1-... unding Sou1c.e:
% Ftutding From Title TV
Other
Major Lawsuits
Quantitat iv<'
Rl'\' tnul"

NTM Gro,_,h (Est)
m
TTM EPS Growth
NTM EPS Growth (Est)
Long Temt BPS Growth (Est)
GroS&
Most Recent Annual
liistoncal Avemge
Ad,r-rthing% ofRtwenue
Rcc.::nt QuarterlY eru
Year
Oner:.ltino i\Jargins
Most Recent Annual
NTM
liistorical Avcmge
Project! Next 3 Y eer Peak
Bad O.ht Expnse
Mos'l Recent Year
Year Ago
Surprise liiKtory (positi\' e out 6 <hl

Net Cash
Debt
Share Repurchase Program
Amollllt Remaining
ROE
ROA
Management <A>llCn<tup
Source: SAL esnmates. FactSet. Company Reports
Key Comparison Metrics
AeEl
af.QL
1991 1978
13% 4 1%
64% 39%
23% 19%
O%
j 2%
Online Phoer\Lx
Combo
Miitary

NA
NA 7.2%
16% 77%
TA (DoD), VA, Cash Grants, Private Loons, Other
NA Securities class acrion
55% 15%
54.7% 23.4%
34% 24%
27%
37% 18"/o
55% 56%
50% 54%
13%112% 23o/ol26%
100/o/10% 24o/ol24%
24% 24%
27% 29"/o
16% 27%
28"/o 300/o
<I% 3.3%
<1% 4.4%
6 5
$53.0 $870.4
$0.0 $0.0
NA Yes
$500.0
65%
26% 300/o
4% 15C}'o
July 31, 2009
Includes
nY
1994
I Bachelot>.
1931
Mastcrt, ru-ul
61%
Doctoral
II%
39% 61%
NA 21%
NA 7%
Combo Combo
Heallhcarc, Culinary. Arts NA
9.1% 65%
69"Ai 65%
Grnnts, Privete Loons, Other Gmnts, Private Loans, Other
Studont and Employee Do Not E.xpeet Material Result
2% 17%
4.4% 24.7%
6% 39" ...
17% 29" ...
IS%
Repres('nts 101al
23%
Student Servaces and
57%
Admi n Expense
53%
61% 47%
27%126%
28%/28% 37o/o/38%
5% IS%
9"/o 17%
13% II%
12% 19%
2.6% 4.8%
2,6,_o 5.5%
3 5
$497.7 $184.0
$2.0 $135.0
Yes Yes
$155.5 $34.3
7% 19%
7% II%
1% 12%
Page 35
Growth Expectation are High Across tbe Board: Al though long tenn grovtJ1 expectations val}' by company (see
below chart) the weighted (by revenue) average l.ong-tenn EPS growth expectation of is impressive. In tenns of
revenue, the group is ex-pected to grow at a weighted average (by revenue) CAGR of 18% over the next 3 years.
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Consensus Long Term EPS Growth Rates
40%
-
37%

t O%
CCO STRA ESl Al'Ol, LJNC UTI l)V 8888 COCO CPLA LOP BPI APEI AVG
(w<lghJed)
Source: FactSet
Consensus Revenue Growth (3 Year Forward CAGR)
60%
38%

0%
C(;0 UTI Jl888 COCO CJ'LA ESI DV l.fNC APJi;.J BPI LOP A VG
(wel.ghted)
Source: FactSet
Page 36
Margins. Gross margins vary by company from the low 40' s to the low 70's. The median for tJ1e group is 57% Tn
tenns of operating margins. they range from the mid-single-digits through the low 30's. The median for U1e group is
15%.
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80%
70%
60%
50%
40%
J00,4
20%
10%
0%
Source: F actSal
"F()rFY07
35%
30%
2 ~ %
:zoA.
1 ~ %
10%
S%
0%
8
8
Source: Poc1Se1
-pq,FIW
8
~
8
0
u
Ool
(.)
>
Q
1::
s
Gross Mat-gins (by Company)
Most Recent Annual
~
g
~
0
u
~
Operating Margins (by Cotnt>any)
Mosl Recent Annual

u
~
l;
::3
u
Page 37
Comprehensive Comparison. The below chart compares the for-profit educators across key profi tability and growtJ1
rnetrics. As one can see, the margins and growth rates vary, but the overall theme is very positive.
Education Stocks: Compatative Analysis
ITM Sales
NTM
TTMEPS NTMEPS TIM Gross
TIM
Growth
Sales
Growth Growth Margins
Operating
Growth Margins
APE I 55% 55% 34% 59% 56% 25%
APOL 15% 23% 22% 12% 59% 28%
BPI 155% NA 257% NA 71% 15%
CECO 2% 7% 6% 73% 57% 5%
coco 15% 24% 213% 124% 41% 7%
CPLA 20% 28% 25% 41% 57% 16%
DV 17% 29% 62% 39% 54% 16%
ESI 17% 31% 39% 43% 64% 35%
LINC 15% 32% 144% 47% 60% 11%
LOPE 62% 69% 325% NA 67% 10%
STRA 25% 33% 27% 36% 67% 33%
UTI -3% 13% -44% NA 48% 8%
Median 17% 29% 37% -B % 58%, 16%
Source: FactSet
Note: UTJ Margins are FY07
Comparative Valuation: Educational Services
Stock Stock Mkt Enterprise PIE PEG EV toEBITDA EV to Sales
l
2
3
4
5
6
7
8
9
10
I I
12
13
American Public tducalion Inc.
Arlolto Gtouplnc, (CI A)
Bridgepoint Education Inc.
Btaclcboard
Capella Education Co.
Career 11ducatlon Corp.
Corinduru1 Colleges Inc.
DeVry !no.
Grand Canyon Education Inc.
liT Educational Services Inc.
Lincoln Educational Services Corp.
Stroye-r Inc.
Universal Tcchnicallnstitulc Inc.
I
Group Av.raoe
Source: FactSet
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Rating Price
APE I BUY $34.83
APOL BUY S69.64
BPI NR $17.91
BBBB NR $33.43
CPLA NR $62.59
CECO Neutral $23.06
coco NR $15.56
DV Neuii".H S48.J6
t.OPE NR $17.36
ESJ NR S96.95
NR $20.02
S'fRA NR $216:93
UTI NR $15.24

Value CY08 CY09
( $MM) ($MM)
S62l 41x 28x
SIQ,320 S9,H8 2Sx l6x
$963 $900 37x 2lx
$1,063 $1.073 4Jx 26x
$1,038 $913 38x 25x
$2,052 $1,557 22x 19;j;
$1,349 $1,280 35x 18x
S3,400 S3,274 " 27x 20s.
$79S $766 l02x 25x
$3,647 S3.58l l9x 13x
$538 $575 28x l 5x
$3.052 $2,965 38x 28x
$365 $310 48x 36x
$2,247 $2,095 38x 22x
CYIO CY08 CY09 CYIO CY08 CY09 CY!O CY08 CY09 CYIO
20x l.lx 0.8x O.Sx 19.6x IJ.h 9.2x S.Sx 4.0l( 2.9x
J3x 0.9x 0.7x il.3x l 8x 6:4x 3.0x 2.4x 2 . 0$
, .. _ .
15x l.2x 0.7x 0.5x 24.6x 10.9x 7.2x 4. l x 2.2x l.6x
22x 1.7 J.l x 0.9x 18.9x 12.2)( 9.2x 5.4x 1.9x 2.5x
20x l.5x !.Ox 0.8x l7.0x l2.5x IO. l x 3.4x 2.8x 2.3x
14x 1.5-x l.Zx l.Ox 8.6x 7.4x 5.4Jt 0.9x 0.9x 0.8x
l3x 1.4x 0.7x 0.5x 13.3x 7.4x 5. 7x l.2x I. Ox 0 8x
16x 1.2x 0.9x 0.7x lS.Sx l1.4x 9.4x 3.0x 2.31 .t9x
l7x 3..:1x O.Sx 06x 36 5x l3.0x 9.lx 4.8x 3.0x 2.2x
ll x 1.2:< 0.8x 0.7x 10.2x 7.2x 6.3x 3.5x 2.8x 2.4x
l2x 1.4x 0.7x 0.6x 10.6x 6.5x 5.6x l.5x l. lx !.Ox
23x J.9x 1.4:< l.lx 2L2x l6.8x 13.5x 7.5,x 5.9x 4 9x
l9x 2.3x l.7x 0.9x l 0.5x l0.3x 7.0x 0.9x 0.9x 0.8x
16.5x 1.6x l .Ox 0.7x 16.8x IO.Sx S.Ox 3.3x 2.5x 2.0x
Page 38
Shot1 Interest
Current
Comparative Analysis: Short Interest
CapeUa Education Co.
Corinthian Colleges Inc.
ITT Educational Services I nc.
American Public Education Inc.
Career Education Corp.
Lincoln Educational Services Corp.
Grand Canyon Education Inc.
Universal Technical Institute Inc.
Apollo Group Inc. (Cl A)
Bridgepoint Education Inc.
DeVrylnc.
Average
Source: FactSet
6 month trend
June
Slrrs Short
STRA 2,991,225
CPLA 2,944,328
coco 14,432,210
F.SI 4,648,850
i\P.1 1,893,188
CECO 9,363,302
UNC 2,499,236
LOPE 4,244,421
liT I 2,089,658
APOL 9,623,487
BPI 1,786,920
I)V 2,038,339
'
Source: /<octSet
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%Short
21%
18%
17%
12%
lO%
10%
9%
9%
9%
6%
3%
3%
May
Slrrs Shm1
3,344,204
3,073,184
14,711,416
4,496,526
1,612,743
9,996,097
2,371,294
4,106,324
2,002,242
9,700,776
1,495,355
1,427,195
%Shmt
24%
18%
17%
12%
9%
11%
9%
CJO/o
8%
6%
3%
2%
Ticker Shares Shor t % of S/0 Short NTMP/E PEG
STRA 2,991,225 21.3% 26.0x 1.3x
CPLA 2,944,328 17.6% 23.5x 0.9x
coco 14,432,2 10 16.6% 13.9x 0.5x
ESI 4,648,850 12. 1% IJ .9x 0.7x
APEI 1,893,188 10.4% 22.6x 0.6x
CECO 9,363,302 10.4% l7.4x 1.2x
LJNC 2,499,236 9.3% 14.2x 0.9x
LOPE 4,244,421 9.3% 21. 7x 0.7x
UTI 2,089,658 8.9% 28.1x 1.4x
APOL 9,623,487 6.3% 13.2x 0.8x
BPI 1,786,920 3.4% 17.4x 0.6x
DV 2,038,339 2.9% 16.2x 0.7x
10.7% J8.9x 0.9x
April March February January
S1rrs Shot1 %Short S1us Short %Short S1rrs Short %Shot1 Slu-s Short %Shot1
3,1 15,033 22% 3,708,976 26% 2,755,261 20% 1,946,802 14%
2,928,960 18% 2,786,239 17% 2,604,377 16% 2,314,480 14%
13,684,855 16% 16,363,917 19% 15,417,021 18% I I ,235,814 13%
3,746,109 10% 5,661,146 15% 4,000,147 LL% 3,482,570 9%
1,312,942 7% 1,837,690 10% 1,643,561 9% 1,546,478 9%
10,185,897 11% 12,953,583 14% 10,042,691 ll% 8,060,327 9%
2,044,150 8% 2,033,311 8% 1,057,132 4% 305,874 1%
3,731,328 8% 3,836,892 8% 1,814,494 4% 1,280,556 3%
2,335,196 10% 2,647,333 II % 2,527,871 I I% 2,193,469 9%
10,340,557 7% 11,645,917 8% 12,826,335 8% 8,147,591 5%
450,287 1% NA NA NA NA NA NA
1,539,757 2% 1,432,124 2% 2,190,410 3% 1,621,432 2%
Page 39
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July 31, 20091119 Pages
APOLLO GROUP, INc. (NNM: APOL)
I NITIATING COVERAGE WITH A B UY; L EADER IN INDUSTRY;
RELATIVE VALUATION NEAR ALL TIME LOW
Initiating Coverage with BUY Rating and $81 target: We
are initiating coverdge of Apollo Group, Inc. (APOL) with a
BUY rating and 12-month target price of $81 based on our
probability weighted valuation analysis. The primary reasons
for the Buy rating are based on the company' s best in class
execution, potential margin e>..'Pansion as the company
continues to leverdge its infrdstructure, our belief tlmt the
company will navigate relatively '"veil through potential
regulatory concerns. and its relatively cheap valuation.
Leading ComJ>any in the Category: With student
enrollment of over 400,000 and nearly $4B in revenue,
APOL is the world' s largest for-profit education providers
focused on the post-secondary space. Its U Diversity of
Phoenix brand (95% of revenue) is particulaJly well known.
Focus on Non-Taditional Student Population: Like many
of its peers in the proprietary (for-profit) education space,
APOL is focused on the non-traditional student population
including working adults looking for flexibility in schedules,
lower cost relative to traditional colleges and easier
accessibility.
Earnin s Summar
FYE Aug
Revenue (M):
2008A
$3,140.9
$749.5
2009E
$3,927.2
$1,124.5 Operating Income (M):
EPS & PIE Summar
2008A 2008 Previous 2009E
EPS: Q1 $0.88 $1. 18
Q2 $0.50 $0.83
Q3 $0.91 $1 .33
Q4 $0.79 $1.10
Full Year $3.07 $4.44
P/E Ratio: 22.8x 15.8x
Company Report
Education
RATING: BUY
Fiscal Year Ends Aug
Rating:
Price:
Price Target:
52-wk Range:
Market Capitalization (M):
Buy
$69.40
$81
$48.30-$90.00
$11,608.4
165.9
3147.7
$10,383
$7.12
Shares Outstanding (M):
Avg. Daily Vol. (000):
Enterprise Value:
Book Value/Share:
Anrind Bhatia, CFA
(214) 702-400 I
abhatia@stemeagee.com
2009 Previous
Luke Shagets
(214) 702-4030
lshagets@stemeagee.com
2010E
$4,669.7
$1,372.1
2010E
$1.46
$1.00
$1 .58
$1 .33
$5.37
13.0x
2010 Previous
Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification,
Investment Banking, Ratings Definitions, and potential conflicts of interest begin on Page I of the Appendix Section.
Sterne, Agee & Le QCh, Inc. Is Member FI NRAISIPC
APOLLO GROUP, INC. (NNM: APOL) July 31 , 2009
Well Positioned for the long-run: APOL is well positioned to benefit from
industry growth driven, in part, by the counter-cyclical nature of the
industry. Additionally, we see potential for further margin expansion
resulting from operating leverage. We are projecting the company's revenue
and EPS to f,'TOW at CAGRs of 15% and 17% respectively over the nexi five
years.
History of Exceeding Expectations: Although there have been times
APOL has missed expectations, in general APOL bas a long history of
beating consensus expectations and over the last 10 years 70% of the time
the company has either met or exceeded expectations. rn the last six
quarters, the company beat consensus five times with average EPS upside
oflO%.
Several Risks: The biggest risk factors facing the company and the industry
include: a) ri sk of increased government regulation under the new
administration; b) poten!lal slowdown in enrollment growth as the economy
improves; c) increased student loan defaults; d) student financing issues; e)
risk of losing accreditation if the company exceeds 90/10 li 1nits and; f)
litigation risk.
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APOLLO GROUP, INC. (NNM: APOL) July 31, 2009
ComJlany Background
Apollo Group has been in the business of private educational services for more than
30 years. The company offers programs and services to high school, undergraduate,
and graduate level students through both onli ne and on-campus programs. Apollo
Group operates the following business units:
The University of Phoenix - the school has been an accredited school
since 1978. It offers its educational programs throughout the world t11rough
both its online and on-ground programs. The online programs are
structured to provide unifonnity with t11e company' s on-ground campuses.
As of t11e last fiscal year (ending August 31
5
\ 2008), University of Phoenix
accounted for of total revenue.
AllOUo Global - established in October of 2007, Apollo Global is a joint
venture with tl1e private equity firm, The Carlyle Group. The focus of the
business is to invest in the international educational services industry by
acquiring post-secondary and other schools outside of the United States.
The agreement witl1 Carlyle requires that APOL put up $801M in cash
while Carlyle will put up $199M. Apollo will hold an 80.1% of Apollo
Global while Carlyle wi ll hold 19.9% of tJ1e business. To-date, Apollo
Global has purchased the companies: Universidad de Artes,
Ciencias y Communicacion (100%), Universidad Lationamericana (65%)
and most tecently in June 2009, it entered into an agreement to acquit'e
BPP Holdings (100%) based in the UK for 620 pence per share or total
enterprise value of $540M. The acquisition is ex-pected to close during
Apollo' s ongoing 4Q09 (ending August 31, 2009). BPP is a leader in the
provision of professional education and training, and developing careers by
helping people to attain and build on professional qualifications. BPP
provides its training and professional education through tltree separate
operating divisions: BPP Professional Education, BPP College of
Professional Studies and Mander Portman Woodward (premium
independent fifth and si>..'th form colleges). In 2007, BPP College of
Professional Studies was grdllted degree awarding powers.
Insight Schools - Insight Schools was acquired by Apollo in October of
2006. The company offers curriculum and administrative services to public
schools to operate full-time online high school programs to students. In
certain states, Insight contracts with school districts, govemments, and
charters to provide the online services. The primary reason for the services
is to offer high school students an alternative to traditional high school.
Western International University -an accredited college that offers both
undergraduate and graduate programs. On-ground locations are in Arizona
whi le online programs are available through Western International
Universi ty Interactive Online. The company also operates in China and
India t11rough various joint educational agreements.
Institute of Professional Development (IPD) - business provides prof,>rdm
development, administration functions and management consulting to
private colleges and universities to help in establishing expanding on
tl1e respective schools working adult progrdllls.
College for Financial Planning Institutes Corporation (CFP) - an
accredited school tl1at provides financial planning education programs and
certification programs in retirement. asset management. and other financial
plamling areas. The school is offered botl1 online and through an on-grmmd
campus in Colorddo.
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Meritus Univeasity - Canadian institution that began operations in
September, 2008. The programs are offered online to students both in
Canada and elsewhere.
Above schools are grouped into the following renot1able business segments:
University of Phoenix- approximately 95% of revenue
Apollo Global - less tl1an 0.5% of revenue
insight Schools -less than 0.5% of revenue
Other Schools - approximately 4% of revenue and includes Western
International University, IPD. CFP. and Meritus University.
Anollo Groun offers the following Degree nrograms <tnd services:

Associate's
0 Arts and Sciences
0 Business and Management
0 Criminal Justice and Security
0 Education
0 Human Services
0 Nursing
0 Health Care
0 Teclmology

Undergraduate
0 Arts and Sciences
0 Education
0 Human Services
0 Nursing
0 HeaJth care
0 Teclmology

Graduate
0 Commwucation
0 Education
0 Human Services
0 Nursing
0 Health Care
0 Psychology
0 Teclmology
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APOLLO GROUP, INC. (NNM: APOL)
Degree Year End August 31, 2008
Doctoral, 6,100
Bachelor's, 141,800
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So11rce: Company reports
Source: Company reports
New Oegret> Erwollment (Last 4 Qua1ters)
July 31 , 2009
Page 44
Business Model/Stated Strategy:
Apollo group is arguably the leading company in the for-profit educational
services industry. The company's strategy revolves around its mission of
providing the hi ghest quality education for individuals around the world.
By providing the highest quality products and services, the company intends
to allow its students l11e ability to maxim:ize the benefits of l11eir respective
educational programs. ApoiJo has outlined a number of key highlights in
order to achieve their aforementioned strategic plan as follows:
o value of core existing domestic post-secondary
business- management has stated that l11is is the company's most
important strategic goal for the foreseeable future. Apollo intends
to accomplish this goaJ by its current
offerings, improving student success rates by increasing retention.,
and by the leverage of the existing
irrfmstructure.
o Ex1>and beyond core - the company intends to continue to branch
out and expand beyond its core business to levemge its expertise in
the educationaJ services industry. Management feels the
can expand into markets that are complementary to its existing
businesses. The acquisition of Insight Schools is evidence of this
initiative as it positioned the company to benefit from the growth
in online education of the K-12 segment an area that Apollo has
traditionally not focused on.
o Continue to 1mrsue OllflOtiunitics to CXI>and into new marl<ets
- Apollo management feels U1at there is an opportunity to expand
its operations international ly from a primarily domestic focus.
There is a growing demand for post-secondary education in foreign
countries, especially countries in Latin America, Europe, and Asia.
Apollo Global. Apollo Groups joint venture with The Carlyle
Group, intends to enter these markets through partnerships and/or
by acquiring existing businesses.
o Protect corp01ate and brand rc1mtation - Apollo has begun a
number of initiatives to focus on academic quality, employee
friendly policies. and social responsibility. Management feels that
these initiatives have helped differentiate Apollo from its
competitors.
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Enrollment Trends, Margin lm!lact, Default Rates:
Total Enrolhncnt (Dy Dcgl'Cc)
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
FY06 FY07 FY08 FY09E FYIOE F"Y.IIE FY12E FYl3E F Y l ~ E
0 Associate's Bachelor's 0 MOister 's 0 Uoctoml
Source: Company reporrs
Associate Degree EnroUment Has Been A Key Driver of Growth. As
can be seen fmm the chart above, the main driver of enrollment growth at
APOL has been its Associate De);.>ree prognun. Associate enrollment
increased from 46,000 in November, 2005 to 186,000 at the end of May,
2008 or a CAGR in excess of 45% over that period. We expect this trend to
continue in the near future. During the same period, Bachelor' s enrollment
increased from 149,200 to 156, 100 or a CAGR of 1%. Similarly, enrollment
in Master' s programs has increased from 68,000 to 71,200 or a CAGR of
1% during the same period. Finally, enrollment in the Doctor'cll pro);.>TIUn
(which represents less than 2% of enrollments) has increased from 3,200 to
6,800 or a CAGR of 24%. In the most recent 12 months, ovenlll enrollment
grew by 75,000 or 22% and Associate enrollment increase was responsible
for 52,000 or 69% of this growth. Growth in the Bachelor enroll ment was
responsible 18,000 or 24% of this growth. Master's and Doctorate
contributed 3,900 (5%) and 1,000 (1%) towards enrollment growth.
Revenue Mix and Margin Impact: Given the rapid growth in Associate
enrollment, the mix of revenue from the Associate degree program bas
increased from 18% in November 2005 to --45% currently. Meanwhile, the
Bachelor' s revenue mix has decreased from 55% to 36% and Master' s
revenue mix from 25% to 16% currently. The significance of this is that the
Associate degree program has the lowest average revenue per enrol I ment
compared to all other programs. In fact, the Associate program averages
about 25% lower than the Bachelor' s and Master' s programs, in tenns of
revenue per enrollment. Also, t11e cost per start, cost of service and student
loan default rate is higher for the Associate program compared to other
programs wllile its retention rate is lower. In other words, an increasing m.ix
of Associate degree revenue offsets some of the margin expansion one
might otherwise e:-.rpect. Said differently, while growth in the Associate
program has been critical to the success of APOL, if the other two programs
were to show more rapid growt11 tl1an currentJy exhibited, it should have a
disproportionately more positive impact on margins.
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Default Rate Trends:
As can be seen from t11e chart below, Cohort Default Rates have been rising
over the last two years both nationally and at Apollo' s University of
Phoenix and Western International University. While data for 2008 is not
available yet, we e>.pect this rising trend to continue in 2008 given tougher
macro economic conditions.
30%
25%
20%
'$. 15%
10%
5%
0%
2005
-+-National Rate
Cohort Default Rates
-.,.. 19%
10%
: 7%
. 9%
2006 2007
_.,_University of Phoenix
~ Western International Univ.
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Recent Ouartel'lv Results:
Apollo recently (June 2 9 ~ ' , 2009) reported results for its fiscal 3Q ending
May 31, 2009. OveraJI, results were better than expected. Revenue of
$1.05B beat t11e First Call consensus estimate of$1.04B whi le EPS of$1.26
beat consensus estimate of $1.13. The company's enroll ment base grew
22% year-over-year (420,700 versus 345,300) while average revenue per
degreed enrollment (pricing) increased ~ 5 % , leading to overall revenue
growtl1 in degree seeking programs of 28%. Non-degree seeking revenues
(certificate programs less t11an 18 hours, single course and conllnuing
education courses etc.) were down 10% year over year.
Historv of Surnrise
Although the company has missed ex-pectalions on occasion, in general
Apollo has a good hi stOI)' of surprising on the upside. Over t11e last five
years, 70% of the time, consensus EPS estimates have increased following
quarterly results. In tJ1e most recent six quarters, the company beat EPS
estimates five times. The average beat was $0.10 or 12%. Six quarters ago
(Feb, 2008), the company missed consensus EPS forecast by $0.11,
reporting $0.41 in EPS versus consensus of $0.52 on higher-than-ex-pected
spending related to a spike in hiring of admissions and marketing
personnel. Also, starts were slightly slower than expected, which t11e
company blamed on t11e transition from Ad.com to Aptimus (online
advertising company), which the company had recently acquired.
APOL: Recent JJPS Surprise History
AnX>unt % Nature of
Actual Conensus of Sum rise Suwrise Suwrise
3Q09 $1.26 $1.13 $0.13 12% Positive
2Q09 $0.77 $0.65 $0.12 18% Positive
1Q09 $1.12 $1.00 $0.12 12% Positive
4Q08 $0.75 $0.69 $0.06 90/o Positive
3Q08 $0.86 $0.78 $0.08 10% Positive
2Q08 $0.41 $0.52 ($0.11) -21% Negative
APOL: Recent Re,'Cnue Surprise History
Amount % Nature of
Actual Con en sus ofSumrise Sum rise Surnrise
C$MM) ($MM) C$MM)
3Q)9 1,051.34 1,037.50 $14 1.3% Positive
2Q)9 876.13 846.77 $29 3.5% Positive
l(X)9 970.97 912.21 $59 6.4% Positive
4Q)8 831.40 805.00 $26 3.3% Positive
3Q)8 835.22 804.21 $31 3.90.1.) Positive
2Q)8 693.64 702.89 ($9)
'
-1.3% Negative
Source: Factset
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Revenue, Gross Margin, Operating Margin Trend:
Over the last 10 years (1998-2008), APOL has experi enced an impressive
revenue growth rate of23% a year. During t11at period, in any given year its
revenue growth has been as high as 34% and at least 10%. Meanwhile,
gross margins have improved from 42% to 56%. Operating margins peaked
in 2005 at 32% (-34%, ex stock based compand other one-time items) and
are estimated to be 29% for t11e ongoing FY ending August 31, 2009.
$9,000
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
Sl ,OOO
Revenue (millions) and Revenue Growth (%)
98 99 00 01 02 03 04 05 06 07 08 09E lOE UE UE 13E 14E
jc:::J Revenue Growth I
Source: Company reporls, ::;AI. estimales
Margin Trend
75%

60'A. 61% 6 1% 62% 62% 63%
.54%
;m 56% 56'G
51%

42% 42%

65%
55%
45%
...
. ....
35%
"""
..... .a
---
.
,,.,

" "
,,o ..

2 7%

29% <or-
.

25%
L5%
18% 19%
; I&!
98 99 00 OJ 02 03 04 05 06 07 08 09E LOE llE l2E BE P E
I-+-Gross Margin --Operating Mal'gin I
Source: SAL Eslimales, Company filings

40jo
35lo
30+
25To
20io
15i o
10o
5%
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Student Acquisition Cost
We calculate the cost of acquiring a new student as total Selling and
Promotion Expense /New Degree Enrollment. We anticipate the average
cost of student acquisition to generally rise over time. That said. we expect
the rate of increase in this cost item to slow over time as the company
realizes benefits from its late 2007 acquisition of Aptimus (online
advertising company). In the most recent two quarters, the company saw
tlris cost decline year-over-year-a positive.
Student Acquisition Cost (Historical and SAL Estimates)
$3.600

$3,000 ... 'ft'---"'---'------------j

v v
& & & & & & & &
Source Company Filings. SAL estimates
Qulll'tcl'ly Otangc in Student Acquisition Cost
---Quarter over Quarter Change
Source Company Filings, SAL estimates
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Net Income
Strong Balance Sheet
As of the end of 3Q09 (May 31 , 2009), the company had $819M in cash
and cash equivalents ($6.70 per share). This was after the company used
$444M in cash to purchase 7.2M shares (4.5% of shares outstanding) @ an
average price of $62. The company now has anot11er $500M left in its stock
buyback authorization. Subsequent to the quarter, the company's Apollo
Global division (N wil11 Carlyle) announced an agreement to acquire BPP
Holdings for $540M in cash. In relati on to that, APOL has funded an
escrow account for $550M. Given tlus is a partners!Up with Carlyle,
we would expect to revert back to APOL, leaving cash balance,
before 4Q cash flow, of
Free Cash Flow
APOL's business model allows it to generate significant amounts of free
cash flow each year, as shown in the table below. Using the simple free
cash flow definition of Non-GAAP Net Income + Depreciation- C<lp Ex,
APOL generated free cash growth of 42% year-over-year in the most recent
nine months.
Simpll' Fr'l'l' Cash Flon
9 Mos Ending May- 9 Mos Ending
2005 2006 2007 2008 09 May-08
($MM) ($MM) ($MM) ($MM) ($MM) ($iv!M)
$461 ,471 $460,262 $454,710 $509,282 $536, 141 382,284
Add: Depreciation and Amorti zation $58.084 $68.514 $69,352 $77.940 $72.857 59.073
Less: Cap Ex (excluding corp hq) ($88,802) ($44,629) ($6 1.185) ($92.471) ($94.873) (67.842)
Free Cash Flow
Free Cash Flow/ Share
Y-0 -Y Change
Source: Company Reports
$430.753 $484, 147 $462,877 $494,751 $514, 125 $373.515
$2.32 $2.68 $2.79 $2.98 $3.23 $2.28
16% 4% 7% 42%
Uses of Cauital
Universi ty of Phoenix provides the highest return on capital for t he
company and therefore gets first priority in terms of any capital needs. This
is followed by the remaining business segments including WIU, Insight
Schools, IPD, CFP and Meritus Universi ty. The next priority is acquisitions
lastly tl1e company plans to rett1m excess to shareholders in the form of
stock buybacks.
Modeling Assumntions
We have assumed enrollment growth of 14%, 11%, 10%, 10% a11d 10% in
FYlO, FYI I. FY12. FY13 and FYI4 respectively. Our model assumes 4%
increase in pricing each year from FY10-FYI4. This leads to annual
revenue growth in degreed enrollment of 19%, 15%. 14%, 14% and 14%
from FY10-FY14 or CAGR of 16%. We have modeled non-degree
revenues to grow at a slower pace of 6% CAGR, leading to overall CAGR
of 15%. We have assumed operating margins will improve by 310bps over
the ne:-.1 five years-tlus could prove conservative given recent strong
improvements.
Page 51
Recent Acquisitions Announced
BPP Holdings - 6/08/09 - 100% acquired; UK based institution that
provides professional and language training and academic education. The
group offers face-to-face courses, books, home study programs and screen
based training for a range of qualifications including accounting, banking,
finance, law, languages, etc. BBP does approxhnately $238M in sales and
$24M in net income. Deal priced at -$540M which equates to -12x
EV/EBITDA.
Universidad Latinoamericana - 8/05/08 - Majority Stake: Mexico City
based - 3 cmnpuses in Mexico City and one in Cuernavaca. Morelos.
Apollo Global acquired a 65% majority stake in the institution on an
implied enterprise value of$47 million.
Valuation Analvsis
As the table on the following page shows, we determined APOL' s target price to
be $81, suggesting upside of 16% from current levels. Additionally, we
detennined an average high and low range of $146 ru1d $60 respectively. We
note that of the group we are initiating on today, APOL had the least amount of
downside (10%) if it were to trade at an average of the hi storical low valuation
ratios.
For our valuation analysis and target price derivation, we looked at a number of
methodologies on a 2 year historical basis including:
1. Fonvard PIE Multiple Trends
2. PEG (PIE to Growth) Trends
3. Trends in Forward PIE Multiple Relative to Market
4. EV to Sales Trends
5. EV to EBITDA trends
6. DCF
Under the first 5 methods, first we derived three different values for the
stock using its historical average, historical low and historical high
multiples.
Next, we assigned probabilities to the average, high and low case
scenarios. In general, we assigned either a very low or a zero
probabWty to the high case scenario (to be conservative). Specifically
for APOL, we gave the stock a 50% probability of trading at its 2 year
historical average for each of the aforementioned methodologies. We
assigned a 50% probability of the stock trading at its historical low for
each methodology.
FinaJiy, \ve derived our target price by averaging the results from t11e
methods used above.
Using our DCF model. we derived an equity value per share for APOL
of $73-$94 which supports our $81 target.
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2 Year
APOL
Current
Historical Avg
Premium/(Disc) Vs Avg
Historical Low
Premium Vs Low
Historical High
Discount Vs High
FOR PROFIT EDUCATION GROUP
Current
Historica I A vg
Historical Low
Historical High
Company Relative to GROUP
Current
Historical Avg
Premium/(Disc.) Vs Avg
Historical Low
Historical High
Current Stock Price (7/30/09)
Value At Historical Avg
Value At Historical Low
Value At High
Probabilitiy for Each Scenario
Average
Low
High
Probabilitiy Weighted Value
Upside Value
Downside Value
Source: factSet, SAL estimates
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Valuation Analysis
Fotvvard PIE
Relative to
Forward NTM PIE PEG S&P 500
13.9x 0.9x l.Ox
18.9x l.3x 1.4x
-27% -280/o -31%
12.4x 0.7x 0.9x
12% 21% 15%
27.7x l.9x 2.0x
-SO% -53% -51%
18.6x 0.8x 1.3x
24.6x l.3x l.9x
-24% -34% -31%
17.2x 0.8x 1.2x
32.3x 1.8x 2.5x
0.7x 0.8x 0.7x
0.8x 1.3x 0.8x
-4% -38% -4%
0.6x 0.7x 0.6x
0.9x 1.9x 0.9x
Tarl!<"f l'l'in & l pside/ I>on nsid< Detennination
Forward PIE
Relative to
$70 $70 $70
$95 $97 $101
$62 $57 $61
$!39 $148 $143
50% 50% 50%
50% 50% 50%
0% 0% 0%
$79 $77 $81
$139 $148 $143
$62 $57 $61
July 31 , 2009
Vto EVto
Sales EBlTDA Average
2.53x 7.1x
3.3x 12.4x
-23% -43% -30%
2.1 x 6.4x
19% ll% 16%
4.7x 17.4x
-46% -59% -52%
3.0x 12.2x
3.4x 13.4x
-14% -8% -22%
2.5x 10.4x
4.6x 17.2x
0.9x 0.6x
LOx 0.9x
-10% -38%
0.9x 0.6x
!.Ox J.Ox
EVto Vto
Sales EBITDA
$70 $70
$90 $122
$59 $63
$ 128 $171
50% 50%
50% 50%
0% 0%
$74 $92 $81
$ 128 $171 $146
$59 $63 $60
Page 53
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JlliL2liM ilillllili llliL2liii Mlllll2 llll22liL1
1:3.000 10,.,_
JlliL2liM
12/YJ
Revenues $1,79$ $US1 $2,478 $3.141 $3,927 $'1,670 $5,393 $6, 162 $7,o42
StiXlO
EBrT 4S7 730 66S 6S7 783 1,175 1,431 1,703 1,978 2,297 I ""'
Taxes 119 285 253 248 307 482 sss 698 Sit 942
BHI

Tax AdJusted EBIT 278 44S us
-
4)1; 693
-
1,005 1,167 1,355
nn ..
+ Depr. & Amort. 76 S4 92 102 112 123

Cha nge In Op. Work. Cap. (103) 10 (lOS) (99) (Sl) (110) (132) (157) (I SS) (224)

113 104 111 !OS !OS m 149 178 212 253 , ...
s268 s331 $411 j404 s$28 s762 s920 $1,086 $1,255 ! 1r450
"'"'

""'
G.rowth Analysl5 lOo; Q Q Q Q Q
Growth 34.396 25.296 10.096 9.996 15.3% 2$.0% 1$.996 15.5% 14.2% 14.3%
""
QQQ Q
Q
EBffGtowth 13.6% 59.996 .0.5% -1.6% 19.1% $().096 12.096 18.8% 16.1% 16.2%
....
T4x Adjust/ E8/T GI'Dwth 60.1% 6.7% 1.596 16.4% 45.6% 12.096 18.8% 16.196 16.2%
...
WDtftng Opital Growth 3.496 :J$.7% 2$.7'16 16.796 1!1.4% 19.496 19.49 19.4% 19.496
....
C..pitJI Grow/J> 103.196 .fJ.4% 7.2% -6.0% 0.396 19.2% 19.2% 19.2% 19.2% 19.2%

i
Free Ctsh FkJw Grotttth 23.8% Zi.2% 1.9% 30.9'16 44.2% 21).896 16.0% 15.596 15.6%

!<

15 15
5
" "
Ma rgi n Analy-sis
EBir% Df ZS.496 JM% 0 .096 Z'I.J% Zi.996 29.9% 30.7% 31.696 32.196 32.6%
Ffr:e CJsh F/ottf RevenU6 1<.9'16 H.796 16.6% 1<.6% 16.8'16 19.496 19.7'16 20.1'16 3M% :trJ.6% 0
T11XR11te 39.196 39.196 37.996 37.8% 39.2% 41.096 41.096 41.0% 41.0% 41.096
Olswunted Free Cash Ao

=
f3t1lt

12.3% 3,781
l2.S% 3,729 7,56S 8,19S 8,S26 9,156 10,087 11,294 11,925 13, 186 13,S16 12,795 13,426 11,056 14,687
3.3% 3,679 7,399 8,016 8,633 9,249 9,866 11,079 11,695 12,312 12,928 13,S4S 11,!>19 12,566 13,182 13,799 H,US
1),6% 3,630

7,841 s ...

9,651 10,868 11,471

12,678 13,281 11,738 12,342 13,548
14.1% l,SSl 7,671 S261 9.442 10,663 11,253 12,433 13023 11.S33 12 123 12713 13 303 13,893
I
otal 'c'"bt

C.sh
N<! t O.bt ($870)
Shares SIS9
Olsc. Ra te
12.3% m
12.8% 67.0% 68.7% 70.3% 71.7% n .O% $71.1 $75.0 $79.0 $83.0 $86.9 $l!;.S $80.S $84.S $88.1 $92.4
13.3% 66.8% 68.S% 70.1% 71.5% 72.11% S69.7 $n.6 $77.S 581.3 $8S.2 $75.2 $19.1 $82.9 $86.8 $90.7
13.8% 66.6% 68.4% 69.9% 71.4% 72.7% S6S.4 $72.2 $76.0 $79.8 $83.6 $n.9 $77h $81.4 $SS.2 589.0
14.3% 66.4% 68.2% 69.S% 71.2% 72.5% $67.1 $70.S $74.5 $78.2 $81.9 $72.6 $76.3 $80.0 $83.7 $87,4
I
0812009 0812010 0812011 0812012 08/2013
User Input 25.0% 18.9% 15.5% 14.2% 14.3%
Historical Average (19%) 18.9% 18.9% 18.9% 18.9% 15.1%
I
08/2009 0812010 08/2011 08/2012 08/2013
User Input 50.0% 22.0% 18.8% 16.1% 16.2%
Historical Average Growth ( 16'*: 16.5% 16.5% 16.5% 16.5% 16.5%
Same rate as Revenue Growth 25.0% 18.9% 15.5% 14.2% 14.3%
Maintain Historical Average Mar 26.8% 26.8% 26.8% 26.8% 27.1%
I 1
user Input
I
user Input
I
User Input
!.!!l.Wlli!.
10.0% 10.0% 10.0% 10.0% 10.0%
l
}
User Input
Historical Average Growth { 19* 19.2% 19.2% 19.2% 19.2% 19.2%
I
1.oox
.,,
I 3
lJ.lY70
w.a2QZ .2.!U..lll.QJI. lll!UQU .2lU.l!lll 2.U!I.U
Chart 1
1 Revenues
Revenues o/o chg.
Revenues
EBIT
Tax Adjusted E81T
Working (Operating)

Free Cash Flow
Qari.l.
E81T o/o of Revenues
Free Cash Flow% of Revenues
Source: i'actSet. SAL estimates
sterne
agee
$1,798
$1,798
$457
$278
($288)
$113
$268
25.4%
14.9%
$2,251 $2,478 $2,724
25.2% 10.0% 9.9%
$2,251 $2,478 $2,724
$730 $668 $657
$445 $415 $409
($278) ($386) ($'186)
$104 $111 $105
$331 $411 $404
32.4% 27.0% 24.1%
14.7% 16.6% 14.8%
$3,141 $3,927 $4,670 $5,393 $6, 162 $7,042
15.3% 25.0% 18.9% 15.5% 14.2% 14.3%
$3,141 $3,927 $4,670 $5,393 $6,162 $7,042
$783 $1,175 $1,433 $1,703 $1,978 $2,297
$476 $693 $846 $1,005 $1, 167 $1,355
($566) ($677) ($008) ($965) ($1,153) ($1,377)
$105 $125 $149 $178 $212 $253
$528 $762 $920 $1,086 $1,255 $1,450
24.9% 29.9% 30.7% 31.6% 32. 1% 32.6%
16.8% 19.4% 19.7% 20.1% 20.4% 20.6%
Page 54
sterne
agee
Valuation Char1s NTM PIE, NTM PIE Relative to S&P 500, NTM PEG,
Relative to the Group, 52 Week Range
Apollo Croup Inc; , fCI A) (APOL)
JIP('t. .. lriM\.4i COIT".tMFI\loXiro.

-
:
1J

..
..

---- .... ''""'""........ ,. ...... ,.,. .... ,.,._ .... ,. .......... ,.,.., ...... ,...,.,.,.. ..........,. ...... .__,.,.,.,.,., .. ,.,. ...... ,.._,. .... ,.,._ .... ........................ _ ""' -- ------ . ..,, ......,. ' 0
1c;dl!;" ll!1.i 4.U 13 t:'O$ 111 4JNt t1)l
NTM PIE: The stock is trading near the historical low on the basis of Price to NTM
EPS. Over the last nvo years. APOL has traded as high as 27.7x NTM PIE. as low as
l2.4x, and at an average of l9.0x. It' s currently trading at l3x.
A, !;AI"'l)
.............
t. :tl :tii;J' Jot.,
"
.,

"
\J
,,.,
... ...
-
-
, ..
-

NTM PIE Relative to S&P 500: The stock is trading at a slight discount relative the
S&P 500 on a NTM PIE basis. Over the last 2 years, the stock has traded at an
average premium on tllis basis of 1.45x. The high premiwn was 2.05x while the low
was 0.87x. Currently, APOL is trading at 0.91x the S&P 500 (on NTM PIE).
Page 55
sterne
agee
._.-Jl.,Gtov'"e
CJt$$!Hi ::!ito&

""'.",. ..,,.. ... .........,..
...

. .... . ....
NTM PEG: On a NTM PEG basis, the stock looks cheap, trading at its historical
low on that basis. Over the last 2 years, the stock bas traded as high as I . 9x, a low of
0.7x (also current), and at an average of 1.3x.
Apotl o Grol.(p fnc. (CIA) lb.POt.l
.APCL 037!0 .. 11)") 2l4:#f..'!}.& SlocitMU"<lK C()(M'tM
to
-
...
<t
<ll<

)\ v I
' '
, ... . ...
Relative to the Group: The stock is trading at a discount to the group
whereas over the last 2 years it trades at a discount. The high valuation
relative to the gToup was 0.94x while the low was 0.6x
,.
Page 56
sterne
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Apollo Croup Inc. (CI AJ IAPOI..)
/o?o)t (OWMOfoC,OQ(t

- M(VSOI

- - - - - - 1.1='\wor..-AtSorl'l-wrl
52 Week Range: The stock is tr<iding close to the mid-point of its 52 wk high and
low range. It has traded as high as $89.22, as low as $50.54. and is currently at
$69.40.
Page 57
Executive Management:
Dr. John Sperling - Executive Chairman of tJ1e Board, Founder - Dr.
Sperling was President of Apollo Group until February 1998, Chief
Executive Officer of Apollo Group until August 2001 and Chainnan of the
Board until June 2004. Prior to his involvement with Apollo Group, from
1961 to 1973, Dr. Sperling was a professor of Humanities at San Jose State
University where he was the Director of tJ1e Right to Read Project and the
Director of the NSF Cooperative College-School Science Program in
Economics. Dr. Sperling received his Doctor of Philosophy from
Cambridge University, a Master of Arts from the University of California,
Berkeley, and a Bachelor of Arts from Reed College.
Charles Edelstein - Director, Co-Chief Executive Officer - Charles
Edelstein became ChiefExecu6ve Officer and a director of Apollo Group in
August 2008. Prior to joining Apollo Group, Mr. Edelstein was employed
by Credit Suisse, a financial services firm, since 1987, and served as a
Managing Director since 1998. He was also the head of the Global Services
Group within the Investment Banking Division of Credit Suisse. His focus
was on providing advisory services regarding acquisitions, dispositions and
capital raising transactions. Mr. Edelstein founded and oversaw Credit
Suisse' s leading advisory practice in the education industry, where he
served as advisor to many of t11e largest educallon companies, including
Apollo Group. He received a Bachelor of Arts with highest distinction from
the University of Illinois and a Master of Business Administration from the
Harvard Business School, where he graduated as a Baker Scholar with high
distinctiort
Gregory Cappelli - Director, Co-Chief Executive Officer; Chairman,
Apollo Global, Inc. - Mr. Cappell i has served as Chainnan of Apollo Global
since its inception in October 2007. Prior to that, he held roles as EVP of
Global Strategy and Assistant to the Executive Chainnan. Prior to Apollo
Group, he spent 10 years as a research analyst for Credit Suisse, where he
most recently served as Managing Director and Senior Research Analyst
and founded the Credit Suisse Global Services Team.
Joseph D' Amico - President, Chief Operating Officer - Mr. D Amico has
been President since June 2008 and Chief Operating Officer since March
2009. Mr. D' Amico was Executive Vice President and Chief Financial
Officer of the Company from June 2007 to March 2009 and Treasurer from
December 2007 to March 2009. He began with Apollo Group in November
2006 when he was brought aboard to serve as interim Chief Financial
Officer. Prior to joining the Company, he was a senior managing director
ofFTT Palladium Partners, an interim management company and a division
of FTI Consulting, Inc. Prior to joining FTI, he was a partner with
PricewaterhouseCoopers where he served in a number of leadership
positions in their Financial Advisory Services line of business and was an
audit partner earlier in his career responsible for public and privately held
companies. Mr. D' Amico received a Bachelor of Science in Accmmtancy
from the University of Illinois and a MBA from the University of Chicago.
sterne Page sa
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sterne
agee
Brian L. Swartz- CFO -Mr. Swartz has been Senior Vice President, Chief
Financial Officer and Treasurer since March 2009. Mr. Swartz was Chief
Accounting Officer from February 2007 to March 2009 and Senior Vice
President, Finance since June 2007. He was Vice President, Corporate
Controller and Chief Accounting Officer from February 2007 to June 2007.
Prior to joining the Company, Mr. Swartz was with EaglePicher
Incorporated as its Vice-President and Corporate Controller. Mr. Swartz
began his career at Arthur Andersen LLP. He graduated magna cum laude
fTom the University of Arizona with a Bachelor of Science in Accounting
and was a member of the Warren Berger Entrepreneurship Program. Mr.
Swartz is a Certified Public Accountant.
Dr. William Pepicello -President, University of Phoenix. Inc. Dr. Pepicello
becan1e Provost of University of Phoen.L'X in January 2006 and was
appointed as President in October 2006. Dr. Pepicello has been witl1
University of Phoenix since 1995. Dr. Pepicello served as Vice Provost for
Academic Affairs from 2003 to 2006 and Dean of the School of Advanced
Studies from 2002 to 2003. From 2000 to 2002. Dr. Pepicello was President
of University of Sarasota and then Chief Academic Officer of American
Intercontinental University. From 1995 to 2000. he was Dean oftl1e College
of Geneml and Professional Studies and also held the position of Vice
President of Academic Affairs of University of Phoenix. Dr. Pepicello holds
both a Master of Arts and a Doctor of Philosophy in Lint:,'llistics from
Brown University and a Bachelor of Arts in Classics from Gannon
University.
I nsider Owner-shin:
Dr. John G. Sperling (Executive Cha.innan) and Mr. Peter Sperling (Vice
Chairman) and entities in which tl1ey control collectively own 100% of the
voting stock (and of Apollo Group). This ownership stmcture makes
Apollo Group a "controlled company" which makes the company exempt
from certain requirements other public companies abide by. These include:
o The Board being comprised of a majority of independent directors
o The compensation of officers being determined by a majority of
independent directors
o Nominations to the Board being made by tl1e majority of
independent directors
lloldN \amr PoSition Positwn \larl,t \ alu %of Outstandong
SPERLING, JOHN Executive COB 16,845,469 $1,128,141,059 11%
SPERLING, PETER Vice COB 5,302,726 $355,123,560 3%
DAlvfiCO, JOSEPH President and COO 21, 160 $1,41 7,085 0%
GOIN, JOHN Executive VP 8,612 $576,746 0%
DECONCINI, DINO Director 8,569 $573,866 0%
CAPPELLI, GREGORY Co-Chief Executive Officer, EVP Global Strategy 7,485 $501,270 0%
ZIMMER, GEORGE Director 6,000 $401,820 00/o
REDMAN,K Director 5,000 $334,850 00/o
RElS,JAMES Director 4.250 $284,623 00/o
HERBERGER, ROY Director 3,500 $234,395 00/o
RELL, VINCE Executive VP 2, 749 $184,101 00/o
OYA,ROBERT EVP General Counsel 2,657 $177,939 00/o
EDELSTEIN, CHARLES Co-Chief' Executive Officer 2,250 $150,683 00/o
SWARTZ, BRIAN SVP, CFO and Treasurer 1,995 $133,605 00/o
BISHOP, TERRi Executive VP 1,516 $101,527 00/o
TOTAL 22,223,938 $1,488,337,128 1-1%
Sour<:e: FactSel
Page 59

sterne
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Aniltd Bhatia, CFA
214-701-100/
Apollo Group (IIPOL-NASDIIQ)
($ millions, except per share)
r---py-
QlA Q2A
!l1A
Nov Feb
R t \'('OU(' $2,724 S781 S694
SeosoJiaiJty Jj" .u"
cost and services 1.237 3H l2S
Selling and promotional 659 177 202
G&A 202 31 33
Litigation, other one time
Toto! oosts/e:q>en.es 2,09S 561 584
l nc01ur from Operations S626 $219 $109
Interest and other income S32 $10 ss
lncome before ta.xes S657 $229 Sill
S218 SS9 $46
Mjnority net tax so so.o so.o
Net lucome-, As Re1- orttd 5409 $140 $72
Basic EPS 52.49 S0.84 SD.43
Diluted EPS S2.46 SO.S3 $0,43
Basic coum 164 167 168
Diluted Share ootml 166 169 16S
One lime/Non Cash items:
Stock based comp S60 SIS S20
Other SIS
Tax Effects SJO S6 SS
Net ancome} NonGAAP $455 Sl 49 S84
NonGAAP EPS S2.74 so.ss so.so
Liogation Cbg. Exclud frm abv so Sl 6S
MARGINS
Revenue 100% 100% 100%
Jrntructional cost and services 45% 43% 47%
SelliJJg and promotional 24% 23% 29%
G&A 7% 1% S%
Otltcr 0'4 0% 0'.4
Total oostsle.,penscs 77% 72% 84%
Optr.,ttng Jncome 230.1. 28% 16%
lncome before ta.xes 24% 29% l7%
Tax Rate
NonGAAP Net Income 11% 19% l2,..o
%ChgYoY
Revem>e 17% 14%
lnstructiona1 cost and services 12% 13% ll,.o
Selling and promotional 21% 14% 21%
G&A 33% 36% 1%
Total IS% 1$% 13%
Opemting Income -4% 22% ..
NonGAAP Net Income
., ...
'23% 9'4
NonGAAP EPS

274 13%
Source: Company reports and Sterne Agee estimates
QJA
May
S835

34S
204
61
612
SZ23
S3
S226
SS6
S0.2
$141
S0.86
$0.86
163
164
$14
SS
$150
$0.91
S2
100%
42%
24%
1%
0%
73%
17%
27%
JS%
IS%
14%
8%
'25%
Jl%
I S%
100..0
6%
IJ%
Q4A
r---py-
QIA Q2A QJA
Aug
!!JA
Nov Feb May
SS31 S3,141 S971 S876 $1,051
1651 100% Jj$9 .!1'-i Jl%
362 1,371 377 373 400
223 S05 229 226 244
48 215 3S 7l n
633 2,391 664 670 715
$198 SH9 $307 $206 S336
S12 Sll S2 $2 S4
S210 $783 S30S S208 $340
SS6 S307 S!2S SS3 Sl39
S0.4 S0.6 so so so
SlZS $477 5180 $125 S201
$0.78 $2.90 $1.13 $0.78 Sl.lS
$0. 78 $2.87 Sl.ll $0. 77 51.26
159 164 159 160 I SS
160 166 161 163 159
S4 Sl4 SIS $16 SI S
S2 S21 S6 S6 .$7
Sl27 $509 S!S9 $! 35 S212
S0.79 S3.07 SI.IS SO.S3 SU3
Si lO so
100% 100% 100% 100% 100'4
44% 44% 39% 43% 38%
27% 26% 24% 26% 23%
5.8% 1% 6% 8%
0% Oo/o 0% 0% 0'4
76o/o 76% 68,.-o 76% 6S%
240../ G 24% 32% 24% 32/G
25% '2.S% Jl% '24% 32%
4l 'o 39% 42% 40% 41%
15% 19o IS% 20%
L6,..o IS% 24% 26% 26%
tl'o II % 13o 14% 15%
28% '22% 29% 12% 20%
23% 1% 14% '29% 17%
12% 14% LS% NA 17%
32% 20% 4M<o NA 51%
10% 1'2% 17% 61% 41.%
IS% 12' 4 34% 66% 46%
Q4 FY FY F'Y FY FY FY
Aug
n2E
Nov Feb May Aug
ill: ll lll m. 1:1.&
Sl,Ol9 S3,927 Sl , 161 Sl ,043 S I.24J Sl,l23 $4,670 $5,393 $6. 162 S7,042 S8.05l
16'' 100!0 ZJ'' JZ,_.
1" J6'!' I (){Po /JJII.' IJm Ill'
417 l,l6S 446 439 467 490 1,841 2. 100 2.36S 2.672 3,014
266 964 271 267 2Sl 313 1. 137 1,294 1,478 1,690 1,932
70 271 70 Sl 83 82 320 369 422 482 351
753 2,803 7S6 790 S36 885 3,298 3,763 4,268
$276 1,124 S375 $253 $407 SJ37 1,372 1,631 1.894 2, 199 2,555
S4 Sll S2 S2 $2 S2 ss SIO $13 $16 $20
szso $1.136 $377 S235 $409 SJJ9 $1 ,380 $1.641 Sl.906 $2.213 S2 .574
$115 $465 $155
I
SI04
I
SI6S
I
S!39 S566 S673 $182 590S SI.OS5
so Sl so so so so so so so so so
$164 S671 $223 $241 $200 $81 4 S968 St , 12S $1,307
$1.01 $4.23 $1.41 $0.95 SU3 $1.27 Sl.l7 S6.14 $7.11 SS.29 $9.64
Sl OJ $4. 18 51.40 $0.94 Sl..\2 $1.26 55.12 S6.09 $7.07 SS.22 $9.55
ISS 159 ISS I SS ISS I SS HS I SS ISS ISS ISS
159 160 159 ! 59 IS9 !59 159 !59 !59 159 159
$19 S69 SIS Sl6 SIS SIS S6S S6S S6S $68 S6S
S8 S2S S6 Sl Sl .S7 S2S 528 SZ8 S2S $28
$176 $712 S231 Sl60 S2l2 S211 $SS4 St.OOS $1, 164 $! ,347 Sl,559
SI.IO $4.44 Sl.46 SI.OO 51.58 $1.33 S5.37 S6.34 S7.32 SS.47 S9.80
100% 100% 100% JOO% 100% 100% 100% 100% 100% 100% 100%
.. l % 40% 3S% 42% 38% 40% 39% 39% 38% 38% 37%
26% 25% 23% 26% ll% 26% 24% 24% 24% 24% '24%
i% 6% S% 7% lo/o 7% 1% 7% 1%
Oo/o 0% Oo/o 0'4 0% 0'.4 Oo/o 0'4 0% 0'.4 0%
73% 7J% 6S% 76% 6m 72% 71% 70% 69% 69% 6SV.
27% 290.G 32% 24% 33tb 28% 29/o 30% J JO/o 3 1% J2Gto
'27% 29% 32% 24% H% 28% 30% 30% Jl% 31% 32%
41% 41% 41% II % 41% 41% 4l l}o 41% 41% 4"o
17% 18% IS% 19% 19-'o 190.0
24% 2So/o 20% 19% IS% 19% 19" 15% 14% 14% 14%
15% 14% 18% 18% 17% 17% 14% ll"o 13% 13%
19% 10% 19% 18% )7% IS% IS% 14% 14% 14% 14%
46% 26% 10% 19% 16% 17% IS% 16% 14% 14% 14%
19% 17% 18% NA 17% IS% IS% 14% 13% 13% 13%
39% 22% NA 21,.. 22,_o
22" 19% 16,o L6% 16 .....
38% 40% 22% 18% 19% 20% 20% 18% 16% 16' 4 16%
39% 45% 1.4% 21% 19% 20% '21% 1s4 16% 164 16%
Page 60
sterne
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Arvind Bhatia , CFA
214-702-4001
Cas h Flow Statement
Fi scal yr ends August
($in '000)
Net income
Share Based comp
Excess tax benet! from share based comp
Depreciation and Amortization
Amortization of deferred gain
Non-cash foreign currency loos
Provision for uncollectible accounts
Minority interest
Deferred income tax and other
AR
Other assets
AP and Accrued liabilities
Income tax payable
Student deposits
Deferred revenue
Other liabilities
Net cash from operating activities
Adds to PP&E
Acquistions, net of cash
Purchase of marketable secunties
Maturities of marketable sec
Increased in restricted cash, other
Net cash used In I nvesting activities
Payment on borrowings
Proceeds from borrowings
Issuance of class A stock
Class A treasury purchases
Tax benefit from share based comp, other
Net cash provided by financing activities
FXimpact
Increase in Cash
Cash at beginning
Cash at end
FY
2005
444,731
19,824
41,183
54,498
3,586
0
45.412
0
11,157
(100,530)
(3,814)
(20,078)
(2, 116)
64,022
0
7,870
565,745
(103,790)
0
(475,009)
761 ,654
(3,657)
179,198
0
0
52,760
(808,192)
0
(755,432)
(573)
(11,062)
156,669
145,607
FY FY 1QA
2006 2007 Nov
438,200 408,810 139,865
19,470 54,027 14,924
(15,361) (4,022) (13, 165)
67,585 71,115 18,134
929 (1 ,763) (446)
0 0 0
83.428 120,614 32,385
0 0 0
6,558 (45,772) (2,665)
(86,410) (150,943) (26,760)
3,781 (1 ,912) (4,229)
16,725 31,174 (29,657)
158 (2,440) 84,791
8,859 73,878 1,854
0 31.003 (7,368)
3,910 4,853 175
547,832 588,622 207,838
(112,443) (104,551) (24,114)
0 (15,079) (47,033)
(1,420,055) (1 ,575,635) (396,660)
1,636,283 1,621 ,636 401,660
(2,861) (58,306) (2,285)
100,904 (131 ,935) (68,432)
0 0 0
0 0 0
28,970 7,738 50,848
(514,931) (437, 735) 0
9,121 4,022 13,165
(476,840) (425,975) 64,013
(519) (451) (610)
171,3n 30,261 202,809
145,607 309,058
316,984 339,319
July 31 , 2009
2QA 3QA 4QA FY 1QA 2QA 3QA
Feb May Aug 2008 Nov Feb May
(32,039) 139,106 229,593 476,525 180,360 125,346 201 ' 104
20,106 14,421 4,119 53,570 15,119 16,239 18,027
(4,509) (273) (701) (18,648) (3,950) (7,231) (328)
19,377 21,562 20,653 79.,726 22,897 23,441 26,519
(413) (420) (507) (1 ,786) (397) (421) (438)
0 0 2.825 2,825 2,467 132 (1,906)
26,601 20,269 24,946 104,201 34,857 36,056 35,977
0 (229) (369) (598) (52) (270) (492)
99,088 (76) (102,881) (6,534) (8,776) (3,807) 16,600
472 (13,227) (66,211) (105,726) (21, 142) (27,130) (33,391)
(1,970) (3,115) 2,029 (7,285) (6,998) (2,114) (3,965)
8,585 (835) 7,752 (14,155) 14,666 3,471 1,578
(105,587) 78,090 (35,627) 21 ,667 113,475 (165,428) 75,727
58,601 (1 ,708) 26,547 85,294 42,136 66,080 (15,808)
14,479 590 27,580 35,281 (8,182) 29,103 12,549
(1 ' 161) 4,819 17,816 21,649 4,316 1,380 2.403
101,630 258,974 157,564 726,006 380,796 94,847 334,156
(31,864) (24,264) (24,637) (104,879) (30,646) (33,373) (30,854)
(22) (23,247) (23,461) (93,763) 0 0 0
(478, 545) 107 (107) (875,205) 0 0 0
401,980 60,911 36,164 900,715 1,660 0 1,000
(155,761) (1,414) 71,774 (87,686) (58,607) (55,625) 8,768
(264,212) 12,093 59,733 (260,818) (87,593) (88,998) (21,086)
0 (250,709) (726) (251,435) (11,564) (3,934) (713)
0 250,000 991 250,991 13,126 494 0
28,175 1,698 22,248 102,969 18,333 78,153 2,477
0 (454,362) 0 (454,362) (2,505) 0 (406,263)
4,509 7,248 5,875 30,797 3,950 7,231 2,328
32,684 (446,125) 28,388 (321 ,040) 21 ,340 81,944 (402,171)
(260) 160 438 (272) (836) (271) 376
(1 30,158) (174,898) 246,123 143,876 313,707 87,522 (88,725)
339,319
483,195
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Apollo Group
Arvind Bhati a , CFA
214-7024001
Summary Balance Sheet
Fiscal Yr ends August
($i n '000)
Assets
Cash & cash equivalents
Restricted Cash
lvfarketable securites
Accounts Receivable
Deterred tax assets
Other current
Total current
PP&E
LT Marketable Sec
Goodwill
Intangible Assets
Deferred tax. LT
Other
Total Assets
Liabilities
Accts payable
Accrued liabilities
Long term, current
lncome tax payable
Student deposits
Deterred Rev, Current
Total Current
Deferred Revenue, L T
Deferred tax
LT liabilities
Total Liabilities
Minority interest
Stockholders' Equity
Preferred stock
APOL class A
APOL class B
Additional PIC
APOL class A treasury
RJE
Accumulated Comp loss
Total Shareholders Equity
Total Liabilities and SE
FY05 FY06
145,607 309,058
225,706 238,267
224,112 45,978
201 ,615 163,910
14,991 15,095
23,058 21,716
835,089 794,024
268,661 794,024
97,350 327,364
37,096 53,692
0 37,096
35,756 32,441
28,993 28,484
1,302,945 2,067,125
40,129 22,449
61,315 61,290
18,878 69,813
9,740 0
387,910 389,950
0 0
517,972 543,502
351 384
0 0
77,748 80,106
596,071 623,992
0 0
0 0
103 103
1 1
0 0
(645,742) (1 ,054,046)
1,353,650 1,706,426
(1,138) (1,657)
706,874 650,827
1,302,945 1,274,819
1QA 2QA
FY07 Nov Feb
339,319 542,128 411,970
296,469 298,754 359,515
31,278 30,324 30,879
190,912 187,551 160,478
50,885 51,186 47,736
16,515 21,124 63,564
925,378 1,131,067 1 ,074,142
364,207 376,102 389,801
22,084 18,017 94,014
29,633 66,671 66,733
0 0
80,077 89,016 161,890
28,484 35,861 131,072
1,449,863 1,716,734 1,917,652
80,729 44,624 42,299
103,651 105,418 119,098
21,093 21,057 20,950
43,351 66,416 0
328,008 329,862 388,463
167,003 159,724 174,210
743,835 727,101 745,020
295 237 230
0 0 0
71,893 123,498 286,995
816,023 850,836 1,032,245
0 0 0
0 0 0
103 103 103
1 1 1
0 0 0
(1,461,368) (1,370,036) (1 ,332,543)
2,096,385 2,237,492 2,219,696
(1 ,281) (1,662) (1,810)
633,840 865,898 885,447
1,449,863 1,716,734 1,917,692
July 31 , 2009
3QA 4QA 1QA 2QA 3QA
May Aug FY08 Nov Feb May
237,072 483,195 483,195 796,902 884,424 795,699
360,929 384,155 384,155 442,762 498,387 489,619
28,366 3,060 3,060 1,397 1,393 991
184,183 221,919 221,919 200,695 193,953 192,612
46,814 55,434 55,434 51 ,696 55,656 58,771
24,683 21 ,780 21,780 26,446 84,173 32,048
882,047 1 '169,543 1,169,543 1,519,898 1,717,986 1,569,740
421,588 439,135 439,135 442,477 457,528 467,321
37,035 25,204 25,204 23,001 23,001 22,401
66,017 85,968 85,968 81 ,757 88,261 88,921
21 ,656 23,096 23,096 17,625 16,804 14,691
161,583 89,499 89,499 102,145 101,486 80,679
122,295 27,967 27,967 29,691 29,218 32,291
1,712,221 1,860,412 1,860,412 2,216,594 2,434,284 2,276,044
42,234 46,589 46,589 54,796 67,756 56,965
116,637 121,200 121 ,200 131,182 121,784 174,217
80,808 47,228 47,228 45,178 40,052 119,922
30,753 6,111 6,111 116,721 0 0
386,755 413,302 413,302 455,438 521,468 505,685
205,795 231,179 231 ,179 217,710 247,466 261,158
862,982 865,609 865,609 1,021,025 998,526 1,117,947
210 104 104 7 0 0
0 2,743 2,743 2,139 1,943 2,012
253,037 145,791 145,791 144,831 158,749 104,802
1,116,229 1,014,247 1,014,247 1,168,002 1,159,218 1,224,761
6,599 11 ,956 11 ,956 11,851 11,527 13,056
0 0 0 0 0 0
103 103 103 103 103 103
1 1 1 1 1 1
7,923 0 0 559 21,937 35,505
(1,783,570) (1 '757,277) (1 ,757,277) (1,725,408) (1,645,745) (2,086,280)
2,367,131 2,595,340 2,595,340 2,777,084 2,902.430 3,103,534
(2,195) (3,958) (3,958) (15,598) (15,187) (14,636)
589,393 834,209 834,209 1,036,741 1,263,539 1,038,227
1,712,221 1,860,412 1,860,412 2,216,594 2,434,284 2,276,044
Page 62
AMERICAN PUBLIC EDUCATION, INC. (NNM: APEI)
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July 31, 20091119 Pages
AMERICAN P UBLIC EDUCATION, INC. (NNM:
APEI)
INITIATING COVERAGE WITH A BUY RATING; MILITARY NICHE
SHOULD CONTINUE TO DRIVE GROWTH; GROWTH
WARRANTS PREMIUM VALUATION
Initiating Coverage with a Buy Rating and $42 tat-get. We
are initiating coverage of American Public Education (APEI)
with a Buy rating and 12-montll target price of $42 based on
our probability weighted valuation analysis.
One of the Fastest Gowing Com1>anies in the S1>ace. We
beLieve APEJ is the one of the fastest growing companies in
the post-secondary education space with expected EPS
CAGR of 36% over tJ1e foreseeable future compared to
industry average of 20%.
Military Niche, Growth in Civilian, and Online Only Are
Key Drivers. We expect continued focus on military
personnel and feel t11eir ex-pertise in that market is not easily
addressed by other post secondal)' institutions. Over time,
we ex'Pect the company to grow their market share of military
persotmel attending postsecondary from 12% to 20%. We
e>.'Pect the company to continue to gain share in the non-
military market as they have demonstrated since achieving
Title 1 V in 2006 and for tlmt segment to represent a higher %
of growth than military. For the most recent quarter, the
civilian segment grew registrations at 88% y-o-y and
represented ~ 1 6 % of total re1:,>istrations (compared to 12% in
the year ago period) growtll.
Earnin s Summar
FYE Dec
Revenue (M):
2009E
$149.9
$38.8
2010E
$200.0
$55.6 Operating Income (M):
EPS & PIE Summar
2009E 2009 Previous 2010E
EPS: Q1 $0.29 $0.40
Q2 $0.27 $0.39
Q3 $0.31 $0.43
Q4 $0.38 $0.54
Full Year $1 .25 $1.76
P/E Ratio: 27.8x 19.8x
July 31 , 2009
Company Report
Education
RATING: BUY
Fiscal Year Ends Dec
Rating:
Price:
Price Target:
52-wk Range:
Market Capitalization (M):
Shares Outstanding (M):
Avg. Daily Vol. (000):
Debt/Equity:
Enterprise Value:
Anrind Bhatia, CFA
(214) 702-400 I
abhatia@stemeagee.com
2010 Previous
Buy
$35.02
$42
$31 .45-$53.24
$657.9
18.9
261.1
0.0%
$605
Luke Shagets
(214) 702-4030
lshagets@stemeagee.com
2011E
$252.5
$73.4
2011E
$2.29
15.2x
2011 Previous
Important Disclosures regarding Price Target Risks, Valuation Methodology, Regulation Analyst Certification,
Investment Banking, Ratings Definitions, and potential conflicts of interest begin on Page I of the Appendix Section.
Sterne, Agee & LeQCh, Inc. Is Member FINRAISIPC
AMERICAN PUBLIC EDUCATION, INC. (NNM: APEI ) July 31, 2009
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Finally, APEI offers its courses online only, which means lower infrastmcture costs 311d
the company has the 3rd highest llW!,>in in the industry of 24% behind ITT Educational
Services Inc. (ESI-$96.42-NR) (32.3%) a11d Strayer Education Inc. (STRA-$212.35-NR)
(32%).
Valuation. APEJ is trading at NTM and 20x CYlO eamings which is above the
industry average of 19x. However, given the company' s strong growth profile, we feel
the stock wanants a premium valuation relative to t11e group. On a PEG basis. the stock is
trading at 0.6x versus the group average of 0.8x.
Younget-, More Nimble Company. Compared to other for-profit players, APEI is a
yotmger. more nimble company in a very large and growing market. We expect the
company to be able to adapt more easily to any new nuances, trends change in
re!,>ulations, etc.
Lower Tuition Prices Means Less Regulatory Risk. APET is conunitted to keeping
tuition costs inline with 1nilitary reimbursement/grant amounts. We feel the relati vely
cheaper tuition may bring less attention to the company and ultimately result is less
regulation from lawmakers than some of its more e:-.rpensive competitors.
Well Positioned to benefit f .-om Industry Growth. APE! is well positioned to benefit
from industry growtl1 driven, in part, by the counter-cyclical nature of the industry.
Additionally, we see some potential for margin expansion resulting from operating
leverage. We are projecti ng the company's revenues to grow at a CAGR of 28% and EPS
CAGR of 32%ver the next five years (2008-13). We expect operating margins to expand
from 24% in 2008 to 30% by 2013.
History of UllSide SuqHises. Although APEI is a relatively young company, they do
have a history of beating consensus. In fact. the company bas exceeded EPS consensus
estinlates in each of the past 6 quarters by an average of $.04 (21%). Additionally, the
company has exceeded on revenue as well on each of the last 6 quarters by an averdge of

The New Gl Bill Should Be a Net Positive. Starting August 1, 2009, the new Gl Bill
will become effective. The new bill makes more funds available to military persotmel 3lld
allow transferdbility (to spouse and children). which should help expand enrollment.
Although the company does not expect an itmnediate or big impact, they should benefit
from tlus tailwind over time.
Risks. The biggest risk factors facing the company and the industry include: a) risk of
increased govenunent regulation under the new administration: b) potential slowdown in
enrollment growth as the economy improves: c) increased student loan defaults d) student
financing issues: e) risk of losing accreditation: l) changes in GI Bill and/or changes in
Department of Defense tuition reimbursement ammmts and: g) litigation risk.
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Comnanv Background
American Public Education was founded in 1991 as American Military University by a
retired Marine officer. The company began offering courses in 1993 as a distance
leaming institution specializing in rnilitaty studies curriculum for mi litary officers
seeking an advanced degree. The company became accredited by the Accrediting
Conmussion of Distance Education and Training Council in ' 95. Following
accreditation, American Mi litary University began offering undergraduate courses
directly to members of armed forces in January of 1996. Over tl1e following years, tl1e
company broadened its product offering to include defense management, civil war
studies, intelligence, unconventional warfare, criminal justice, emergency management,
national security. and homeland security. In an effort to better appeal to non-military, tlle
company reorganized in ' 02 from American Military into two new bnmds: AMU and
APU. Since ilien, tlle company has established itself as a leading post-secondary
institution for boili military and non-military civilians. APEI achieved regional
accreditation in May ' 06 witl1 The Higher Learning Conmlission of tlle North Central
Association of Colleges and Schools. In September ' 07, tl1e company aclueved approval
from The Higher Leanling Commission to offer seven new degree programs in Education
and Information Technology.
Prcsent ComJ)anv Structure/Overview
APEI provides postsecondary education exclusively online to both military and public
service communities. As we previously mentioned, the company operates tJ1rough two
universities - American Military University (AMU) and American Public University
(APU). The uni versities offer 74 degree programs and 51 certificate programs in areas of
study such as national security. mi litary studies, intelligence, homeland security, criminal
justice, technology, business adnunistration, education and liberal arts. These programs
contain more tl1an 1.200 courses. designated as core, major, or elective courses. Courses
begi n every month and are in eight or sixteen-week fonnats. The university system is
both regionaJly and nationaiJy accredited.
Programs Number
Master of Arts
Master of Business Administration
Master of Education
Master of Public Health
Master of Science
Bachelor of Arts
Bachelor of Business Administration
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Recruit ment, Admissions, and Tuition
The company generates leads and student recruitment primarily tltrough a relationship
based strategy - maintaining relationship witl1 influential people at the various military
and public senrice communities they serve. This approach enables t11e company to attract
students at a lower cost than other postsecondary institutions that rely on more expensive
methods of student recruitment. APET has a policy of open enrollment -qualification for
t11e undergraduate program is only a high school diploma or General Education
Development certificate. APEI maintains their tuition cost inline with public, in-state
schools and within the Department of Defense (DoD) tuition ceilings in order to provide
a competitive alternative to more traditional schools and ~ m attractive option for military
persotmel looking to advance/change their careers. Undergraduate tuition is currently
priced at $250 per semester credit hour ($750 for a typical three-credit course). A f1.tll
tmdergraduate degree can be obtained for $30,000. As we mentioned previously, tuition
pricing is aligned directly with t11e DoD' s maximum tuition assistance levels per course-
enabling most students to take courses without any out-of-pocket costs. APEI has not
increase undergraduate tuition since 2000. Graduate tuition costs $275 per semester hour
($825 per semester course). For military students the senrice pays for $750 per semester
course and students can either pay the remainder out of pocket or by applying their GI
BiU entitlement. We feel that the relative inexpensive tuition that APEI is conunitted to
maintaining may insulate the company from some of t11e issues that other for-profits may
e>-'Perience in the future. These issues include regulatory pressures to make tuition more
affordable, student' s ability to obtain financing, and student loan defaults.
Growth Strategy
APEI has increased total revenue from $40 mi llion in ' 06 to $107.1 million in ' 08 which
represents a CAGR of 63.6% over that time period. Net course registrations. tl1e key
driver of revenue growth for tlle company, have increased 73% in ' 07 and 55% in ' 08.
The company cites reasoning for its recent growth as 1) high student satisfaction and
referral rates. 2) regional accreditation in ' 06 3) increasing accepta.nce of distance
leaming ~ l l l d 4) achieving certification to participate in federal student aid programs under
Title IV of tl1e Higher Education Act of 1965. As we mentioned in tl1e "Company
Background" paragraph APEl has made a concerted effort in recent years to attract t11e
non-military citizen to their degree programs. For tl1e years 2006. 2007 and 2008. 67%.
66%. ~ m d 65%. respectively of revenue was generated from students who receive tuition
assistance from tuition assistance programs sponsored by tl1e United States Department
of Defense. The vast majority of the remaining students are public service professionals
including federdl, nation,'ll. and local law enforcement persormel. Altl1ough tl1e company
generates the majority of its revenue tltrough DoD progmms. we expect t11e trend to a
higher mix of revenue from non-DoD programs to continue for tl1e foreseeable future.
One of the key growth strategies of APEI hinges on capitalizing on tJ1e aforementioned
non-military market. The company has outlined their intent to capitalize on Title IV
availability to penetrate the public senrice and civilian markets. Traditionally. these
marl<ets were less accessible to APEI because excluding the federal government. only a
few agencies/departments have t11e tuition reimbursement plans that are critical to
funding post secondary education. However. beginning witll classes in November ' 06.
t11e company had achieved Title IV eligibility enabling their prospective students to
obtain grants and low cost loans through Title IV programs. Federal student aid
programs under Title IV constituted 13.9% of net ' 08 registrations - we would expect
t11at % to rise over t11e ne>-1 several years. Additionally. in the most recent reported
quarter (Ql09) Title N enrollments increased 87.5% y-o-y on the heels of relatively
robust civilian applications and improving civilian conversion rates.
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AMERICAN PUBLIC EDUCATION, INC. (NNM: APEI) July 31, 2009
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AHhough t11ere has been a recent focus on expanding t11e non-military student base, the
company has not lost sight of its niche and historical focus on their core military market.
Further market share gains in that space is a key growtl1 strategy. The mi litary market is
large and growing. We estimate tJmt the current market of active and recently active
1nilitary persoru1el to be approximately 4 million (50/50 between active and recently
active). Of that 4 mi llion, approximately 300,000 persons are actively enrolled at a post-
secondaty institution. APEI currently has a 12% market share of tJmt 300,000 (36,000
1nilitary students) and we expect t11at % to grow to ~ 2 0 % over tJ1e next 4 years. By
focusing on the needs and nuances of military life, we feel tJ1at APET provides an
unparalleled service to t11e militaty community tJ1at is difficult to replicate. APEI is
committed to maintaining its leadership in providing post-secondary education to military
professionals by offering the following:
A:ffordability -there are minimal out of pocket expenses for active duty military
Conmmnity of students with interest aligned (military ~ m d public service)
Niche degree programs and courses - appealing specifically to mi li tary
pers01mel
Military friendly policies
Thus, we feel APEI is likely to maintain its position as one of the "go-to" schools for
military personnel.
APEI intends to continualJy eA'])and its product offering by expanding degree prof:,T'dlns.
The company recentJy received approval from The Higher Learning Commission to offer
19 new Associate degrees and a Bachelor of Science in Criminal Justice. We eA'])ect their
product offering to continue to grow - especially to better appeal to t11e non-milital)'
prospective student.
Finally, by focusing on and improving student retention, APEI aims to improve overall
financial perfom1ance. As of 12/31108, over 80% of APEI students who had completed
three classes remain with the Universi ty as active students or graduate. As an open
enrollment school, where every student with a high school diplonm is accepted. there wi ll
always be a certain % of students that aren't retained tJ1rough graduation, but tJ1ere is
potential to improve from tl1e 80% mark that tJ1e company finished '08 with.
Page 67
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Enrollment and Revenue Growtb
Since Q306, net course registrations on a quarterly basis have increased from 14,790 to
almost 47,000 in the most recent quarter (Ql09) t11ough average quarter over quarter
growth in that time period approached 60%. As one can from t11e below chart, we expect
positive growth to continue for the foreseeable future, albeit at a slightly decelerating
rate. Specifically for Q209, we expect a total of 46,620 net registrations which is 40%
higher tlmn Q208 and we expect average quarter over quarter growth of 34% through
Q410. As one would e>.'])ect, revenue is closely tied to enrollment growth, especially
with APEI as the company has had limited tuition increases over the past several years.
Since 2005, revenue has increased at a CAGR of 56% through 2008 ru1d we are
projecting a 21% CAGRfrom FY09 throughFY14.
Revenue (In millions)
$500.0
$450.0
$400.0
CA.OR- 21 V. (FY09-FYI4)
$350.0
$300.0
$250.0
$200.0
uso.o
$100.0 +------=-..:::;;.- -:::ojO>O>IIJ.-.lJI..W.--------------i
sso.o
$-
PYOS FY06 FY07 FY08 PY09E FYlOE FYJ IE FY13E FY14E
Source, Company reporls and SAL estimates
250
Net (Annual)
In
'FY02 FY03 'FY04 'FY05 FY06 'FY07 'FY08 'FY09E
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Onetating Income/Margin lm!Hovement
Since FY03, APET has grown operating income at a 66% CAGR from $1.9 m:illion to $40
m:illion while improving operating margin over that time frame from 7% to 24%. Our
model assumes addi tional improvement from the 24% actual in FY08 to 27% in FY09
and tJ1cn 28% in FYlO thru FY12 as the company continues to accelerate its growt11
strategy and tJ1en to improve to 30% in FYI3 and FY14 ..
$4$.0
Operating (Annual)
'In l.\1lll ions

$35.0
$30.0
$25.0 -1------------::>""'"-------
$20.0 +----------.,-"'---------
$15.0
$10.0
$5.0 -1---.:..:c-'----------
s.
FY03 J1Y04 .FY05 .FY06
Model Assumntions
FY07 FY08 .FY09E
We are not assuming any tuition price increases going fonvard over the next several
years. However, we expect APEI to increase tmdergraduate tt1ition inline with any DoD
increases in their tuition assistance program. We expect revenue CAGR of 28% between
2008 2013. We expect operating margins to increase from 24% in 2008 to 30% by
2013 leading to CAGR in EPS of at least 32%. We expect operdting nwt:,>in expansion to
be driven by leverage in the instructional cost and services and G&A lines. We feel we
are being conservative at this point in our operating margin assumptions as we see the
company being able to achieve margins in the low- to mid-30s over time.
Page 69
Valuation AnaJvsis
As the table on the following page shows, we determined APET target price to be $42
suggesting upside of -20% from current levels. Additionally, we determined an average
high and low range of$97 and $34, respectively.
For our valuation analysis and target price derivation, we looked at a number of
methodologies on a 2 year historical basis including:
7. Forward P/E Multiple Trends
8. PEG (PIE to Growth) Trends
9. Trends in Forward PIE Multiple Relative to Market
10. EV to SaJes Trends
11. EV to EBITDA trends
12. DCF
Under the first 5 methods, first we derived three different values for the stock
using its historical average, historical low and historical high multiples.
Next, we assigned probabilities to l11e average, high and low case scenarios. tn
general, we assigned either a vety low or a zero probability to the high case
scenario (to be conservative). Specifically for APET, we gave the stock a 35%
probability of trading at its 2 year historical average for each of the
aforementioned methodologies. We assigned a 65% probability of the stock
trading at its historical low for each methodology.
Finally, we derived our target price by averaging the results from the methods
used above.
Using our DCF model, we derived an equity value per share for APEI of $39-
$51 which supports our $42 target.
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AMERICAN PUBLIC EDUCATION, INC. (NNM: APEI )
APE1
Current
Historical Avg
Historical Low
Premium Vs Low
Historical High
Discount Vs High
FOR PROFIT EDUCATION GROUP
CuJTent
HistoJical Avg
Historical Low
Historical High
Company Relative to GROUP
Current
Historical Avg
Historical Low
Historical High
Current Stock Price (7/30/09 lntraday)
Value At Historical Avg
Value At Historical Low
Value At Historical High
Probabi litiy tor Each Scenario
Average
Low
High
Probabilitiy Weighted Value
Upside Value
Downside Value
Source: FactSet, SAL Estimates
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Valuation Analysis
Forward PIE
Relative to
23.4x 0.6x l.6x
388x l.l x 3.0x
-40% -40% -46%
22.2x 0.6x l..Sx
5% 5% 6%
69.0x 2.0x 4.7x
-66% -68% -65%
18.9x 0.9x l.3x
24.5x l.3x l.9x
-23% -33% -29%
17.2x 0.8x 1.2x
32.3x 1. 8x 2.5x
l.2x 0.6x 1.2x
1.6x l.l x l.6x
-24% -41% -24%
1.2x 0.6x 1.2x
2.3x 2.0x 2.3x
T:tl'j!t't l'rin & l psidt/l>m\ nsidt Ddtrminatinn
Forward PIE
Relative to
$35 $35 $35
$58 $59 $65
$33 $33 $33
$103 $108 $100
35% 35% 35%
65% 65% 65%
0% 0% 0%
$42 $42 $44
$103 $108 $100
$33 $33 $33
July 31, 2009
EVto EVto
Sales EBITDA Average
5. 11 x 17.6x
9.3x 20.lx
-45% - 12% -37%
5. 1x 17.8x
1% -1% 3%
17.9x 23.3x
-72% -25% -59%
3.0x 12.5x
3.4x 13.4x
- 12% -6% -21 %
2.5x l0.4x
4.6x l7.2x
l.7x 1.4x
2.7x l.5x
-37% -7%
2.0x J.7x
3.9x 1.4x
t::Vto t::V to
Sales EBITDA
$35 $35
$64 $40
$35 $35
$123 $46
35% 35%
65% 65%
0% 0%
$45 $37 $42
$123 $46 $96
$35 $35 $34
Page 71
AMERI CAN PUBLIC EDUCATION, INC. (NNM: APEI)
" '"'"''r- "'
American Public
EBJT
Taxes
Tax Adjusted EBIT
+ oepr. & Amort..
Change In Work. cap.

Growth Analysts
Crowlh
ESUG'owth
T4X Acl}.lskd EBn Gtowlh
Wk1!;7 capltJI &owth
II>'uwth
!tee C.uh f.bw O'owlh
Margi n Anatysl s
EBrr %of Rermues
Flu GJsh Flow % ol

Soun::e: FactSet
:tilL\
28. 2
2.2
1,1
1.2
1.3
(0.3)
4.6
(1.8)
1.9%
6.S'f6
47.7i6
2.9
I
2.0
2.1
4. 5
(2)
1.3'16
-6.1 ..
26.1'46
fiAi
69
2.8
4.2
6.8
@)
SJ. I %
-$6.196
21.3%
.(}.S'Ht
46.S'Ht
frlli
107
25.7
10
4.2
6.0
10.0
a
"txm
ISO
39
16
23
s
4
II
u
:19....
SJ.Z%
SM%
/().Mil
J(},()IJI,
293.2%
EXm wn:
208 ...
56 73
22 29
33 ..
7 9
4 4
12 13
23 !16
38./i'H, 18.4%
4.1.1,.
43.1% 32-0%
IO.O'Ht JO..M6
10.0% J(}.()IJ6
7#.7% <U.l%
26.7% 25.5%
//.8% JZ.4f6
40.0% 40..ot6
lfut
399
89
36
II
s
IS
46
J$.4%
21.816

10.04
J(},M/,
27.7%
am'
S49
114
45

14
5
16
61
37.7%
27.Jti
27.1%
10.0%
JO.O%
33. 1%
20.7%
//.0%
40.0%
July 31 , 2009
Disc. Rate Discounted Free Ca.sh
591 6213 702 ""'ffl' "f.t ""'m ""= ......
H ...
IO.O'IIt
!O.YMt

Disc. Rate
9 .....
9.5 ..
l O.O'MJ
10.5411,
U.Oitlt
Chart l
QwU
133
131
129
127
125
sJs 614 450 686 m 708 744 781 st7 853 756 792 828 864 900
s6s 600 &3S 670 706 693 729 764 799 S34 741 n6 st2 847 m2
552 SS6 621 6SS 690 679 713 74S 782 817 726 761 795 830 864
540 573 607 641 674 664 698 732 766 799 712 746 779 813 847
User Input
User Input

81.5%
81.4%
81.3%
81.2%
Historical Average Growth ( 169'
Same rate as Revenue Growth
Maintain Historical Average Mar.
User Input
Historical Average (40%)
User Input
User Input
#OIV/01
User Input
Historical Average Growth ( 32'*

82.4%
82.3%
82.2%
82.1%
f:ll'lf.

8!,,..,
SJ.t ..

8) .....
fY..Wf.
39.9%
ill!2f.
ffi.Qf.
10.0%
168.9%
39.9%
15.1%

&M%
839%
838%
8).7%
38.8%
10.0%
168.9%
38.8%
15.1%

94.1'Mo
.. ....
eo ....
94.4"MM
fWf
38.4%
.El.l1f.
10.0%
168.9%
38.4%
15.1%

39
39
38
37
fill.E.
Eillf.
38.4%
10.0%
168.9%
38.4%
15.1%
41
40
40
39
ELUf.
.EY.ill.
1
43
42
42
41
37.7%
10.0%
168.9%
37.7%
200.0%
l:!llZt. 40.0% !::llllt. 40.0% l:ll.lt. 40.0% t::!.lit. 40.0% l:l.L& 40.0%
40.0% 40.0% 40.0% 40.0% 40.0%
!:!.l.!'Z!;. 29.1>% 2b.3% 21.8%
!..!..,&
21.8'i'o
39.9% 38.8% 38.4% 38.4% 38.4%
l:!llZt. 10.0% t:ll\ll;. 10.0% Wlt. 10.0% l:lllt. 10.0% t.X.Ul;, 10.0%
39.9% 38.8% 38.4% 38.4% 37.7%
#DIV/01 #DIV/01 #DIV/0! #DIV/0! #DIV/0!
!:!ll;l& 10.0% 10.0% !:!.1!!; 10.0% tiUt. 10.0% 10.0%
39.9% 38.8% 38.4% 38.4% 37.7%
32.0% 32.0% 32.0% 32.0% 32.0%
.jtJ
';I.UU

IU.U!Nb
ll&Q .EI2.
.El2Z.
.El.!1.
1
3
2
2
2
2

45
44
43
43
.Elill

47
46
45
..
..
$42.00
$41.17
$40.35
S39.S6

01al c;:; 46 l
Net Debt (48)
Shares taoo
..
$44.01
$43.13
$42.27
$41.43
.Eil..ll
Jt.:f
$46.01
$4S.09
544.18
543.30
.Elill
.. w:
548.02
$47.05
$46.10
$45,18
=
$50.02
$49.01
$48.02
S47.0S

1 Revenues 0 28 40 69 107 150 208 288 399 549
Revenues % chg. #DIV/0! 42.1% n .5% 55.1% 39.9% 38.8% 38.4% 38.4% 37.7%
EBIT % of Revenues 0.0% 7.9% 7.3% 21.3% 24.0% 25.9% 26.7% 25.5% 22.4% 20.7%
Free cash Flow% of Revenues 0.0% -6.5% -6.1% -o.5% 3.4% 9.4% 11.8% 12.4% 11.4% 11.0%
::.ource: t-acts:>et, :>AL estimates
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Page 72
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Val uation Charts NTM PIE, NTM PIE Relative to S&P 500, NTM PEG, Relative to
the Group, 52 Week Range
Afll.ri<CUI i elvcatton Inc. (APil)
N'EJ C2tSM03 D1t)GMJ. ti..\SQ!l,Ot>M.Io-*6-K CoOiolt'..,OI:I-c:lo:.c
t7:t1-l\'()1(D4i!1

On a NTM P/E basis, APEl is trading at 22.7x and since becoming public has traded in at
a high of 69x, a low of22.6x, and at an average of39.3x.
P't;O.lfc b\c. (N'II)
Wf .,:-.,,..tn c.-...
; .. )lol ...... .(,..,
-tllf'l""r'
10 "
\ . ...

...
\v<
"
...,. - - -...-
:10-f

Since becoming public, APEI has traded at a premium relative to tJ1e S&P 500 on a NTM
PIE basis. The stock is currently trading at 1.54x tJ1e NTM PIE of the S&P 500 and has
traded as high as 4.7x, as low as 1.54x, and at an average of 3.1 x.
Page 73
sterne
agee
Jo.mu.can Pu.blle In. (AP1)
N'E (ll11r.I\C)
24-..k.!tlJO<'

...
. .

Since becoming public, APEI has traded at NTM PEG as high as 2.0x, as low as 0.6x,
and at an average of l.lx. The company is currently trading at the low PEG ratio.
Mlt.mll,...:._-.,!e: r cruubolllttlc. Wln

.._.1f"U .. :fN-l'OOtiDW
.. .

f
........
,,
"
tlf
"

-
....
On a NTM PIE basis and relative to its peer group, APEl has always traded at a premium
since becoming public. The premium has ranged from2.33x to 1.19 x and is currently at
l.2x. The average has been l.62x.
Page 74
Fiscal Qtr Actual
03/2009 $33.16
1212008 $31.50
09/2008 $27.40
0612008 $25.00
0312008 $23.24
1212007 $21.22
Ptltl-k(. .. 1M ne..c,AP1)
.,.

,.,. , .. >> ...
Over the last 52 weeks, APEI has traded in a range of $49.65-$32.29 and is currently
trading at $35.02.
Recent Results
APEI reported its most recent quarter (Q109) on 5/07/09. Overall, results were better
than expected. Revenues increased y-o-y from $23.2 to $33.2 million on the heels of
strong growth in net registrations. EPS came in at $0.28- an increase of 53% compared
to t11e $0.18 reported in t11e year ago period. Reported revenue and EPS were botJ1 ahead
of consensus of $32.8 million and $0.25 respectively. As on can see from the below
chart, APEI has an excellent history of exceeding consensus expectations.
Sales (mimom>) - Surprise Eamings Per Shue - Stuprise
Surp ;.
0
/o Price Surp ;.
0
/ol'ricc
Consensus Amt Surp Tmpact Fiscal Qtr Actual Consensus Amt Surp Tmpact
$32.79 $0.37 03/2009 $0.28 $0.25 $0.03 10.5% 0<}1>
$3 1.05 $0.45 1212008 $0.27 $0.23 $0.04 16.8%
$26.32 $1.09 4.1'3& 1796 09/2008 $0.20 $0.18 $0.02 11.1%
$24.74 $0.26 8% 06/2008 $0.21 $0.15 $0.06 -10.0% 8%
$21.93 SL.31 6.0% 0312008 $0.18 $0.13 $0.05
$20.73 $0.49 1212007 $0.19 $0. 18 $0.01 - 20{1
S26.92 S26.26 S0.66 2.7% 2 2% SU.22 SO 19 SO Il-l 21.2% 2.2%
Source: Factset
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Page 75
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Balance Sheet Summav
The company ended their most recent quarter with $53 million in cash and ST
investments, an increase of 67% year-over-year. The company' s current ratio at quarter
end was 2. 97. APEJ does not have any Iong-tem1 debt.
American Pubic E:ducation Inc.
Total Assets (R ght)
Ca:h & ST I nve9:rren1s (R g h ~
Ca:h & ST I nve9:rren1s% T o1al ~ 1 s (Left)
6:ZO/o
61%
60%
59%
58%
57%
56%
55%
54%
53%
5:ZO/o
9/07 12/07
Data Satrce: Fact Set Fundamentals
Holders
3/08 6/08
80
70
60
50
40
30
20
10
()
9/08 12/08 3/09
lloltler :\a me I lloltler I ~ pe I Position I \!lit \ al I %of Total
BOSTON, WALLACE E JR President, CEO 317,697 $1 1,437,092 1.8%
WlLKINS. HARRY T EVP,CFO 202, 121 $7,276,356 l.l %
GILBERT. CAROLS Executive VP 40, 159 $ 1,445;724 0.2%
LEUBA, MARK L Senior v"P 17,624 $634,464 O.l%
WEGL!CkL TIMOTHY T .Director 15.443 $555.948 0.1%
CLOUGH, PHILLiP A Director 13,936 $501,696 0.1%
GU3BONS. PETER vJ SeniorVP }0,322 $371,592 0.1%
Total 617,302 $22,222,872 3.4%
Page 76

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