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SEC Investigates University of Phoenix Owner, Apollo Group

Student Loan Girl — Thu, 29 Oct 2009 19:03:00 GMT

Apollo Group Inc., the parent company of the University of Phoenix, the largest for-profit college in the country, announced on Tuesday that the Securities and Exchange Commission has launched an “informal inquiry” into the company’s revenue accounting practices.

This new probe, being conducted by the SEC’s enforcement unit, marks the second time this year that the SEC has targeted Apollo’s accounting operations for investigation. In February, the corporate finance division of the SEC also revealed it was reviewing Apollo’s revenue recognition practices.

“The ‘revenue recognition’ issue revolves around how Apollo determines when a student drops out of a class and how much income Apollo can leave on its balance sheet, and for how long,” The Associated Press explains in its reporting on the new SEC inquiry (“Ahead of the Bell: Apollo Shares Sink on SEC Probe,” Oct. 28, 2009).

Nearly 90 percent of Apollo’s income — most of which is generated from student tuition — comes from federal student loans and other government financial aid. Federal student aid accounted for roughly 86 percent of the company’s revenue in the 2009 fiscal year, Bloomberg reports, up from 82 percent in fiscal 2008 and 48 percent in fiscal 2001 (“Apollo Shares Plunge as SEC Starts Accounting Inquiry,” Oct. 28, 2009).

Apollo Defends Accounting Policies

In a conference call with investors on the same day that it released the news of the SEC probe, Apollo defended its accounting practices (webcast of Apollo’s fourth-quarter 2009 earnings conference call, Oct. 27, 2009).

Analysts on the call directed questions toward Apollo’s revenue recognition policies, asking the company about its attendance records and how revenue is booked when a student drops a class.

Apollo responded that it stops recognizing revenue not immediately upon a student’s withdrawal from a course but only once a tuition refund is processed. The company books full tuition revenue for a course if a student attends more than 60 percent of the class sessions. In the case that a refund is delayed for any reason, the company will make the necessary revenue adjustments, Apollo said.

“The policies are straightforward and they are in accordance with GAAP — all of them,” said Apollo’s chief financial officer, Brian Swartz, referring to Generally Accepted Accounting Principles, the standard financial accounting guidelines that publicly traded companies are required to follow.

Analysts: SEC Targeting of More For-Profit Institutions Unlikely

After Apollo’s announcement of the SEC inquiry, the company’s shares plunged nearly 20 percent to their lowest levels in more than 19 months in New York trading.

But blowback from the news of the government’s scrutiny didn’t remain limited to Apollo: Shares of other for-profit education companies traded lower yesterday, the day after Apollo’s announcement, The Wall Street Journal reported, as investors questioned whether the SEC probe into Apollo is a precursor for an industry-wide crackdown (“Education Stocks Drop After Apollo Announces SEC Probe,” Oct. 28, 2009).

“For-profit colleges have come under fire numerous times for their methods of recognizing revenue,” the article in The Wall Street Journal notes.

Perhaps with this history in mind, “some investors have opted to scrutinize the company’s practices on student refunds and bad-debt expense, the implication being that this could be the beginning of an industry-wide review of practices,” a Wedbush Morgan analyst wrote in a note to investors Wednesday.

However, the Wedbush Morgan note went on to caution, “we remind investors that it’s plausible that the issue could equally relate to other parts of the business.”

Trace Urdan, who follows Apollo for the Signal Hill Capital Group, believes a larger regulatory examination into for-profit colleges is something to be taken into consideration. “I think there’s sort of two possibilities,” Urdan told The Arizona Republic. “Either the SEC’s got something on Apollo specifically and they’re moving in, or there’s something related to the industry” (“Apollo in Accounting Investigation,” Oct. 28, 2009).

Other analysts, however, feel the SEC action doesn’t represent anything broader in scope than a check into Apollo itself.

While downgrading their ratings of Apollo, analysts at Morgan Stanley noted there’s no reason to believe the SEC investigation signals a larger industry issue, The Wall Street Journal reported. And in a note to clients, RBC Capital markets analyst Robert Wetenhall asserted that his firm is confident the SEC accounting probe is specific to Apollo.

“We feel that the issues that are affecting Apollo are unique to it and not applicable to the broader sector” of for-profit education companies, Wetenhall said.

Analysts at Deutsche Bank, consulting with financial legal expert David Seide, concurred. In their estimation, the StreetInsider reported, the SEC issue “is probably company-specific, not part of an industry-wide sweep, as the SEC enforcement division focuses on potential violations, not policy” (“Apollo Group Can’t Find Traction After Disclosing SEC Probe,” Oct. 29, 2009).

Seide “did not rule out an industry sweep, but this seems like a lower-probability event.”

A Move Toward Increased Oversight of For-Profit Colleges?

Some market-watchers wonder if the SEC probe of Apollo, while not ushering in a federal swoop-down on for-profit colleges, may still be an indication of significant changes in regulatory attitudes toward these schools looming in the wings of the White House.

In this view, the SEC inquiry may have arisen out of the move toward generally increased consumer financial protections within the new government administration.

“It is no secret to insiders that the Bush-era education team has been favorable to for-profit education,” Citron Research declared, noting that Sally Stroup, the assistant secretary for post-secondary education during the Bush administration and the highest-ranking official overseeing for-profit schools, was a lobbyist for the University of Phoenix for eight years (“Citron Releases the Document That the Apollo Group Does Not Want You or the U.S. Government to See,” Jan. 13, 2009).

Citron has been fiercely critical of what it argues are Apollo’s fraudulent business practices and unethical, strong-arm recruitment tactics (“Citron Exposes Apollo’s Big Dirty Secret,” March 4, 2009).

“Count on the Obama administration to take a fresh, critical look” at Apollo, Citron predicted in January. “As the largest single recipient of student loans in this country, [Apollo] is a for-profit institution whose insiders have sold hundreds of millions of dollars of stock while collecting over 75 percent of their revenue from government-guaranteed loan funds, while delivering an education of questionable value amid a history of unsavory business practices.”

Continuing Legal Embroilments for Apollo

The changed tenor at the White House notwithstanding, specialists in financial circles say the SEC’s investigation into Apollo may never go any further than the current “informal inquiry.”

“We do not believe a formal inquiry or fraud allegations are a foregone conclusion,” Deutsche Bank analysts told the StreetInsider.

In fact, out of the roughly 800 informal investigations initiated each year by the SEC against corporations and individuals, only slightly more than half, about 450, result in formal investigations, the StreetInsider reports. Just 100 result in actions.

At the same time, even if this newly launched SEC review of Apollo’s accounting practices fades away with no further repercussions, corporate observers can’t escape the fact that this latest government probe is adding yet another chapter in a growing string of recent legal troubles for the company:

Sued by employees: In its fourth-quarter and year-end earnings report issued on Tuesday, the same report in which it disclosed the SEC inquiry, Apollo also revealed it took a charge of $80.5 million for the quarter to cover a possible settlement pending in a federal whistleblower suit (“Apollo Group, Inc. Reports Fiscal 2009 Fourth-Quarter and Year-End Results,” Oct. 27, 2009).

The lawsuit, brought in 2003 by two former University of Phoenix enrollment counselors, accuses the University of Phoenix of violating a federal ban that prohibits schools from paying recruiters based on the number of students the recruiter enrolls.

Apollo paid $9.8 million to the U.S. Department of Education in 2004 to settle alleged violations of the same rule, Bloomberg reports.
Sued by shareholders: That same year that Apollo settled with the Education Department for illegal recruiting, Apollo officials, after receiving a scathing report from government regulators on the company’s recruitment practices, decided not to publicly disclose the contents of the government report, out of concern for the potential negative reaction from shareholders.

The decision to hold back this information led to a securities class-action lawsuit from Apollo shareholders, accusing the company of misrepresenting and of failing to disclose “material adverse facts.”

In January 2008, a federal jury unanimously found Apollo guilty of securities fraud for misleading investors, delivering a verdict of $277.5 million, although the judgment was overturned seven months later on appeal.
Sued by students: Apollo has also been taken to court by its students: In December 2008, three former University of Phoenix students filed a federal class-action lawsuit against Apollo and the University of Phoenix, accusing the institutions of improperly denying them the use of federal student loans, in violation of the Higher Education Act.

The students alleged that, when they dropped courses shortly after enrolling, the University of Phoenix returned all of their federal student loan funds to the lenders without the students’ “knowledge or consent,” even though the students had already incurred tuition charges. The school then demanded immediate repayment from the students for the partial tuition owed.

By charging the students directly and not allowing them to use their federal student loans as payment, the complaint stated, the University of Phoenix denied these students the borrower protections and more generous loan repayment terms offered by the federal government.

Returning the students’ federal student loan money was also a “transparent attempt” by the University of Phoenix to unlawfully manipulate its federal student loan default rate, the lawsuit charged, since students who don’t finish their education are at the highest risk of defaulting on their student loans. In this case, the school effectively prevented these high-risk students from defaulting on federal student loans. If the students failed to pay their tuition charges, they would be defaulting on a debt to the school, not to the government — a default that wouldn’t affect the school’s eligibility for federal funds.

Student loan default rates were also the focus of a recent government assessment of for-profit schools. The Government Accountability Office released a report last month critical of the high student loan default rates at for-profit colleges like those run by Apollo (“Proprietary Schools: Stronger Department of Education Oversight Needed to Help Ensure Only Eligible Students Receive Federal Student Aid”).

For-profit schools, the GAO found, exhibited a tendency to admit unqualified students who are more likely than other students to drop out, as well as a pattern of allowing students to remain enrolled despite a lack of academic progress.

On the company’s Tuesday conference call, Apollo’s co-chief executive, Chas Edelstein, assured investors that the company is working to “ensure that only students who have a reasonable chance to succeed enroll in our universities,” as a means of trying to scale down the number of students who default on their student loans.

Apollo’s bad-debt expense — defaulted student loans the company has written off as uncollectable — rose to 4.2 percent in the fourth quarter, up from 3 percent.

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Students Left Holding the Bag as Loan Forgiveness Programs Vanish

Student Loan Girl — Wed, 03 Jun 2009 22:30:00 GMT

College graduates who were lured into high-need fields, including teaching, nursing, and public service, by programs that would forgive a portion or all of their student loans are receiving this sobering news: The cavalry isn’t coming after all.

These graduates, who in some cases were enticed by the loan forgiveness programs to take out student loans that exceeded their earning potential, are now discovering they’re on the hook for their large debts — and are struggling to pay them — because the state agencies originally offering the loan forgiveness can no longer afford to do so.

“We’d gotten married in June and bought a house, pretty much planned our whole life,” said Travis Gay, a special education teacher in Kentucky (“Recession Imperils Loan Forgiveness Programs ,” The New York Times, May 27, 2009).

Gay and his wife, Stephanie, also a teacher, thought they had a handle on repaying the $100,000 they owed in combined student loans. They were under the impression that a portion of their college loans would be forgiven each year over the next five years under a state program offering loan forgiveness for schoolteachers.

Then the Gays received a letter from the Kentucky Higher Education Student Loan Corporation, the lending agency that offered the program, “saying that our forgiveness this year was next to nothing.”

The student loan agency contends that it never promised the thousands of indebted public school teachers and nurses who have been affected by cuts to the program that their loans would definitely be forgiven. Financing for the loan forgiveness program was never actually guaranteed, says Ted Franzeim, vice president of customer relations for the student loan agency.

And it’s not just Kentucky borrowers who are being hurt by program cuts. Student loan forgiveness programs are on the chopping block throughout the country as the state agencies and nonprofit student loan organizations that sponsor these programs reel from dwindling government aid and strained market conditions.

The New Hampshire Higher Education Loan Corporation, for example, suspended its loan forgiveness program for teachers, and the Pennsylvania Higher Education Assistance Authority has put the brakes on its loan forgiveness program for nurses and people called to active duty in the military.

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Debt Collection Agency Adding Hundreds of Jobs

Student Loan Girl — Tue, 18 Nov 2008 17:21:00 GMT

Premiere Credit of North America, a debt collection agency based in Indianapolis, is a bit of an anomaly in today’s down economy — it is thriving at a time when many businesses are cutting back their workforces and many debt collection agencies are losing money to cash-strapped consumers who can’t pay up.

Premiere Credit, which specializes in collecting unpaid student loans and government debt, has been performing so well that it’s looking to add nearly 300 employees to its 250-person staff, reports Erika Smith of The Indianapolis Star (“Debt Collector Premiere Credit to Expand, Add 300 Jobs,” Nov. 13, 2008).

To accommodate its growing business, Premiere Credit is also preparing for a $4 million expansion of its headquarters and is planning to open a second operations center (“Indianapolis Debt Collection Firm to Expand,” Chicago Tribune, Nov. 12, 2008).

The company, which manages more than 700,000 accounts valued at more than $1 billion, is scheduled to receive about $2.5 million in performance-based tax credits from the state, as well as up to $200,000 in training grants.

Student Loans Make Up 40% of Company’s Debt-Collection Business

Premiere Credit CEO David Hoeft attributes the company’s growth to its four-year contract with the U.S. Department of Education, which currently accounts for 40 percent of its business. While the number of delinquent college loans isn’t growing — the student loan default rate has remained steady at 5 percent over the last few years — Premiere has snagged a greater proportion of collection work, Hoeft said, and, with the help of an expansion to its Education Department contract, Premiere’s student loan debt collection business is expected to grow even more.

Debt collectors have a much easier time collecting government-backed student loans than unsecured debts like credit cards, which are not tied to an asset. Federal student loans can forcibly be repaid in a number of different ways and debt collectors have more legal leeway to track down debtors.

“There’s no statute of limitations on collection efforts. [Federal student loans], more often than not, can’t be discharged in a bankruptcy,” Smith writes. “Collection agents can garnish wages, tax refunds and Social Security payments, and they can access a federal database of new hires that makes it easier to find employed people who can pay.”

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Davidson College Sees Positive Results After Eliminating Student Loans

Student Loan Girl — Thu, 10 Jul 2008 03:44:00 GMT

While Princeton was the first university to completely eliminate student loans from its financial aid packages in 2001, it was Harvard’s announcement to follow in Princeton’s footsteps this fall that garnered national media attention as no-loan financial aid policies for 2008–09 began to turn up at elite colleges and universities across the country: Amherst, Columbia, Dartmouth, Stanford, Swarthmore, Yale.

So far, some 50 institutions across the country have implemented no-loan and loan-cap financial aid policies, according to the Project on Student Debt, a nonprofit advocacy group — in some cases for all students; in others, only for students whose families fall below a certain income cutoff, although that cutoff runs as high as $150,000 a year at some schools.

After stinging rebukes from legislators critical of yearly tuition-hikes that have outstripped inflation and the proliferation of costly private student loans in undergraduate debt loads, many of the nation’s richest schools have moved to reduce student dependency on college loans and to entice greater numbers of low- and middle-income students to enroll at their institutions.

But it’s a small, selective liberal arts institution in North Carolina — Davidson College — that’s already seeing the results of eliminating student loans from its financial aid packages (“At Davidson, Getting Rid of Loans Shows Early Signs of Success,” The Chronicle of Higher Education, July 11, 2008).

While the long-term, broader nationwide impact of these new financial aid policies may not be seen for a few years, Davidson — which got a head start over the rest of the Ivy Leagues by instituting its no-loan policy a year earlier, in the fall of 2007 — has already experienced a three-percent jump this year in the number of incoming students who demonstrate financial need.

Although Davidson’s endowment of $489 million is much smaller than the multibillion-dollar endowments of its Ivy League competitors, the school has set a goal to have 40 percent of its incoming students receiving only need-based aid by 2011 — a plan that Davidson’s dean of admissions and financial aid, Christopher Gruber, says will cost $3.5 million to implement.

"We're moving in the right direction with a year to promote it," Gruber says.

Davidson’s early results aren’t surprising, says Jonathan Epstein, from the education consulting firm Maguire Associates. But families shouldn’t expect no-loan policies to become the norm. “My take is, it’s not something that, as announced policy, is going to spread across the country.”

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The New Financial Aid Landscape

Student Loan Girl — Sat, 26 Apr 2008 19:41:00 GMT

In the last few months, the media has been drawn to the potential student loan crisis, focusing on how students will be able to weather accessibility issues to get the funds they need for college next fall.

At the same time, many of the country’s top colleges and universities have been revamping their financial aid programs to better assist parents and students in covering their college costs.

Schools Modifying Financial Aid Programs

To date, about 50 schools have made substantial changes to their financial aid programs, writes Anne Marie Chaker of The Wall Street Journal (“The New Math of College Financing,” April 21, 2008).

Several schools have chosen to replace student loans with grant money that won’t need to be repaid, effectively lowering their tuition. Others have waived tuition costs altogether for families that fall below a specific income. Some have capped the amount of money a family is required to contribute toward college costs at a certain percentage of the family’s yearly income.

Student Loans Being Replaced with Grants

Undergraduates attending Stanford, Dartmouth, Harvard, M.I.T., Yale, or Cornell next fall now have a better chance of graduating with less debt from student loans, thanks to a significant shift in the financial aid programs at these schools.

Under pressure from Congress, with legislators questioning growing student debt levels and skyrocketing tuition costs that outpace inflation even as the wealthiest schools report endowments of $500 million or more, colleges and universities with sizeable endowments are tapping into those endowments to replace student loans with grants in their financial aid awards.

Although Harvard is using grant awards to eliminate student loans from its financial aid packages entirely, other schools are reserving these loan-replacement grants for families at qualifying income levels, Chaker notes.

Cornell, for example, in the 2009–10 academic year, will only replace student loans with grants for families making less than $75,000 annually. (The threshold was $60,000 for the current school year.) Students from families earning between $75,000 and $120,000 a year may still be awarded student loans, but those loans will be capped at $3,000 for 2009–10.

Tuition Waivers for Middle-Income Families

A handful of the nation’s top schools have also implemented programs that eliminate tuition charges completely for middle-income and even upper-middle-income families, with qualifying income levels as high as $100,000.

At M.I.T. and Dartmouth, families who make less than $75,000 a year will be able to send their children to college at zero tuition cost (although they may still have to cover room and board, books, and other living expenses). At Stanford, the income cutoff for a tuition waiver is $100,000 (with assets typical for that income level).

Family Contribution Capped Even for $100K+ Incomes

Last year, Harvard announced “one of the most ambitious [financial aid] plans out there,” writes Chaker, allowing families earning between $120,000 and $180,000 a year, with standard corresponding assets, to put just 10 percent of their annual income toward their child’s cost to attend — in other words, paying only between $12,000 and $18,000 of the 2008-09 sticker price of roughly $50,000.

Yale followed on Harvard’s heels with its own 10-percent policy that went even further up the income bracket, applying to families who make up to $200,000 a year.

As part of these new financial aid plans, both Yale and Harvard require that students contribute between $2,500 and $4,000 of their own funds, earned through a part-time or summer job or both, in addition to their parents’ 10-percent contribution.

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Tufts University to Help Graduates in Public-Service Repay Student Loans

Student Loan Girl — Thu, 24 Apr 2008 17:31:00 GMT

Under a new student loan repayment program offered by Tufts University, graduates and undergraduates from the school who pursue jobs in public service could have a portion of their student loans forgiven.

Tufts alumni from any graduating class who choose or have chosen to work for a nonprofit or public-sector employer following graduation may be eligible for the program, according to an article by The Chronicle of Higher Education writer Elizabeth Farrell (“Tufts Offers Loan Relief to Public-Service-Minded Students and Alumni,” April 23, 2008).

Tufts officials tout the university-wide program as the nation’s first debt relief plan to include all students who graduate from a particular school, Farrell wrote.

The total loan-repayment-assistance award a Tufts graduate could receive through the program is dependent on the graduate’s income level and the remaining balance of his or her student loan debt.

University officials expect to grant the school’s first loan-forgiveness awards in December. Initial funding for the program includes a $100 million gift from Tufts graduate, and eBay founder, Pierre Omidyar and $500,000 from the Omidyar-Tufts Microfinance Fund.

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