Analysis: With University of Phoenix Acquisition, Idaho Gambles Big on Online Education

The University of Idaho will acquire the University of Phoenix for $550 million in a deal that the Idaho State Board of Education approved on May 18. The unanimous vote occurred only weeks after a similar University of Arkansas proposal collapsed, following a divisive debate where one trustee complained that the for-profit Phoenix has a “terrible reputation.”

Idaho’s decision comes only days after six U.S. senators asked four federal agencies to investigate Phoenix’s continued deceptive advertising. “Phoenix is an unscrupulous and predatory for-profit college that has long preyed on veterans, low-income students, and students of color,” the senators write.

The day before the vote, education industry analyst David Halperin wrote, “what’s not understandable, at least in terms of the interests of the people of Idaho, is why U of I would want to buy Phoenix, at any price.”

The acquisition still needs approval from the U.S. Department of Education and two regional accrediting boards. According to a 40-question FAQ posted on the University of Idaho’s website, a nonprofit corporation created by the school called NewU would buy Phoenix and transition it into a nonprofit.

That approach emulates the deal structure proposed under the Arkansas plan that we explored at length in our recent analysis. But beyond that process, the terms of Idaho’s acquisition differ significantly from the rejected Arkansas proposal and may have been modified to correct several defects that hindered the previous initiative.

For example, although an Arkansas nonprofit owner of Phoenix would have remained independent from the University of Arkansas, Idaho’s plan enables Phoenix to eventually merge into that state’s university system after operating as a separate entity.

Currently enrolling 9,375 students, the consolidated University of Idaho would then educate approximately 87,975 students, since in 2021, Phoenix enrolled 78,600 online students, of which 54,400 were undergraduates.

But the FAQ does not suggest a timetable and presents vague language discussing how and when that merger could ever materialize.

Some of the Idaho deal’s aspects also differ markedly from the Arkansas plan. For one thing, the U of I says that Apollo Global Management—the Wall Street hedge fund owner of the University of Phoenix—agrees to provide an initial one-time $200 million working capital deposit to the nonprofit corporation; no such deposit was announced during the Arkansas deliberations.

Another difference is that Idaho will annually receive guaranteed payments of $10 million from NewU, and in the following FAQ excerpt suggests that the money is probably the main reason why the state would want to own Phoenix: “The initial benefit is $10 million in supplemental education funding to U of I. We expect that amount will grow over time.” Nevertheless, that’s only half of what Arkansas would have received each year, even though Phoenix reportedly generates $100 million in free cash flow annually–ten times the amount Idaho received as a guarantee.

Furthermore, Idaho’s deal structure is essentially a leveraged buyout since the FAQ also reports that the state will finance the deal through taxable and tax-exempt municipal bond issues, yielding cash flows “separate from any U of I budgets or funding lines.” Generally, the purpose of leveraged buyouts is to enable organizations to complete large acquisitions without substantial amounts of capital. The University of Idaho President Scott Green—a Harvard MBA who worked for Goldman Sachs and from 2007 to 2012 as an executive director at WilmerHale, a law firm with a history representing for-profit education clients—said “the affiliation will diversify our revenue streams to provide greater economic stability for delivery of educational opportunities.”

Some of the provisions carry significant risks. Not only does the University of Idaho agree to provide $25 million worth of liquidity to Phoenix, but a clause in the agreement assigns responsibility to Idaho for “backstopping” NewU. What happens if NewU, as Phoenix’s owner, finds itself unable to pay the debt service required by $685 million in sub-investment-grade bonds that will finance the $550 million purchase—a price tag three times the University of Idaho’s annual operating budget?

In that case, Idaho guarantees it will cover NewU’s obligations up to $10 million annually. The Washington Post is reporting that the U of I’s leadership anticipates that the school may suffer a bond rating downgrade as a result; such an outcome could make future financing more expensive.

It remains unclear how the Idaho board could unanimously ratify this acquisition only 15 days after the six senators—including Elizabeth Warren of Massachusetts and Richard Durbin of Illinois—urged reviews of Phoenix’s privileges granted by federal student aid programs.

The senators wrote to the secretaries of the Departments of Education, Defense, and Veterans Affairs and also sent a copy to the chair of the Federal Trade Commission. As we discussed in our second article on Arkansas’ bid for Phoenix, what triggered the senators’ letter appears to be a misleading national advertising campaign. Since mid-2022, this campaign has run deceptive advertisements suggesting Phoenix is a state university instead of a private, for-profit school. Some of the outrageous statements in the ads on Phoenix’s admissions website include “No out of state tuition” and “Some state universities charge higher tuition to out-of-state students—but not University of Phoenix.”

The senators point out that prospective students could easily “interpret these misleading statements to mean that Phoenix is an affordable public university, when in reality it is neither.” That’s because the campaign falsely implies that Phoenix’s tuition is comparable to in-state tuition at public universities. In reality, the for-profit school charges $13,245—a whopping 27 percent more than the in-state public higher education national average of $10,423 reported by NCES, the National Center for Education Statistics.

This campaign could quickly unravel into a debacle for the U of I. In 2019 Phoenix reached a $191 million settlement with the FTC for running deceptive TV ads from 2012 to 2014. That campaign falsely implied that the school had partnered with employers like AT&T, Yahoo, Twitter, Microsoft, and the American Red Cross. As we point out in our first article about Phoenix’s potential sale, no such partnerships ever existed.

This was the largest settlement ever reached between any for-profit school and the FTC; it included roughly $141 million worth of debts owed to Phoenix by students harmed by the campaign that the school agreed to cancel. And most notably for Idaho, the settlement includes an injunction stipulating a permanent ban on Phoenix’s running advertisements conveying misleading benefits. “Phoenix’s most recent advertising campaign clearly defies this injunction,” write the senators.

Their letter foreshadows a cascade of potential setbacks for the Idaho deal. First, a potential takeover of Phoenix will require approval by the Biden Administration’s Education Department following a pre-acquisition review process that could take six months. Given the agency’s regulatory crackdown against for-profit schools extending as far back as 2015, plus its reluctance to tolerate for-profit schools’ escaping regulations by masquerading as nonprofit entities, the Department could block NewU’s purchase of Phoenix, effectively killing the Idaho deal.

Second, even if the Education Department approves the acquisition, Phoenix’s new owner may be financially responsible for a second stipulation imposed by the FTC. Because Phoenix is clearly a repeat offender, a second judgment may order Phoenix to pay much more in penalties than the $191 million amount of the 2019 settlement.

Third, Phoenix may incur substantial liability under federal borrower defense to repayment regulations. The senators write:

We applaud ED’s recent efforts to hold for-profit colleges accountable, including developing a low-financial-value programs list and providing borrower defense to repayment discharges for students who attended Corinthian Colleges, ITT Technical Institute, and Westwood. ED, VA, and DOD, however, can and must take additional steps to protect student borrowers and taxpayers by scrutinizing Phoenix’s participation in federal student aid programs, especially after clear violations of its previous agreement with the FTC.

The senators’ reference to current borrower defense to repayment discharges is significant. If a college or university had lied to a student loan borrower about material aspects—such as their academic credits’ transferability, or about their job prospects or probable salary following graduation—the borrower defense rule enables that student to ask the Department of Education to forgive their student loan indebtedness.

In fact, just in August 2022, the Department went after Chicago-based for-profit DeVry University to recoup the costs for $72 million worth of borrower defense to repayment discharges as part of $415 million worth of awards to former students at four schools. The agency determined that DeVry made “widespread, substantial misrepresentations” about its job placement rates to 1,800 former students. The Department pointed out that these are the first borrower defense claims it has approved that are associated with a currently operating school, and that the agency “anticipates that the number of approved claims related to DeVry will increase as it continues reviewing pending applications.”

The Idaho Statesman’s editorial board asked, “Could it do the same to the University of Phoenix?” Roughly 49,000 borrower defense claims were pending against Phoenix in January 2023, and because the Education Department continues reviewing applications, the school’s total liability isn’t yet known. However, Halperin—a Yale Law-trained Washington super lawyer and an expert on the legal environment of higher education—argues that Phoenix could potentially face “billions in liability for canceled loans from ripped-off students.”

Compare that ominous prospect with what seems like Idaho’s principal strategy for defending against these financial threats: liability insurance. Incredibly, President Green reports that the liability coverage the U of I is negotiating only carries a $250 million coverage limit after satisfying a $40 million deductible. He also counts Phoenix’s $200 million working capital deposit towards this potential liability fund, yielding a total available reserve of merely $410 million. That’s roughly equivalent to the award granted to the students at DeVry and the other three schools and little more than double the amount of the 2019 FTC settlement.

Besides the fact that the public only received 24 hours of advance notice about the board’s vote, one of the most disturbing aspects involves Phoenix’s management team and its future tenure under this deal.

The FAQ downplays how Phoenix’s reputation had been “tarnished” but then talks in glowing language about how the school’s “new ownership in 2017” improved its business practices. In reality, Halperin has extensively documented how the facts fail to support any assertions that a new and more ethical management team has been running Phoenix for the past six years.

For example, just in 2022, this team had hired as Phoenix’s new president the former CEO of Denver-based for-profit Alta Colleges, George Burnett. Under Burnett, Alta had been receiving at one point $338 million annually from student loans underwritten by American taxpayers. But Alta was also the parent company of Westwood College, which went out of business in 2015 following a damaging fraud action by Illinois Attorney General Lisa Madigan. Law enforcement officials shut down Westwood after investigations revealed a broad range of illegal, deceptive, and abusive sales and marketing tactics against vulnerable low-income students.

Cited by the six senators, Westwood College is one of the four schools in the group (along with DeVry) that misrepresented students’ salary potential and probability of finding a job upon graduation. As a result, the Education Department forgave about $53 million worth of student loans taken out by 1,600 of Westwood’s borrowers.

After the U.S. Department of Education sent Burnett this tough list of questions in June 2022, he abruptly resigned as Phoenix’s president. But suppose Phoenix was under the leadership of different and more ethically-conscious management. In that case, one has to wonder about a crucial question: Why would an enlightened team like that hire an executive like Burnett? Could it be that Phoenix’s leadership had never actually changed?

Look carefully at Phoenix’s management history, and curious anomalies emerge. In this June 2022 article, here’s how Halperin summarizes them:

The University of Phoenix is operated by a company, Apollo Education Group, Inc., that was acquired in 2017 by the private equity firms Apollo Global Management and the Vistria Group.

The CEO running Apollo Education Group for these owners is Gregory Cappelli, who previously. . .ran Apollo Education Group for the previous owners. Cappelli joined Apollo in 2007 as executive vice president, became co-CEO in 2009, and CEO in 2012. That year Cappelli’s annual compensation was reported as $25.1 million.

Bloomberg’s executive database corroborates Halperin’s career history about Cappelli, who, before joining Apollo Education Group, had served as a managing director at Credit Suisse. This history implies that Cappelli had been in command of Phoenix for approximately 13 consecutive years. And that fact also means Cappelli was in charge of Phoenix while it ran the deceptive TV ads from 2012 to 2014 that triggered the charges from the FTC that Phoenix later settled for $191 million—and while it also faced a torrent of allegations over other fraudulent and unlawful business practices. Halperin continues:

The University of Phoenix during Cappelli’s tenure has repeatedly engaged in deceptive, predatory, and illegal practices, leading to investigations and actions against it by the Federal Trade Commission, Department of Justice, Department of Education, [Department of Veterans Affairs], Department of Defense, and various state attorneys general.

About Phoenix, Green told the Board of Education that “we met their management team that was hired after their regulatory issues” and “found them to be good, caring people who are focused on providing a quality educational experience to their students.”

But Green didn’t tell the Board that—according to the timeline Halperin reports and outlets like Bloomberg confirm—Cappelli must have presided over both the deceptive TV campaign that prompted the FTC’s charges, as well as the deceptive “No Out of State Tuition” campaign launched in 2022 that now has half a dozen senators calling for federal investigations across four agencies.

Yet, believe it or not, Green actually said that Phoenix’s top management “are good, caring people.” And U of I Provost and Executive Vice President Dr. Torrey Lawrence said that Idaho would like to ensure that both Cappelli and Phoenix’s Chief Academic Officer and Provost Dr. John Woods both continue. Why? Because according to Lawrence, the executives are “pretty critical to the operation.”

But this isn’t the kind of “operation” a prestigious, flagship state research university has any business running. In an op-ed entitled “University of Phoenix Should Stop in Its Tracks,” here’s how the Idaho Statesman’s editorial board summed up its impressions of the deal:

If the plan is for the University of Idaho to operate the University of Phoenix as an income-generating sideline to subsidize traditional students, as appeared to be the plan in Arkansas, it’s a bad one. If morals matter, don’t buy the University of Phoenix because it’s exploitative. If morals don’t matter, just buy up a whole bunch of payday lenders instead. Their margins are probably better.

This is way too much, way too fast. The State Board of Education is supposed to be administering public assets, not running a hedge fund.