What a University of Phoenix Takeover Might Mean for Online Education

The hottest story in online education right now involves a potential deal in which the University of Arkansas System would acquire the University of Phoenix as a nonprofit affiliate. Such an acquisition would continue a controversial trend in which state universities have recently bought for-profit schools, despite substantial risks to those public institutions’ brands, rankings, and reputations.

Experts say that the move reflects two trends. One trend embodies the disassembly of the for-profit higher education industry in the United States, largely in response to hostile public opinion, a regulatory crackdown, and court decisions. The other trend reflects the aggressive expansion by traditional colleges and universities into the lucrative exploding market for online education targeting early-and mid-career working adults.

The University of Phoenix (UoP) during its peak year of 2010 received more than $4 billion in taxpayer-funded aid for 470,000 mostly working online and in-person students in 1,700 programs. This for-profit university that conducts no research won all those enrollments through a unique value proposition unlike any other. In short, UoP offers a radically nontraditional approach to higher education by targeting underserved older students in the labor force through an open admissions policy. The school’s original 1976 tagline was “The First University Created for Working Adults.”

That value proposition emphasized online education earlier than almost all other universities, an innovation that made higher education more accessible to working adults, single parents, and others who faced obstacles to attending classes in person. A little-known fact about Phoenix is that the school actually started offering online business courses for credit through the Prodigy online service—the $1 billion joint venture between Sears and IBM—during the late 1980s. It then bundled those courses into one of the first online MBA programs in 1989, just before Prodigy’s coast-to-coast launch.

The school also targeted career education and job-related skills that students could apply to win promotions and raises. During Phoenix’s first two years, that prong of the value proposition appealed to employers who reimbursed employee tuition. But that reimbursement push was dropped when Phoenix won accreditation in 1978. That’s because the school could then rake in funding through federal student loans—the business model that transformed its stock into one of the hottest on Wall Street after Phoenix went public in 1994.

During the three years from 2012 to 2014, Phoenix ran prime-time commercials on network television that advertised partnerships with blue-chip employers like AT&T, Microsoft, Twitter, Adobe, and Yahoo. The only problem for the hundreds of thousands of students who relied on those advertisements and enrolled at Phoenix was that those partnerships did not exist.

Few other sectors of the economy have been riddled with fraud, scandals, and investigations, like the for-profit education industry, and Phoenix demonstrates one of the worst track records. In 2019, Phoenix agreed to a $190 million settlement with the Federal Trade Commission over deceptive advertising charges arising from that campaign. The resulting terrible press coverage about that kind of outrageous deceptive marketing—along with intense scrutiny over aggressive telemarketing sales techniques, low graduation rates, and poor outcomes after graduation—has destroyed the public’s confidence in the for-profit education industry that Phoenix largely created.

Besides deceptive advertising, aggressively deceptive telephone selling appears to be one of the more shocking problems within this industry. A 2022 California state court decision clearly reveals that sales managers created fear-driven, cold-call “boiler room” selling environments at one of Phoenix’s for-profit competitors, Ashford University. In these sweatshops, they demanded their salespeople call hundreds of prospective students daily; then they continually fired the poorest-performing 10 percent of those sales reps.

As a result, Ashford’s salespeople routinely misrepresented the school’s programs and misled prospects about every factor relevant to their enrollment decisions. For example, sales employees frequently misstated the amount of financial aid students would receive, knowingly claimed degree programs could be completed in substantially less time than was possible, and made false representations that Ashford would accept transfer credits that the sales reps knew the school would never approve. They even misrepresented the ability to obtain careers requiring licensure—such as nursing—even though the salespeople knew that no state had granted licensure approval for any of Ashford’s programs.

Here are a few remarkable excerpts from the court’s decision:

The Court heard substantial evidence that over the last decade, Defendants created a high-pressure admissions department whose north star was enrollment numbers. Admissions counselors were expected to call hundreds of leads a day, and managers would threaten to fire those who failed to enroll enough students—warning that “Someone can fill your chair” if counselors did not meet their numbers.

The high-pressure culture went beyond rhetoric: Defendants put their words into action by creating “lowest performer lists” and then firing the bottom 10 percent of admissions counselors based, in part, on enrollment numbers. . .

Defendants’ line-level admissions counselors testified to a work environment permeated by fear, where closing the sale was prioritized above providing students with accurate information. For example, as former employee Wesley Adkins testified, “The job was a numbers game and not an advising or a counseling position…” One employee explained: “The only objective is to enroll as many students as possible. Employees fear for their jobs every day if they are not enrolling enough students.”

What’s especially concerning is that Ashford’s salespeople almost exclusively called vulnerable sales prospects from disadvantaged groups traditionally underrepresented in higher education. Again, from the court’s opinion:

As Ashford’s former Presidents testified, Defendants enroll vulnerable students who lead “complex” and “difficult lives,” which “heightens” the need for accurate college advising. Ashford students typically are older than traditional college students (average age 35-37) and are low-income (between 55 and 76 percent receive Pell Grants, which require significant financial need). Around half of Ashford students identify as minorities (between 47 and 56 percent).

Ashford’s student profile isn’t significantly different from the University of Phoenix students. At Phoenix, seventy percent are women. More than half report they’re ethnic minorities, with 35 percent African American and 18 percent Hispanic. The average age for new students is 38, and 60 percent grew up without a parent who had attended college.

If taking advantage of a vulnerable population through deceptive marketing and sales wasn’t bad enough, then there are the industry’s problems with poor outcomes. For example, Phoenix claims an eight-year college graduation rate of only about a quarter of all students who enroll—13 percent—or about 21 percent of the nation’s four-year average. That means 87 percent of these undergraduates won’t earn the crucial credential needed to pay off the student loans they took out to finance this for-profit school’s expensive tuition. Typically, private school tuition within the for-profit sector amounts to many times that charged by community colleges, and more than triple that charged by state universities.

The public’s outrage at how the for-profit education industry had for decades exploited vulnerable Americans through deceptive advertising and sales practices primarily drove a regulatory crackdown that greatly diminished Phoenix’s profile and fortunes. Today the college reports only 54,400 students enrolled in undergraduate degree programs out of a total enrollment of 78,600. That amounts to a staggering 83 percent plummet over little more than a decade, or only about 17 percent of total enrollment during the school’s peak in 2010.

Oddly enough, this wouldn’t be the first purchase of a for-profit college by the University of Arkansas System. The university acquired a small, distressed Missouri for-profit school, Grantham University, in November 2021. At only 4,000 students, the deal was not large enough to benefit Arkansas except as a warm-up for buying a larger player like Phoenix, although we know some of the other reasons why Arkansas might have welcomed the Grantham deal from documents leaked to the press. Despite that acquisition, Arkansas is not the only state university that purchased a for-profit college with a toxic brand.

Two other for-profit schools were recently taken over by public universities. During the first of these cases in 2017, Purdue University bought Kaplan University and rebranded it as Purdue Global. The second case involved Ashford University—the very same for-profit school we discussed above. In the latter case, the University of Arizona bought Ashford in early 2020 and rebranded that school as the University of Arizona Global Campus. These state universities apparently wanted to quickly acquire scalable high-tech platforms to gain an advantage over the influx of competitors entering the exploding worldwide market for online education.

Ashford attempted to enact a support arrangement with the University of Arizona through its holding company Zovio, an option that drew tremendous fire from Arizona’s faculty. However, the court which issued the decision we quote from above ruled that Ashford had deceived students by violating California’s consumer protection laws. Once that ruling attracted intense scrutiny from the Biden Administration’s regulators in March 2022, the deal for the support contract with Arizona fell apart and Zovio filed for bankruptcy.

It’s unknown whether the Phoenix deal includes such a service contract. An Arkansas Times story quotes a spokesperson as claiming the deal would “not include any remaining private ownership of the nonprofit entity or the University of Phoenix,” a statement inconsistent with such an arrangement. The story also reports a $500 million to $700 million valuation of UoP which was confirmed by an anonymous source. If that valuation report is correct, it’s unlikely that the University of Arkansas would pay for a service contract on top of such a hefty price tag in excess of half a billion dollars.

So what exactly does the State of Arkansas hope to accomplish by buying the University of Phoenix?

In a word, Arkansas is buying scalability. To be sure, the university is buying a ready-made online education software platform that would require many millions of dollars and take years to develop if Arkansas attempted to build the platform on its own.

But the university can’t wait that long because building that massively scalable computing infrastructure would take too much time; in three or four years, they’d lose any competitive advantage they could have achieved against all the other universities sure to enter this lucrative market. This kind of scalability in what was once a winner-take-all marketplace controlled by the first mover would give Arkansas a powerful competitive advantage.

On the other hand, Phoenix comes with a toxic, damaged brand that will never boost the rankings or reputation of the University of Arkansas. And suppose federal regulators establish in a forthcoming investigation that Phoenix misled students. Should the deal go through, Arkansas might be on the hook to refund the U.S. Department of Education billions of dollars in canceled federal loan obligations.

According to Higher Ed Dive’s Editor Natalie Schwartz, “The University of Phoenix will likely face more scrutiny down the road. The Biden administration has pledged to crack down on for-profits and has tightened a slew of policies and regulations governing the sector—and more changes are looming.”

In sum, education industry analyst David Halperin asked the big question on the minds of many observers:

What exactly would the Arkansas system be buying in the deal for Phoenix, beyond an aggressive and deceptive recruiting playbook, employees steeped in that training, and courses and degrees that often leave students worse off than when they started?