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Comments?

From:

James Bob

To:

Finley, Steve

CC:

D ate:

4/ 12/2010 5:33 :50 PM

Subject:

Robert H. James Liaison for Career Institutions ofHigher Education U.S Department ofEducation FAX: 317-257-2098 Call first Cell Phone #202-557-5835 D.C. # 202-377-4301 Indianapolis Office 317-257-2098 8527 Quail Hollow Road Indianapolis. IN 46260-2208

The Honorable Anthony Wilder Miller Deputy Secretary U.S. Department of Education 400 Maryland Avenue, SW Washington, DC 20202

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 behalfof 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 find 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.

The Honorable Anthony Wilder Miller April 12, 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 fmancial aid, concludes:

"The 8% debt-service-to-income threshold is so strict that it wouldpreclude for-profit colleges from offering Bachelor 's degree programs. It would also eliminate many Associate 's degree programs atfor-profit colleges. Even non-frofit calleges wouldfind it difficult to satisfy this standard ifthey were subjected to it. "

Kantrowitz further found that:

"The proposed use ofBureau ofLabor Statistics wage data harm minority andfemale students. " 3

will disproportionately

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, 2010, p. 1. 3 Ibid.

The Honorable Anthony Wilder Miller April 12,2010 Page 3

"The debt-service-to-income threshold effectively establishes borrowing limits based on field ofstudy 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. s 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, Apri12, 2010, prepared by Jonathan Guryan, PhD, and Matthew Thompson, PhD, p. 1.

The Honorable Anthony Wilder Miller 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 hasfailed 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.

The Honorable Anthony Wilder Miller 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 fmancial 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 90/10 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.

The Honorable Anthony Wilder Miller 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 The Honorable Martha J. Kanter Mr. Robert Shireman

cc:

APPENDIX 1

INSTITUTIONAL DISCLOSURES RELATED TO EXPECTED EARNINGS AND DEBT

You have requested information about our

Program Level: 0

Associates

:.A

:.:c::

[g)Bachelors

:co=-u=.:n~t:.:.:in"""g

0Masters

Here are some important disclosures for the award year ending

program

Ocertificate/Diploma

June 30, 2010

, continue to be actively enrolled at the institution while 24.2

During the year ended

June 30, 2009

75.8

%of students enrolled in this program graduated or

% ceased enrollment.

Of the students who graduated, 88.6 % were employed in their field of stud y, 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} co des 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:llwww.bls.gov/oeslcurrentloes_nat.htm.

The cost of this program of study fo r 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 monthl y 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 http s:IIstud entloans.govImyDi rectLoa n/i ndex .actio n .

The latest official Cohort Default Rate (FY07) from the US Department of Education indicates that

1.7 % of graduates in this program defaulted

on their federal loan s.

PLEASE NOTE THAT YOUR ACTUAL EXPERIENCE MAY BE DIFFERENT THAN THE AVERAGES AND STATISTICS PRESENTED ABOVE.

From:

To:

CC:

Robert MacArthur <nnacarthur@altresearch com> Wittman Donna Woodward Jennifer

Date:

6/23/2010 8:49:58 AM

Subject:

North America United States l/l Industria ls Business Services & Education Deutsche Bank Apollo Gro
North America United States
l/l
Industria ls Business Services & Education
Deutsche Bank
Apollo Gro up (A POL.OO), USD48.01
Bu y, Price Target USD80.00
Ame ri can Pub lic Ed. Inc
(APEI.OO), USD48.00 Hol d, Pri ce
Target USD44.00
Prepared testimonies from Margaret Reiter (consumer advocate), Yasmine
lssa (student), Steve Eisman (investor), and Kathleen Tighe (OIG ) are now
widely circulating in Washington, which we obtained via our DC contacts.
Based on expected testimony, it does not seem like there is new proof of
wrongdoing by the industry. While we expect testimony will be decidedly
Corinthian Colleges Inc
(COCO.OO),USD 11 .2 1 Buy, Pri ce
Target USD24.00
negative, nearly all of it has likely been heard before . The key negative in
the upcoming hearings and GAO review is that they w ill potentially give the
DoE more confidence (and potentially Congressional support) to be strict in
t heir final regs, particularly
Gainful Employment.

DeVry (DV N), USD56 58 Hold, Pri ce Target USD70.00

ITT Ed ucation Servi ces (ESI .N), USD93.42 Buy, Price Ta rge t

USD125.00

1) Based on the info being disseminated, there w ill likely be a call fo r toughe r cohort default rate (CDR) thresholds as witnesses reportedly believe the "true" CDR is higher than published rates due to w idespread use of defer- ment and forbearance. There may also be a call for tougher accreditation review s. 2) lssa's testimony will likely elicit some empathy. She is unable to sit for a licensing ex am wi thout a year 's w ork ex perience due to the program's lack of state accreditation, but cannot get a job w it hout a license or w ork expe- rience.

3) Testimony suggests Reiter may cite data from a settled complaint against COCO in 2007, and claim for-profi t abuses and fraud are wi de-s pread. She reportedly believes accreditation, increased disclosure, and current DoE proposals are insufficient to solve the problems.

We think most of the critique on Thursday w ill be addressed by the pending DoE Notice of Proposed Rulemaking (NPRM). The OIG acknow ledges the NPRM covers many of its concerns, particularly Definition of a Credit Hour, w hile Reiter and Eisman have publicly stated that they w ant legis lation be- yond w hat is currently proposed .

Paul Ginocchio, CFA

Research Analyst

(+1) 4156 17-4207

paul.ginocchioCdb.com

Adrienne Colby

Associate Analyst

() 212 250-0948

adrie nne.colbyCd b.co m

Deutsche Bank Securities Inc.

All prices are t hose cu rrent at

Deu tsche Bank and subject companies . Deutsche

Bank does and seeks t o do business w it h compan ies covered in its resea rch report s. Thus, investors should be awar e t hat t he fi rm may have a con f lict of interest t hat could affect the objecti vity of thi s report. Investors should consider this report as only

a single factor

THE VIEWS EXPRESSED A BOVE ACCURATELY REFLECT PERSONAL VIEWS OF THE AUTHORS ABOU T THE SUBJECT CO M PANY(IES) AND ITS(TH EIR) SECUR ITIES. THEY HAVE NOT AN D W ILL NOT RECEIVE ANY CO M PENSATION FOR PRO- VIDING A SPECIFIC RECO M MENDATION OR VIEW I N THIS REPORT. FOR OTHER DISC LOSU RES PLEAS E VISIT HTTPI/ GM.D B.CO M M ICA(P) 007/05/20 10

the en d of t he previous trading session unless ot herw ise indicated. Prices are sourced f rom loca l

exchang es via Reuters, Bl oomberg and other vendors . Data is

sourced from

in making t heir investment decision .

From:

To:

CC:

Robert MacArthur <nnacarthur@altresearch com> Robert MacArthur

Date:

7/20/2010 9:45:08 PM

Subject:

North America United States

Industrials Business Services & Education

19 July 2010

Deutsche Bank

Services & Education 19 July 2010 Deutsche Bank DB Education Services Gainful Employment Update Paul

DB Education Services

Gainful Employment Update

Paul Ginocchio, CFA

Adrienne Colby

Research Analyst

Associate Analyst

(+ 1) 415617-4207

( ) 212 25()-0948

paul.ginocchio@db.com

adrienne.colby@db.com

At 12% over 10 years, Gainful Employment is less onerous

A Washington pol it ical ana lyst reported to day that Gainful Em p loyment (GE) cou ld

now p otential ly be a debt

t he prev ious 8%. At 12%,

fo r APOL and DV, a 3% im pact fo r ES I, and "on ly" a 26% hit to COCO. We also

update d our original EPS im pact, assuming 8% over 10 yea rs, correcting an inconsistency in our m o del an d up dati ng f or new info - t h is sign ificantly reduced

t he EPS hit for DV and ESI. Our to p pick

us i n g our GE mo de l, we calculate n o CY1 OE EPS impact

repayment met ric of 12% o f income over 10 y ears, vs

in t he sector rema ins APOL.

We also updated our original Gainful Employment 8% calculations

In our J u ly 2"d not e, we showed a very s ign ificant 80% negative im p act to

ESI and DV f rom a Gainful Em ploym ent w ith debt repayment at 8% of

over 10 years. We showed t ransfer credits in our m odel, but d id not actuall y include t hem in our calculations. Correct ing t his error, plus updat ing assumptions

fo r other new informat ion, reduced t he

y ears

14%, our up dated EPS impact is -10% . For DV, the im pact goes f rom -79% to- 41 %, f or ESI from -80% t o -66%, and fo r COCO f rom -1 20% to -109%. For a copy

EPS fo r income

neg ative EPS im pact u nder the 8% over 10

EPS im pact we o r i g ina ll y ca lcu lated was -

scenario. Fo r Apo llo, t he CY1 OE

Industry Update

Apollo Gro up (APOLOQ),US045.56 Buy
Apollo Gro up (APOLOQ),US045.56
Buy
 

2009A

2010E

2011E

EPS (USD! P/ E !xl EV/EBITDA (x)

3.79

5.35

5.53

18.0

8.5

8.2

8.1

3.9

3.5

Am erican Publi c Ed. Inc (APEI.OQ),U$042.67

Hold

 

2009A

2010E

2011E

EPS (USD)

1.27

1.74

2.50

P/E (x)

28.6

24.5

17.1

EV/EBITDA (x)

13.5

11.6

7.8

Cor inthian Colleges Inc (COCO.OQ),US010.40

Buy

 

2009A

2010E

201 1E

EPS (USD) P/ E !xl EV/EBITDA (x)

0.82

1.63

2 04

19.4

6.4

5.1

7.0

3.0

1.9

OeVry (0V.N),US052.85

Hold

 

2009A

2010E

2011E

EPS (USD! P/ E !xl EV/EBITDA (x)

2.30

3.78

5.12

22 .2

14.0

10.3

12.2

7.4

4.9

ITT Education Servi ces (ESI.N),U$086.53

Buy

 

2009A

2010E

2011E

EPS (USD)

7.98

11.04

11.71

P/E (x)

12.9

7.8

7.4

EV/EBITDA (x)

7.3

4.2

3.8

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 o n t he For Prof it industry on J une 24 th, Senator Harkin stated t here would be another one in J uly and at least one more after that. We ha d

heard f rom contacts t hat August 4 th

August recess

wh ich starts on th e 9 th, t he hearing has t o be an no u nced by Friday or the next o ne

wi ll not occur until September. An announcement is now likely in t he next f ou r

days .

Apollo remains our favorite idea in the sector

We find APOL attractive as 1) it is addressing most of its issues already t hrough

t he

befo re t hey take on student debt, 2) our u pda te d Gainful Em ployment calculations

(at 12% over 10 years) suggest no im pact on revenues and EPS, and 3) Apollo's 3-

We va lue APOL us ing relative valuation

scatter p lots of CY1 OE PEs versus pee rs . We support o u r re lative valuation work

with a DCF analysis . Our DCF

terminal value we use a 3.5% long-term g rowth rate. Our WACC uses a beta of

1.0, a 4 o/o r isk free rate, and an elevated 8% r isk prem i um. Key risks i ncl ude:

negat ive regu lat ory developments that are not already pr iced in, higher 2009 CDRs

negative growth im pact from t he orientation program or or a stronger t han expected recovery in job growth.

bachelor's degree focus,

t han expected, a bigger

year draft CDR is rising but manageable.

University Orientation pro gram , which weeds out uncommitted students

September. Due t o t he

was t he next li kely date, with anot her o ne in

requ ired 2-week notice period and t he

ca lcu lat ions include exp li cit 10-yr fo recasts. In our

Deutsche Bank Securities Inc .

All prices are t hose current at t he end of t he previous t rad ing session unless otherwise indicated . Prices are sourced from loca l exchanges via Reuters, Bloomberg an d other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche

be aware t hat the f irm

report as only a single

factor in making t heir investment decis ion. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LO CATED IN APPENDIX 1.

may have a conflict of interest that could affect the object ivity of t his report. Investors should consider t his

Bank does an d seeks to d o business w ith compan ies covered in

its research reports . Thus, investors should

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 ana lysis of the estimated effects of t he Department of Education's (DoE) Gainful Employment (GE) proposa l on revenues and EPS for Apol lo, Corinthian, DeVry and ITT at a 12% income repayment t hreshold. There were reports out today f rom a Washington po litical analyst suggesting gainful employment's met rics on debt repayment could be 12% of income over 10 years , versus the previous 8% over 10 years. Due to t his

news, we felt it wou ld be helpf ul to run this potentia l new scenario th rough 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 t hat under t his potential new scenario, that

The EPS im pact to Apo ll o and DeVry, we believe, cou ld be zero, at ITT it is very minor, and at COCO the im pact is vastly red uced- from wiping out earnings to "only" a 26% EPS i mpact.

Gainfu l Employment is less onerous.

Figure 1: Summary of impact of Gainful Employment under various scenario's

Impact APOL -3% -10% -4% -14% coco -14% -109% -16% -120% DV 0% -1 0%
Impact
APOL
-3%
-10%
-4%
-14%
coco
-14%
-109%
-16%
-120%
DV
0%
-1 0%
-41%
-19%
-79%
ESI
-1%
-3%
-29%
-66%
-35%
-80%
0% -41% -19% -79% ESI -1% -3% -29% -66% -35% -80% Updated debt repayment calculations at

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

showed t ransfer cred its in ou r

worksheet, our original ga inful

t hese t ransfer cred its . Th is was a significant oversight on our part and t his change alone took

t he EPS impact fo r DeVry fro m -79% to about -40%, whi le f or ESI t he EPS im pact moved from -80% t o -50%. In addition to now correctly including transfer credits, we have m ade

pu blished origi nal ly on 2 J u ly 201 0. Even though we

employment calculations for ITT and DeVry did not include

some other adjustments to our assumptions fo r all t he companies which we outli ne below .

These changes take us f rom the "original" 8% ca lcs to the "updated" 8% above.

ca lcs in Figu re 1

• Apollo Group: We reduced APOL's online BA enrollment exposure from 14% to 4% as on APO L's last earnings ca ll they stated most of their on-ground students were BA's and most of t heir on li ne students were Associates' . We also increased our transfer credit assumptions for the online BA program due to its higher cost versus on-cam pus. We assu me students who chose t his higher cost program wou ld not

need many cred it s to grad uate . Apollo did disclose on its webs ite t hat its average debt per b achelor graduate in 2007-2008 was $25,200, wh il e for associates was

$14,200.

should generally account for the 2-years of tuition increases that have occurred .

We are still 11% and 12% above t hese averages in our model, which

• DeVry: We slightly decreased DeVry's transfer credit assumptions from 1 year in the BA program to 0 .75, to be conservative. We raised the average BA salary slightly t o be "above $50,000", which is what we believe DeVry BA's average. We also raised

t he Associate sa lary to $33,288, wh ich is t he low end of t he starting sa laries disclosed in DeVry's 1OK.

• ITT Technical Institute: We slight ly decreased ITT Tech's t ransfer credit assumptions

f rom 1.25 years in t he BA prog ram to 0.75, to be conservative. Due to t heir slightly

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank l/l

lower High School student exposure, ITI's transfer cred its may be slightly higher than DV's, but we assume the same to reduce complexity. We lowered the cash

co m mentary i n t he 1OK t ha t

first go around. Finall y, we

slightly lowered salaries as t he $32,800 average salary in 2008, disclosed i n the 2009 1OK, is likely the product of a 80/20 mix of associates/bachelor's, not the 85/15 t hat we originally assumed.

pay assu m ptio n fro m 10% of t uit i on to 5% as t here is suggests th is level; someth in g we overlooked i n the

• Corinthian Colleges: We increased our c ash p ay assumption from 2% to 5%, as we assume COCO's cash pay is sim ila r to ESI's, and we now have a ha rd data point fo r ES I. Otherwise, we made no other mean ingful changes to our COCO ga infu l employment calculations.

• Please note t hat the Dept of Education has yet to release its Ga inful Em ployment proposa l. In the last version of t he p roposal in Jan uary, t he Dept proposed req ui ri ng students of For-Prof it Tit le IV eligible programs to be able to replay their total student debt w ith less than 8% of a graduates' expected an nua l income and be rep ayable over a 10 year period. With the publ ication of its Prog ram Int egrity NPRM

its plans to release GE in a second NPRM later t his

in m id-J une, the Dept in dicated

summer (we believe late J uly to M id-August).

Major assumptions in our Gainful Employment calculations

We make five key assumptions in our Gainful Employment EPS impact calculations:

1)

The nu m ber o f cred its t he average student t ransfers in w it h from another i nstitution,

2)

We do not assume t hat students have any debt assoc iated w ith these t ransfer

cred its, w hic h is not a co rrect assumption but help guide us,

one we have absolutely no data on to

3)

We assu me a percentage of cash t u ition contribution per student,

4)

We

assume starting graduate salaries fo r APOL, DV & ESI based on disclosed data

by t he compan ies and their peers (we use Standard Occupat ional Code-Bureau of Labor Statistics data, w hich may no longer be valid, fo r COCO),

5)

We are ass uming no o ff setting cost cuts or pot ential reven ues, f rom increased t uition at certain prog rams or larger class sizes. In li ght of t his f inal ass umptio n, our ca lculat ions may somewhat reflect a worst case scenario.

We

ind ivid ual prog ram by program bas is, gran ular prog ram dat a avai lable, our

school-wide calcu lations, w hich cou ld lead to significant variation f rom t he actual program by program impact.

on an i nstitution-wide bas is. Due to t he lack of

remind investors t hat t he DoE's GE d raft proposed evaluating Title IV eligibil ity on an

not

GE estimates above are constrained to high level,

Finally, we note t hat alt houg h our ana lys is assumes t hat schools wou ld c ut tuition costs in

response to a GE p roposa l,

lower tu it ion. We believe t his is largely

amo unt of debt a student q ual if ies fo r and may chose to take on. In Apollo's FY 3010 100 f iling, the company makes the fo llowing comments in regards to Gai nful Employment: "If t his

decide to eliminate specific p rograms, rat her t han due to a school's inability to control or limit t he

schools may

reg ulat ion is adopted in a form simil ar to the U.S. Department of Educat ion's proposal in t he negotiated ru lemaking p rocess, it could render many of our program s, and man y p rograms

If a

o ffered by other proprietary educational inst itutions, ineligible for Title IV f und ing

19 July 2010

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particular program ceased to be e li gible fo r Tit le IV f unding, in most cases it wou ld not be practical to continue offering t hat cou rse under our current b usiness model."

We have in cl uded snapshots of our Ga infu l Emp loyment ana lys is for Apollo, Co ri nt h ian, DeVry and ITI in Appendix 1, at the end of this note.

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Appendix 1

Figure 2: Gainful Employment Calculations- Apollo Group

Step 1

- Cal cu lat in g p oten t ia l t u1t 1on cuts

Source/Calc

APOL

APOL

APOL

Tu ition

& Fees

$

67,000

$

54,400

$

22,200

source

online

avg. ground

on lin e website Assoc

website

website

Program o/o of Total Enrollment

 

BA

BA

DB ests.

4%

38%

40%

Avg. Pell Grant '08-'09 (DoE) Percent of Students getting Pell

DoE

$

2,695

$ 2,695

$

2,695

DoE

55%

55%

55%

Assumed years of credits transferred

DB ests.

2.00

1.50

0.20

Total Tuit ion & Fees Cash/out of pocket payments Pell Grants Avg. Debt from School

calc

$

33,500

$ 34,000

$

19,980

7%

2,345

2,380

1,399

calc

2,960

3,700

2,664

sum

28,195

27,920

15,917

Monthly payments over 10 years at 6.8% interest rate

mort calc

$

324

$ 321

$

183

interest rate mort calc $ 324 $ 321 $ 183 Implied Requu-ed Salary to meet mont

Implied Requu-ed Salary to meet mont y pay:· e -------------~--~~--~ '~r-~~~~--~~~~~--~

12%

Assumed starting salary Total monthly student debt payments Max Debt Load Cash/out of pocket payments add Avg. PelI Grants Total Tuition & Fees

DB est.

$ 50,000

$

50,000

$

25,000

$ 500

$

500

$

250

Mort. Calc.

43,448

43,448

21,724

2,345

2,380

1,399

2,960

3,700

2,664

 

$ 48,753

$

49,528

$

25,787

Implied Pr'ice.Cut @-8% ofsalary over 10yrs

46%

46%

29%

St e p 2- Reven ue Re duct 1on Estimate of impact of current Gainful Employment PhD & Master's Online Bachelor's degrees* On campus Bachelor's degrees* Online associates** On campus associates

o/o of Revs

Price Cut Rev impact

19%

0%

0.0%

4%

0.0%

0.0%

38%

0.0%

0.0%

39%

0.0%

0.0%

0%

0%

0.0%

Total revenue impact

100%

0.0%

St e p 3 - Im pact t o EPS and PE Current Calendar 201 OE DB EPS EPS impact from revenue decrease with no cost offset Estimated impact from Gainful Employment

EPS

PE

$ 5.66

8.6x

$ 5.66

8.6x

NOt<> PriCes as ol July 19"

I'JP-cut sc t1>3t star11trg b#l:hell>t'ss.l.,yls$501:

( •• JN<> f)tif:eCVI tf ~SCCi~res can~rn$2$K .lf gr~virl<::m

Soutee Ct:>mpany date •ntJ Oeutsr:he S.nrestm,.tes

r PM E1

19 July 2010

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Figure 3: Gainful Employment Calculations- DeVry

Step 1 - calculation Exposure to HS Grads

Tuition & Fees source Program %of Total Enrollment

Avg. Pell Grant '08-'09 (DoE) Percent of Students getting Pell

Assumed years of credits transferred

Total Tuition & Fees Cash/out of pocket payments Pell Grants Avg. Debt from School

Average Starting Salary

Monthly payment at 8%

of salary

Max Debt Load, over 10 years, 6.8% int.rate Cash/out of pocket payments add Avg. Pell Grants Total Tuition & Fees Implied Price Cut @ 8% of salary over 1Oyrs

 

Source/Calc Co . comments

DV

30%

DV

30%

 

$

61,700

$

35,038

 

10-K

10-K

BA

Assoc .

52%

15%

 

DoE

$

2,572

$

2,572

DoE

77%

77%

DB est.

0.75

0.25

calc

$

50,131

$

30,658

10%

5,013

3,066

calc

6,420

3,457

sum

38,698

24,135

est, See Calc A

$

50,071

$

33,288

I

12%

$

501

$

333

mort calc

$

43,510

$

28,926

from above

5,013

3,066

from above

6,420

3,457

 

$

54,943

$

35,449

 

10%

16%

Step 2 - Revenue Reduction Estimate of impact of current Gainful Employment Ross Medical Keller Graduate School Bachelor's degrees·><:

 

%of Revs

Price Cut Rev impact

12%

0%

0.0%

14%

0%

0.0%

40%

0%

0.0%

Associate's degrees** US Healthcare & Chamberlain Becker CPNCFA & Other (Fanor, Advanced Academics HS)

12%

0%

0.0%

15%

0%

0.0%

7%

0%

0.0%

Total revenue impact

100%

0.0%

Step 3- Impact to EPS and PE Current Calendar 201 OE DB EPS EPS impact from revenue decrease with no cost offset Estimated impact from Gainful Employment

 

EPS

PE

$

4.48

11

.9x

$

4.48

11

.9x

 

0%

0%

Note Pn·ces as of July 1ft" 1 PM ET

t•JPrice cur .1ssummg starTingbdchelor's saldl"f tS $50~

( • •JPnce cur >SSum"'g sr.ttJ119 .s•cNre·s salary

Scutce Cc!'~?Pinrdatil •fKI Oe<tlxl>o 8ankeSttn><les

1$ $2 71<

19 July 2010

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Figure 4: Gainful Employment Calculations -ITT Education

St ep 1 -ca lcul at

ion

Source/Calc

Exposure to HS Grads

Co. comments

Tui tion & Fees source Prog ram % of Total Enrollment

Company data

Avg. Pell Grant '08-' 09 (DoE) Percent of Students g etting Pell

DoE

DoE

Assum ed yea rs of c red1ts tra nsferred

DB ests .

Total Tuition & Fees Cash/out of pocket payments Pell Grants Avg. Debt from School (D)

calc

I

5%

calc

sum

Average Starting Salary

Impl i ed

Implied starting salary by debt (D)

m o nth ly pa yme nts to c ove r d

ebt (D) (8%. 1Oyrs. 6 8%)

est. See Calc A

Monthly payment at 8%

of salary

12%
12%

Max Debt lo ad. over 10

years. 6.8% int.rate

m ort

calc

Cash/ou t o f p ocket p aym ents

 

from above

add Avg. Pell Gran ts

from

above

Total Tu ition & Fees lmphed Price Cvt@ S'f(• of salary ove1

10 1 rs

Step 2- Revenue ReductiOn

Estimate of impact of current Gainful Employment Bachelors Associates Total revenue impact

St ep 3- Impact t o EPS and PE Cu rre nt Ca le nda r 2 01 OE DB EPS EPS impact from revenue decrease w ith no cost offset Estimat ed impact f rom Ga inful Emp loym ent

Noll!! Ptices as o/Juty IS", I PM ET

SO<Jrce·Ccm,o.>ny data arK/ 0e<A$CI>e BankeStrmatM

%of Revs

15%

85%

$

100%

EPS

11.04

(0.36)

$

10.68

-3%

 

ESI

ESI

20.25%

20.25%

$

69, 600

$

34,800

1o-K

1o-K

BA

Assoc.

15%

85%

2.550

2.550

80%

80%

0.75

0.25

$

56.550

$

30.4 50

2 .828

1. 523

6,630

3.570

 

47 ,093

25,358

$

50.000

$

29.000

 

$

542

$

292

$

54. 194

$

29.181

$

500

$

290

$

43.448

$

47.093

$

25.200

$

25.358

2,828

2.828

1.523

1,523

6, 630

6,630

3,570

3,570

$

52, 905

$

56,550

$

30,292

$

30.450

,0%

·1 %

Price Cut

,0%

-1%

PE

8.0x

8.3x

3%

Rev impact

-1.0%

-0.4%

-1 .4%

19 July 2010

Business Services & Education

DB Education Services

Deutsche Bank

l/l

Figure 5: Gainful Employment Calculations- Corinthian Colleges

· Exposure to HS

,

,

·

., Grads ( 11

 

Souroa/Calc

COCO

COCO

 

COCO

COCO

COCO

COCO

Co oomments

 

5%1010%

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

Dtesel

Auto Body

Electncian

%of Total Enrollment

 

-4%16% revsl

<I% II% revs!

<1% 11% revs!

<1%ll%revsl

Avg Pell Grant '08-'09 (DoEI Petcent of Students gemng Pell

 

DoE

$

2.407

$2.407

$

2,407

$

2.407

$

2.407

$

2,407

DB est

90%

90%

90%

90%

90%

90%

Total Tuition & Fees CastVout or pod:et payments

calc

$

15,409

$31,000

$

26,450

$

26,450

$

26.450

$

19,026

I

5%

770

1,550

1,323

1,323

1,323

951

Pell Grants Avg Debt from School

 

calc

2.166

4,333

2.166

2,166

2.166

2,166

sum

12.472

25.117

22.961

22.961

22.961

15.900

Average Starttn<J Salary

SOCoodes

$

24.200 1
24.200 1
 

$

25.aa:J

$

32.660

$

29.620

$

35.990

source

24.060 1 $ BLS

DB est

Bl.S

BLS

BLS

BLS

lmp!Jed monthly paymerus to oover debttn row 18 (8%. IOyrs, 6.8%1 lmphed sta<Mg salary by debt m row 18

 

$

289

$

28.905

Montnty ~~ at 891-

ofS<>iatY

 

I

12%

$

241

$

242

$

2$

$

327

$.

2$6$

360

Max Debt Load. over 10 years. 68% tnt rate CastVout or pocket payments add Avg Pell Grants Total Tuition & Fees

mort calc

$

20.907

$

21.029

$

25,117

$

22.489

$

28,38)

$

25,739

$

31,274

lromaeov"

770

1.550

1.550

1,323

1,323

1,323

951

!romabOve

2,166

4,333

4,333

2.166

2,166

2166

21EO

 

23.844

26.911

31.000

25.977

31,869

29.227

34,391

Estimate of impact of cu rrent Gainful E~loyme nt Certiltcate tn Healthcare Assoaate's 1n Bus1ness Associate's'" Cnmmal Just1oe Auto mechantc Otesel mechante+

 

%of Revs

Price Cut

Rev impact

 
 

56%

0%

00%

13%

-t39'o

-17%

16%

· 13%

·21%

10%

·2%

.02%

2%

20%

04%

Auto body

2%

II%

02%

Trades

1%

0%

00%

Total revenue impact

 

100%

-34%

~r

1

=

r

t

EPS

PE

Current Calendar 201 OE OB EPS EPS tmpact from revenw decrease wtth no cost offset Esbmated tmpact from Gatnful Employment

 

$

1.71

 

(0451

 

$

126

S.lx

 

-26%

na

Note Pn·ces ~sof Juty 1Y". 1 PM ET POC-e cur assummg stJrting salary for assoc~ate's In busiflfiSS and Comindl Justice is $24k. $26K tor Auto Mechanic. $33/K for Diesel Mechanic and $30K for Auto Body.

$()(JJC8 Company Wtd af'X'J 06utsch8 Bant-'esrtmates

19 July 2010

Business Services & Education DB Education Services

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Appendix 2

Important Disclosures

Additional information available upon req uest

Disclosure checklist Company

Ticker

Recent price*

Disclosure

Apollo Group

APOL.OO

* Prices are sourced from local exchanges via Reuters. Bloomberg and other vendors.

45.56 (USD) 16 J ul 10

2

Data is sourced from Deutsche Bank and subject companies.

Important Disclosures Required by U.S. Regulators

Disclosures marked with an asterisk may also be requ ired by at least one jurisd iction in add ition to the Un ited States.

" Important Disclosu res Requ ired by Non-US Regu lators" and Explanatory Notes.

2. Deutsche Bank and/or its affiliate(s) makes a market i n securities issued by t his company.

See

Important Disclosures Required by Non-U.S. Regulators

Please also refer to disclosures in the " Important Disclosures Required by US Regulators " and the Explanatory Notes.

2. Deutsche Bank and/or its aff iliate(s) makes a market i n securities issued by t his company.

For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our

website at http:Uqm.db .com/qer/disclosure/DisclosureDirectory.eqsr.

Analyst Certification

The views expressed in this report accurately reflect t he personal views of the undersigned lead analyst about t he subject

lead analyst has not and wi ll not receive any

issuers and the securities of t hose issuers. In addition, t he undersigned

compensation for providi ng a specific recommendation or view in this report. Pau l Ginocchio

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Historical recommendations and target price: Apollo Group (APOL.OQ)

(as of 7/16/2010j

Q)

.2

a

.~

::1

()

Q)

(/)

no.oo~----------------------------------------------------------~ 00.00 +-~----~~----~~----~~-- ~ ~~----~~----~~----~~-4
no.oo~----------------------------------------------------------~
00.00 +-~----~~----~~----~~-- ~ ~~----~~----~~----~~-4
00.00 +-----w---~ ------------------~ ~~ ~-------------------------4
60.00
50.00
40.00
0.00 +---~----~---r----~--~--~~--~--~----,---~----~--~

Jul 07

Oct 07

Jan 08

Apr 08

Jul 08

Oct 08

Jan 09

Date

Apr 09

Jul 09

Oct 09

Jan '0

Apr '0

Previous Recommendations

Strong Buy

Buy

Market Perform

Underperform

Not Rated

Suspended Rating

Current Recommendations

Buy

Hold

Sell

Not Rated

Suspended Ratmg

*New

Recommendation

Structure

as of September 9, 2002

1.

4/20/2009:

Buy, Target Price Change US080.00

2.

7/1/2010:

Buy, Target Price Change US075.00

Eq u1ty rat mg key

Buy: Based on a current 12- month view of total share- holder return (TSR = percentage change in share price from current price to projected target price plus pro- jected d ividend yield), we recomm end that investors buy the stock. Sell: Based on a current 12-month view of total share- holder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this t i me horizon, do no t recom mend either a Buy or Sell.

Notes:

1. Newly issued research recommendat ions and target

prices always supersede previously published research.

2. Ratings definitions prior to 27 January, 2007 were:

Buy: Expected total return (including dividends) of 10% or more over a 12-month period

Hold: Expected total

between -10% and 10% over a 12-month period

Sell: Expected

10% or worse over a 12-month period

return (i nclud ing dividends)

total retu rn (including dividends) of-

Eq u 1ty ratmg d 1spers 1o n and bank 1ng re lat 1o ns h1ps

500 ~-- 49'~~---------~~%.---------------~

400

300

200

100

0

1%27%

-j- ---L--

400 300 200 100 0 1%27% -j- ---L-- Buy Hold Sell 0 Companies Covered lil'il Cos.

Buy

Hold

Sell

0 Companies Covered lil'il Cos. w/ Banking Relationsh ip

North American Universe

19 July 2010

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Regulatory Disclosures

1. Important Additional Conflict Disclosures

Aside from within this report, important conflict disclosures can also be found at https://gm.db.co m/equ ities under the "Disclos ures Lookup" and "Legal" tabs . Investors are strongly encouraged to review this information before investing .

2. Short-Term Trade Ideas

Deutsche Bank equity research analysts sometimes have shorter-term t rade id eas (known as SOLAR ideas) t hat are

or inco nsistent with Deutsche Bank's existing longer term rat ings. These t rade ideas can be found at the SOLAR link at http://qm .db.com.

consistent

3. Country-Specific Disclosures

A ustralia: Th is research, and any access to it, is intended on ly

Corporations Act. EU countries: Disclosures relating to our obligations under MiFiD can be fou nd at http ://globalmarkets .db .com/riskd isclosures. Japan : Disclosures under t he Fi nancia l Instruments and Exchange Law: Com pany name- Deutsche Securities Inc. Registrat ion number- Registered as a financia l inst ruments dealer by the Head of the Kanto Loca l Finance Bureau (Kinsho) No . 117 . Member of associations: JSDA, The Financial Futures Association of Japa n. Commissions and risks involved in stock transactions - fo r stock t ransactions, we charge stock commissions and consumption tax by m ultiplying t he t ra nsact ion amount by the com mission rate agreed with each customer. Stock t ransactions can lead to losses as a resu lt of share price f luctuations and other facto rs . Transact ions in foreign stocks can lead to additional losses stemming f rom foreign exchange fluctuations.

for "wholesa le cl ients" within t he mean ing of t he Austra lia n

New Zealand : Th is research is not intended for, and should not be given to, "members of the public" within the meani ng of the New Zealand Securities Market Act 1988. Russia : Th is informat ion, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisa l or eva luation activity requiring a license in t he Russian Federation .

Deutsche Bank

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Deutsche Bank Securities Inc.

North American locations

Deutsche Bank Securities Inc.

60 Wall Street

New York. NY 10005 Tel: (2 12) 250 2500

Deutsche Bank Securities Inc.

225

25th Floor Boston, MA 02110 Tel (617) 988 6100

Street

Frankli n

Deutsche Bank Securities Inc.

222 South Riverside Plaza

30th Floor Chicago. IL 60606 Tel: (3 12) 537-3758

Deutsche Bank Securities Inc.

3033 East First Avenue

Sui te

Denver, CO 80206 Tel: (303) 394 6800

Thi rd Floor

303,

Deutsche Bank Securities Inc. 1735 Market Street 24th Floor Philadelphia. PA 19103 Tel: (2 15) 8541546

Deutsche Bank Securities Inc.

Deutsche Bank Securities Inc.

 

101

California Street

700

Louisiana Street

46th Floor San Francisco, CA 94111 Tel (415) 617 2800

Houston. TX 77002 Tel: (832) 239-4600

 

International locations

 

Deutsche Bank Securities Inc.

Deutsche Bank AG London

Deutsche Bank AG GroBe GallusstraBe HH 4 60272 Frankfurt am Main Germany Tel : (49) 69 91 o 00

Deutsche Bank AG Deutsche Bank Place Level 16 Corner of Hunter & Phill ip Street s Sydney, NSW 2000 Australia Tel: (61) 2 82581234

60

Wall Street

1 Great Winchester Street London EC2N 2EO United Kingdom Tel: (44) 20 7 545 8000

New York. NY 10005 United States ol America Tel: (1) 212 250 2500

Deutsche Bank AG Level 55 Cheung Kong Center 2 Queen's Road Central Hong Kong Tel: (852) 2203 8888

Deutsche Securities Inc. 2-11-1 Nagatacho Sanno Park Tower Chiyoda-ku, Tokyo 100-6171 Japan Tel: (81) 3 5156 6701

 

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CopfrtghtC 2010 Deutsche Bank AG

the reeornmendationsl'l"'ay differ Md the price ~rgets ~nd eStil"l'l:etes of eachl"l'l:ey vary widely

FYI

Comments?

From:

James Bob

To:

Finley, Steve

CC:

D ate:

4/ 12/2010 5:33 :50 PM

Subject:

Robert H. James Liaison for Career Institutions ofHigher Education U.S Department ofEducation FAX: 317-257-2098 Call first Cell Phone #202-557-5835 D.C. # 202-377-4301 Indianapolis Office 317-257-2098 8527 Quail Hollow Road Indianapolis. IN 46260-2208

The Honorable Anthony Wilder Miller Deputy Secretary U.S. Department of Education 400 Maryland Avenue, SW Washington, DC 20202

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 behalfof 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 find 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.

The Honorable Anthony Wilder Miller April 12, 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 fmancial aid, concludes:

"The 8% debt-service-to-income threshold is so strict that it wouldpreclude for-profit colleges from offering Bachelor 's degree programs. It would also eliminate many Associate 's degree programs atfor-profit colleges. Even non-frofit calleges wouldfind it difficult to satisfy this standard ifthey were subjected to it. "

Kantrowitz further found that:

"The proposed use ofBureau ofLabor Statistics wage data harm minority andfemale students. " 3

will disproportionately

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, 2010, p. 1. 3 Ibid.

The Honorable Anthony Wilder Miller April 12,2010 Page 3

"The debt-service-to-income threshold effectively establishes borrowing limits based on field ofstudy 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. s 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, Apri12, 2010, prepared by Jonathan Guryan, PhD, and Matthew Thompson, PhD, p. 1.

The Honorable Anthony Wilder Miller 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 hasfailed 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.

The Honorable Anthony Wilder Miller 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 fmancial 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 90/10 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.

The Honorable Anthony Wilder Miller 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 The Honorable Martha J. Kanter Mr. Robert Shireman

cc:

APPENDIX 1

INSTITUTIONAL DISCLOSURES RELATED TO EXPECTED EARNINGS AND DEBT

You have requested information about our

Program Level: 0

Associates

:.A

:.:c::

[g)Bachelors

:co=-u=.:n~t:.:.:in"""g

0Masters

Here are some important disclosures for the award year ending

program

Ocertificate/Diploma

June 30, 2010

, continue to be actively enrolled at the institution while 24.2

During the year ended

June 30, 2009

75.8

%of students enrolled in this program graduated or

% ceased enrollment.

Of the students who graduated, 88.6 % were employed in their field of stud y, 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} co des 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:llwww.bls.gov/oeslcurrentloes_nat.htm.

The cost of this program of study fo r 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 monthl y 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 http s:IIstud entloans.govImyDi rectLoa n/i ndex .actio n .

The latest official Cohort Default Rate (FY07) from the US Department of Education indicates that

1.7 % of graduates in this program defaulted

on their federal loan s.

PLEASE NOTE THAT YOUR ACTUAL EXPERIENCE MAY BE DIFFERENT THAN THE AVERAGES AND STATISTICS PRESENTED ABOVE.

From:

To:

CC:

Robert MacArthur <nnacarthur@altresearch com> Wittman Donna Woodward Jennifer

Date:

6/23/2010 8:49:58 AM

Subject:

North America United States l/l Industria ls Business Services & Education Deutsche Bank Apollo Gro
North America United States
l/l
Industria ls Business Services & Education
Deutsche Bank
Apollo Gro up (A POL.OO), USD48.01
Bu y, Price Target USD80.00
Ame ri can Pub lic Ed. Inc
(APEI.OO), USD48.00 Hol d, Pri ce
Target USD44.00
Prepared testimonies from Margaret Reiter (consumer advocate), Yasmine
lssa (student), Steve Eisman (investor), and Kathleen Tighe (OIG ) are now
widely circulating in Washington, which we obtained via our DC contacts.
Based on expected testimony, it does not seem like there is new proof of
wrongdoing by the industry. While we expect testimony will be decidedly
Corinthian Colleges Inc
(COCO.OO),USD 11 .2 1 Buy, Pri ce
Target USD24.00
negative, nearly all of it has likely been heard before . The key negative in
the upcoming hearings and GAO review is that they w ill potentially give the
DoE more confidence (and potentially Congressional support) to be strict in
t heir final regs, particularly
Gainful Employment.

DeVry (DV N), USD56 58 Hold, Pri ce Target USD70.00

ITT Ed ucation Servi ces (ESI .N), USD93.42 Buy, Price Ta rge t

USD125.00

1) Based on the info being disseminated, there w ill likely be a call fo r toughe r cohort default rate (CDR) thresholds as witnesses reportedly believe the "true" CDR is higher than published rates due to w idespread use of defer- ment and forbearance. There may also be a call for tougher accreditation review s. 2) lssa's testimony will likely elicit some empathy. She is unable to sit for a licensing ex am wi thout a year 's w ork ex perience due to the program's lack of state accreditation, but cannot get a job w it hout a license or w ork expe- rience.

3) Testimony suggests Reiter may cite data from a settled complaint against COCO in 2007, and claim for-profi t abuses and fraud are wi de-s pread. She reportedly believes accreditation, increased disclosure, and current DoE proposals are insufficient to solve the problems.

We think most of the critique on Thursday w ill be addressed by the pending DoE Notice of Proposed Rulemaking (NPRM). The OIG acknow ledges the NPRM covers many of its concerns, particularly Definition of a Credit Hour, w hile Reiter and Eisman have publicly stated that they w ant legis lation be- yond w hat is currently proposed .

Paul Ginocchio, CFA

Research Analyst

(+1) 4156 17-4207

paul.ginocchioCdb.com

Adrienne Colby

Associate Analyst

() 212 250-0948

adrie nne.colbyCd b.co m

Deutsche Bank Securities Inc.

All prices are t hose cu rrent at

Deu tsche Bank and subject companies . Deutsche

Bank does and seeks t o do business w it h compan ies covered in its resea rch report s. Thus, investors should be awar e t hat t he fi rm may have a con f lict of interest t hat could affect the objecti vity of thi s report. Investors should consider this report as only

a single factor

THE VIEWS EXPRESSED A BOVE ACCURATELY REFLECT PERSONAL VIEWS OF THE AUTHORS ABOU T THE SUBJECT CO M PANY(IES) AND ITS(TH EIR) SECUR ITIES. THEY HAVE NOT AN D W ILL NOT RECEIVE ANY CO M PENSATION FOR PRO- VIDING A SPECIFIC RECO M MENDATION OR VIEW I N THIS REPORT. FOR OTHER DISC LOSU RES PLEAS E VISIT HTTPI/ GM.D B.CO M M ICA(P) 007/05/20 10

the en d of t he previous trading session unless ot herw ise indicated. Prices are sourced f rom loca l

exchang es via Reuters, Bl oomberg and other vendors . Data is

sourced from

in making t heir investment decision .

From:

To:

CC:

Robert MacArthur <nnacarthur@altresearch com> Robert MacArthur

Date:

7/20/2010 9:45:08 PM

Subject:

North America United States

Industrials Business Services & Education

19 July 2010

Deutsche Bank

Services & Education 19 July 2010 Deutsche Bank DB Education Services Gainful Employment Update Paul

DB Education Services

Gainful Employment Update

Paul Ginocchio, CFA

Adrienne Colby

Research Analyst

Associate Analyst

(+ 1) 415617-4207

( ) 212 25()-0948

paul.ginocchio@db.com

adrienne.colby@db.com

At 12% over 10 years, Gainful Employment is less onerous

A Washington pol it ical ana lyst reported to day that Gainful Em p loyment (GE) cou ld

now p otential ly be a debt

t he prev ious 8%. At 12%,

fo r APOL and DV, a 3% im pact fo r ES I, and "on ly" a 26% hit to COCO. We also

update d our original EPS im pact, assuming 8% over 10 yea rs, correcting an inconsistency in our m o del an d up dati ng f or new info - t h is sign ificantly reduced

t he EPS hit for DV and ESI. Our to p pick

us i n g our GE mo de l, we calculate n o CY1 OE EPS impact

repayment met ric of 12% o f income over 10 y ears, vs

in t he sector rema ins APOL.

We also updated our original Gainful Employment 8% calculations

In our J u ly 2"d not e, we showed a very s ign ificant 80% negative im p act to

ESI and DV f rom a Gainful Em ploym ent w ith debt repayment at 8% of

over 10 years. We showed t ransfer credits in our m odel, but d id not actuall y include t hem in our calculations. Correct ing t his error, plus updat ing assumptions

fo r other new informat ion, reduced t he

y ears

14%, our up dated EPS impact is -10% . For DV, the im pact goes f rom -79% to- 41 %, f or ESI from -80% t o -66%, and fo r COCO f rom -1 20% to -109%. For a copy

EPS fo r income

neg ative EPS im pact u nder the 8% over 10

EPS im pact we o r i g ina ll y ca lcu lated was -

scenario. Fo r Apo llo, t he CY1 OE

Industry Update

Apollo Gro up (APOLOQ),US045.56 Buy
Apollo Gro up (APOLOQ),US045.56
Buy
 

2009A

2010E

2011E

EPS (USD! P/ E !xl EV/EBITDA (x)

3.79

5.35

5.53

18.0

8.5

8.2

8.1

3.9

3.5

Am erican Publi c Ed. Inc (APEI.OQ),U$042.67

Hold

 

2009A

2010E

2011E

EPS (USD)

1.27

1.74

2.50

P/E (x)

28.6

24.5

17.1

EV/EBITDA (x)

13.5

11.6

7.8

Cor inthian Colleges Inc (COCO.OQ),US010.40

Buy

 

2009A

2010E

201 1E

EPS (USD) P/ E !xl EV/EBITDA (x)

0.82

1.63

2 04

19.4

6.4

5.1

7.0

3.0

1.9

OeVry (0V.N),US052.85

Hold

 

2009A

2010E

2011E

EPS (USD! P/ E !xl EV/EBITDA (x)

2.30

3.78

5.12

22 .2

14.0

10.3

12.2

7.4

4.9

ITT Education Servi ces (ESI.N),U$086.53

Buy

 

2009A

2010E

2011E

EPS (USD)

7.98

11.04

11.71

P/E (x)

12.9

7.8

7.4

EV/EBITDA (x)

7.3

4.2

3.8

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 o n t he For Prof it industry on J une 24 th, Senator Harkin stated t here would be another one in J uly and at least one more after that. We ha d

heard f rom contacts t hat August 4 th

August recess

wh ich starts on th e 9 th, t he hearing has t o be an no u nced by Friday or the next o ne

wi ll not occur until September. An announcement is now likely in t he next f ou r

days .

Apollo remains our favorite idea in the sector

We find APOL attractive as 1) it is addressing most of its issues already t hrough

t he

befo re t hey take on student debt, 2) our u pda te d Gainful Em ployment calculations

(at 12% over 10 years) suggest no im pact on revenues and EPS, and 3) Apollo's 3-

We va lue APOL us ing relative valuation

scatter p lots of CY1 OE PEs versus pee rs . We support o u r re lative valuation work

with a DCF analysis . Our DCF

terminal value we use a 3.5% long-term g rowth rate. Our WACC uses a beta of

1.0, a 4 o/o r isk free rate, and an elevated 8% r isk prem i um. Key risks i ncl ude:

negat ive regu lat ory developments that are not already pr iced in, higher 2009 CDRs

negative growth im pact from t he orientation program or or a stronger t han expected recovery in job growth.

bachelor's degree focus,

t han expected, a bigger

year draft CDR is rising but manageable.

University Orientation pro gram , which weeds out uncommitted students

September. Due t o t he

was t he next li kely date, with anot her o ne in

requ ired 2-week notice period and t he

ca lcu lat ions include exp li cit 10-yr fo recasts. In our

Deutsche Bank Securities Inc .

All prices are t hose current at t he end of t he previous t rad ing session unless otherwise indicated . Prices are sourced from loca l exchanges via Reuters, Bloomberg an d other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche

be aware t hat the f irm

report as only a single

factor in making t heir investment decis ion. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LO CATED IN APPENDIX 1.

may have a conflict of interest that could affect the object ivity of t his report. Investors should consider t his

Bank does an d seeks to d o business w ith compan ies covered in

its research reports . Thus, investors should

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 ana lysis of the estimated effects of t he Department of Education's (DoE) Gainful Employment (GE) proposa l on revenues and EPS for Apol lo, Corinthian, DeVry and ITT at a 12% income repayment t hreshold. There were reports out today f rom a Washington po litical analyst suggesting gainful employment's met rics on debt repayment could be 12% of income over 10 years , versus the previous 8% over 10 years. Due to t his

news, we felt it wou ld be helpf ul to run this potentia l new scenario th rough 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 t hat under t his potential new scenario, that

The EPS im pact to Apo ll o and DeVry, we believe, cou ld be zero, at ITT it is very minor, and at COCO the im pact is vastly red uced- from wiping out earnings to "only" a 26% EPS i mpact.

Gainfu l Employment is less onerous.

Figure 1: Summary of impact of Gainful Employment under various scenario's

Impact APOL -3% -10% -4% -14% coco -14% -109% -16% -120% DV 0% -1 0%
Impact
APOL
-3%
-10%
-4%
-14%
coco
-14%
-109%
-16%
-120%
DV
0%
-1 0%
-41%
-19%
-79%
ESI
-1%
-3%
-29%
-66%
-35%
-80%
0% -41% -19% -79% ESI -1% -3% -29% -66% -35% -80% Updated debt repayment calculations at

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

showed t ransfer cred its in ou r

worksheet, our original ga inful

t hese t ransfer cred its . Th is was a significant oversight on our part and t his change alone took

t he EPS impact fo r DeVry fro m -79% to about -40%, whi le f or ESI t he EPS im pact moved from -80% t o -50%. In addition to now correctly including transfer credits, we have m ade

pu blished origi nal ly on 2 J u ly 201 0. Even though we

employment calculations for ITT and DeVry did not include

some other adjustments to our assumptions fo r all t he companies which we outli ne below .

These changes take us f rom the "original" 8% ca lcs to the "updated" 8% above.

ca lcs in Figu re 1

• Apollo Group: We reduced APOL's online BA enrollment exposure from 14% to 4% as on APO L's last earnings ca ll they stated most of their on-ground students were BA's and most of t heir on li ne students were Associates' . We also increased our transfer credit assumptions for the online BA program due to its higher cost versus on-cam pus. We assu me students who chose t his higher cost program wou ld not

need many cred it s to grad uate . Apollo did disclose on its webs ite t hat its average debt per b achelor graduate in 2007-2008 was $25,200, wh il e for associates was

$14,200.

should generally account for the 2-years of tuition increases that have occurred .

We are still 11% and 12% above t hese averages in our model, which

• DeVry: We slightly decreased DeVry's transfer credit assumptions from 1 year in the BA program to 0 .75, to be conservative. We raised the average BA salary slightly t o be "above $50,000", which is what we believe DeVry BA's average. We also raised

t he Associate sa lary to $33,288, wh ich is t he low end of t he starting sa laries disclosed in DeVry's 1OK.

• ITT Technical Institute: We slight ly decreased ITT Tech's t ransfer credit assumptions

f rom 1.25 years in t he BA prog ram to 0.75, to be conservative. Due to t heir slightly

19 July 2010

Business Services & Education DB Education Services

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lower High School student exposure, ITI's transfer cred its may be slightly higher than DV's, but we assume the same to reduce complexity. We lowered the cash

co m mentary i n t he 1OK t ha t

first go around. Finall y, we

slightly lowered salaries as t he $32,800 average salary in 2008, disclosed i n the 2009 1OK, is likely the product of a 80/20 mix of associates/bachelor's, not the 85/15 t hat we originally assumed.

pay assu m ptio n fro m 10% of t uit i on to 5% as t here is suggests th is level; someth in g we overlooked i n the

• Corinthian Colleges: We increased our c ash p ay assumption from 2% to 5%, as we assume COCO's cash pay is sim ila r to ESI's, and we now have a ha rd data point fo r ES I. Otherwise, we made no other mean ingful changes to our COCO ga infu l employment calculations.

• Please note t hat the Dept of Education has yet to release its Ga inful Em ployment proposa l. In the last version of t he p roposal in Jan uary, t he Dept proposed req ui ri ng students of For-Prof it Tit le IV eligible programs to be able to replay their total student debt w ith less than 8% of a graduates' expected an nua l income and be rep ayable over a 10 year period. With the publ ication of its Prog ram Int egrity NPRM

its plans to release GE in a second NPRM later t his

in m id-J une, the Dept in dicated

summer (we believe late J uly to M id-August).

Major assumptions in our Gainful Employment calculations

We make five key assumptions in our Gainful Employment EPS impact calculations:

1)

The nu m ber o f cred its t he average student t ransfers in w it h from another i nstitution,

2)

We do not assume t hat students have any debt assoc iated w ith these t ransfer

cred its, w hic h is not a co rrect assumption but help guide us,

one we have absolutely no data on to

3)

We assu me a percentage of cash t u ition contribution per student,

4)

We

assume starting graduate salaries fo r APOL, DV & ESI based on disclosed data

by t he compan ies and their peers (we use Standard Occupat ional Code-Bureau of Labor Statistics data, w hich may no longer be valid, fo r COCO),

5)

We are ass uming no o ff setting cost cuts or pot ential reven ues, f rom increased t uition at certain prog rams or larger class sizes. In li ght of t his f inal ass umptio n, our ca lculat ions may somewhat reflect a worst case scenario.

We

ind ivid ual prog ram by program bas is, gran ular prog ram dat a avai lable, our

school-wide calcu lations, w hich cou ld lead to significant variation f rom t he actual program by program impact.

on an i nstitution-wide bas is. Due to t he lack of

remind investors t hat t he DoE's GE d raft proposed evaluating Title IV eligibil ity on an

not

GE estimates above are constrained to high level,

Finally, we note t hat alt houg h our ana lys is assumes t hat schools wou ld c ut tuition costs in

response to a GE p roposa l,

lower tu it ion. We believe t his is largely

amo unt of debt a student q ual if ies fo r and may chose to take on. In Apollo's FY 3010 100 f iling, the company makes the fo llowing comments in regards to Gai nful Employment: "If t his

decide to eliminate specific p rograms, rat her t han due to a school's inability to control or limit t he

schools may

reg ulat ion is adopted in a form simil ar to the U.S. Department of Educat ion's proposal in t he negotiated ru lemaking p rocess, it could render many of our program s, and man y p rograms

If a

o ffered by other proprietary educational inst itutions, ineligible for Title IV f und ing

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particular program ceased to be e li gible fo r Tit le IV f unding, in most cases it wou ld not be practical to continue offering t hat cou rse under our current b usiness model."

We have in cl uded snapshots of our Ga infu l Emp loyment ana lys is for Apollo, Co ri nt h ian, DeVry and ITI in Appendix 1, at the end of this note.

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Appendix 1

Figure 2: Gainful Employment Calculations- Apollo Group

Step 1

- Cal cu lat in g p oten t ia l t u1t 1on cuts

Source/Calc

APOL

APOL

APOL

Tu ition

& Fees

$

67,000

$

54,400

$

22,200

source

online

avg. ground

on lin e website Assoc

website

website

Program o/o of Total Enrollment

 

BA

BA

DB ests.

4%

38%

40%

Avg. Pell Grant '08-'09 (DoE) Percent of Students getting Pell

DoE

$

2,695

$ 2,695

$

2,695

DoE

55%

55%

55%

Assumed years of credits transferred

DB ests.

2.00

1.50

0.20

Total Tuit ion & Fees Cash/out of pocket payments Pell Grants Avg. Debt from School

calc

$

33,500

$ 34,000

$

19,980

7%

2,345

2,380

1,399

calc

2,960

3,700

2,664

sum

28,195

27,920

15,917

Monthly payments over 10 years at 6.8% interest rate

mort calc

$

324

$ 321

$

183

interest rate mort calc $ 324 $ 321 $ 183 Implied Requu-ed Salary to meet mont

Implied Requu-ed Salary to meet mont y pay:· e -------------~--~~--~ '~r-~~~~--~~~~~--~

12%

Assumed starting salary