From

:

To: CC: Date: 4/12/2010 5:33 :50 PM
Subject:

James Bob Finley, Steve

FYI Comments? Robert H. James Liaison for Career Institutions of Higher 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

April 12,2010

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

Dear Secretary·Miller: Thank you for soliciting input on the Department of Education's (ED) proposed Gainful Employment (GE) regulation at our recent meetings. We are writing on behalf of our institutions (Kaplan, DeVry, and Education Management Corporation), which together offer opportunities for over three hundred thousand students to attend college annually. We are deeply committed to educating and preparing our students for the new jobs of the 21st century, and to ensuring that our students receive high-quality, results-oriented education, without being burdened by excessive debt. We understand and support what you are trying to accomplish. We believe that together we can 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 nontraditional 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-toincome 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 would preclude for-profit colleges from offering Bachelor 's degree programs. It would also eliminate many Associate 's degree programs at for-profit colleges. Even non-frofit calleges would find it difficult to satisfy this standard if they were subjected to it. "

Kantrowitz further found that:
"The proposed use ofBureau of Labor Statistics wage data ... will disproportionately harm minority andfemale students. " 3

Kantrowitz also points out that the proposed GE rule tasks institutions with a job without providing the tools necessary to complete the job:

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.

1

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
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.
4

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 has failed a debt-service-to-incomeratio 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.

7

Kantrowitz, pp. 20-21 .

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 longterm 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 debtservice-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 postgraduate employment rates. We believe that the proposal contained in this letter provides an innovative and effective way to protect students from institutions that over promise and under deliver to students, thus leaving students with too much debt and not enough return on investment.

8

How Much Debt Is Too Much, Sandy Baum and Saul Schwartz, The College Board, 2006, p. 12.

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 cc: The Honorable Martha J. Kanter Mr. Robert Shireman

APPENDIX 1
INSTITUTIONAL DISCLOSURES RELATED TO EXPECTED EARNINGS AND DEBT

You have requested information about our _.....:...:.:c::..:co=-u=.:n~t:.:.:in"""g._____ program A Program Level: 0 Associates [g)Bachelors 0Masters Ocertificate/Diploma June 30, 2010

Here are some important disclosures for the award year ending

During the year ended June 30, 2009 , 75.8 %of students enrolled in this program graduated or continue to be actively enrolled at the institution while 24.2 % ceased enrollment. Of the students who graduated, 88.6 % were employed in their field of study, or a related field, within six months of graduation with an average annual salary of approximately$ 46,300 per year. This academic program corresponds to the following Standard Occupational Classification (SOC} codes as reported by the Bureau of Labor Statistics (BLS): 13~2011 . The weighted annual salaries for these SOC codes at the 25th and 75th percentiles are $ 45,900 and $ 78,210 . respectively. For information related to salaries from these and other occupations, please visit http:llwww.bls.gov/oeslcurrentloes_nat.htm. The cost of this program of study for a student enrolled full-time and with no transfer credits is $ 62.040 . The average annual tuition increase for the most recently concluded three years was 4.6 % The average education loan debt of students incurred at this institution and who graduated from this program during the prior award year was $ 33,100 . This amount includes $ 30,900 of federal student loan debt and $ 2.200 of institutional loan debt. This does not include any debt incurred while attending another institution. Additionally, 4.6 %of graduates obtained private student loans from third parties. If this average education loan debt was 100% federal loans with an average interest rate of 6.8% and you chose to repay using a 10 year standard repayment term, the annual total of 12 monthly payments would be$ 4,571.04 . If you chose to pay using a graduated repayment plan (over 10 years), the total of your first 12 monthly payments would be $ 3,138.60 . For more information concerning repayment options on federal loans, please visit https:IIstud entloans.govImyDi rectLoa n/i ndex.action. 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 loans. PLEASE NOTE THAT YOUR ACTUAL EXPERIENCE MAY BE DIFFERENT THAN THE AVERAGES AND STATISTICS PRESENTED ABOVE.

From: To:

Robert MacArthur <nnacarthur@altresearch com> Wittman Donna Woodward Jennifer 6/23/2010 8:49:58 AM

CC:
Date: Subject:

North America United States Industrials Business Services & Education

Deutsche Bank

l/l

Apollo Group (A POL.OO), USD48.01 Bu y, Price Target USD80.00 American Public Ed. Inc (APEI.OO), USD48.00 Hold, Price Target USD44.00 Corinthian Colleges Inc (COCO.OO),USD11 .21 Buy, Price Target USD24.00 DeVry (DV N), USD56 58 Hold, Price Target USD70.00 ITT Ed ucation Services (ESI.N), USD93.42 Buy, Price Targe t USD125.00

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 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. 1) Based on the info being disseminated, there w ill likely be a call for tougher cohort default rate (CDR) thresholds as witnesses reportedly believe the "true" CDR is higher than published rates due to w idespread use of deferment 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 exam without 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 experience. 3) Testimony suggests Reiter may cite data from a settled complaint against COCO in 2007, and claim for-profit abuses and fraud are wide-spread. 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 beyond w hat is currently proposed .

Paul Ginocchio, CFA
Research Analyst

Adrienne Colby
Associate Analyst () 212 250-0948 adrie nne.colbyCdb.com

(+1) 415617-4207 paul.ginocchioCdb.com

Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading session unless otherw ise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business w ith companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. THE VIEWS EXPRESSED ABOVE ACCURATELY REFLECT PERSONAL VIEWS OF THE AUTHORS ABOUT THE SUBJECT COM PANY(IES) AND ITS(TH EIR) SECURITIES. THEY HAVE NOT AN D WILL NOT RECEIVE ANY COMPENSATION FOR PROVIDING A SPECIFIC RECOMMENDATION OR VIEW IN THIS REPORT. FOR OTHER DISCLOSU RES PLEASE VISIT HTTPI/ GM.DB.COM M ICA(P) 007/05/2010

From: To:

Robert MacArthur <nnacarthur@altresearch com> Robert MacArthur 7/20/2010 9:45:08 PM

CC:
Date: Subject:

North America United States Industrials Business Services & Education

Deutsche Bank
Industry Update

19 July 2010

DB Education Services Gainful Employment Update
Paul Ginocchio, CFA
Research Analyst (+ 1) 415617-4207 paul.ginocchio@db.com

Adrienne Colby
Associate Analyst ( ) 212 25()-0948 adrienne.colby@db.com

At 12% over 10 years, Gainful Employment is less onerous A Washington political analyst reported to day that Gainful Employment (GE) could now potentially be a debt repayment metric of 12% of income over 10 years, vs the previous 8%. At 12%, using our GE model, we calculate no CY1 OE EPS impact fo r APOL and DV, a 3% impact for ESI, and "only" a 26% hit to COCO. We also updated our original EPS impact, assuming 8% over 10 years, correcting an inconsistency in our m odel and updating f or new info - this significantly reduced the EPS hit for DV and ESI. Our top pick in the sector remains APOL. We also updated our original Gainful Employment 8% calculations In our July 2"d not e, we showed a very significant 80% negative impact to EPS for ESI and DV from a Gainful Employm ent w ith debt repayment at 8% of income over 10 years. We showed transfer credits in our model, but d id not actually include them in our calculations. Correcting this error, plus updating assumptions fo r other new information, reduced the negative EPS impact under the 8% over 10 years scenario. For Apollo, the CY1 OE EPS impact we originally calculated was 14%, our updated EPS impact is -10% . For DV, the im pact goes from -79% to41 %, for ESI from -80% t o -66%, and for COCO from -1 20% to -109%. For a copy of our fully-dynamic Gainful Employment EPS impact model, please email us. No update yet on the next Senate hearing on For Profits At the last Senate hearing on the For Profit industry on J une 24th, Senator Harkin stated there would be another one in J uly and at least one more after that. We had heard from contacts that August 4th was the next likely date, with another one in September. Due t o the required 2-week notice period and the August recess which starts on the 9th, the hearing has t o be announced by Friday or the next one will not occur until September. An announcement is now likely in the next f our days . Apollo remains our favorite idea in the sector We find APOL attractive as 1) it is addressing most of its issues already through the University Orientation pro gram, which weeds out uncommitted students befo re they take on student debt, 2) our updated Gainful Employment calculations (at 12% over 10 years) suggest no impact on revenues and EPS, and 3) Apollo's 3year draft CDR is rising but manageable. We value APOL using relative valuation scatter plots of CY1 OE PEs versus peers . We support our relative valuation work with a DCF analysis. Our DCF calculations include explicit 10-yr forecasts. In our terminal value we use a 3.5% long-term g rowth rate. Our WACC uses a beta of 1.0, a 4 o/o risk free rate, and an elevated 8% risk premium. Key risks include: negative regulat ory developments that are not already priced in, higher 2009 CDRs than expected, a bigger negative growth impact from the orientation program or bachelor's degree focus, or a stronger than expected recovery in job growth.

Apollo Group (APOLOQ),US045.56 Buy 2009A 2010E 2011E EPS (USD! 3.79 5.35 5.53 18.0 8.5 8.2 P E !xl / EV/EBITDA (x) 8.1 3.9 3.5 Am erican Public 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) 0.82 1.63 2 04 P E !xl / 19.4 6.4 5.1 EV/EBITDA (x) 7.0 3.0 1.9 OeVry (0V.N),US052.85 Hold 2009A 2010E 2011E EPS (USD! 2.30 3.78 5.12 P E !xl / 22 .2 14.0 10.3 EV/EBITDA (x) 12.2 7.4 4.9 ITT Education Services (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

Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business w ith companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. M ICA(P) 007/05/2010

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank

l/l

Gainful employment calculations at 12% of income over 10 years
We have updated our analysis of the estimated effects of the Department of Education's (DoE) Gainful Employment (GE) proposal on revenues and EPS for Apollo, Corinthian, DeVry and ITT at a 12% income repayment threshold. There were reports out today from a Washington political analyst suggesting gainful employment's metrics on debt repayment could be 12% of income over 10 years, versus the previous 8% over 10 years. Due to this news, we felt it would be helpful to run this potential new scenario through our Gainful Employment EPS impact model (please see our assumptions in the next section which are important to understanding our EPS impact). We believe that under this potential new scenario, that Gainful Employment is less onerous. The EPS im pact to Apollo and DeVry, we believe, could be zero, at ITT it is very minor, and at COCO the im pact is vastly reduced- from wiping out earnings to "only" a 26% EPS impact.
Figure 1: Summary of impact of Gainful Employment under various scenario's

Impact APOL

coco
DV
ESI
0% -1% -3%

-3% -14% -1 0% -29%

-10% -109% -41% -66%

-4% -16% -19% -35%

-14% -120% -79% -80%

Updated debt repayment calculations at 8% over 10 years versus Original scenario We have updated our EPS impact calculations for 8% over 10 years versus what we published originally on 2 July 201 0. Even though we showed transfer credits in our worksheet, our original gainful employment calculations for ITT and DeVry did not include these transfer credits. This was a significant oversight on our part and this change alone took the EPS impact for DeVry from -79% to about -40%, while for ESI the EPS impact moved from -80% t o -50%. In addition to now correctly including transfer credits, we have m ade some other adjustments to our assumptions for all the companies which we outline below.

These changes take us from the "original" 8% calcs to the "updated" 8% calcs in Figure 1 above. • Apollo Group: We reduced APOL's online BA enrollment exposure from 14% to 4% as on APOL's last earnings call they stated most of their on-ground students were BA's and most of their online students were Associates' . We also increased our transfer credit assumptions for the online BA program due to its higher cost versus on-cam pus. We assume students who chose this higher cost program would not need many credit s to graduate. Apollo did disclose on its website that its average debt per bachelor graduate in 2007-2008 was $25,200, while for associates was $14,200. We are still 11% and 12% above these averages in our model, which should generally account for the 2-years of tuition increases that have occurred . DeVry: We slightly decreased DeVry's transfer credit assumptions from 1 year in the BA program to 0.75, to be 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 the Associate salary to $33,288, which is the low end of the starting salaries disclosed in DeVry's 1OK. ITT Technical Institute: We slightly decreased ITT Tech's transfer credit assumptions from 1.25 years in the BA program to 0.75, to be conservative. Due to their slightly

Page 2

Deutsche Bank Securities Inc.

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank

l/l

lower High School student exposure, ITI's transfer credits may be slightly higher than DV's, but we assume the same to reduce complexity. We lowered the cash pay assumption from 10% of tuition to 5% as there is commentary in the 1OK that suggests this level; something we overlooked in the first go around. Finally, we slightly lowered salaries as the $32,800 average salary in 2008, disclosed in the 2009 1OK, is likely the product of a 80/20 mix of associates/bachelor's, not the 85/15 that we originally assumed. • Corinthian Colleges: We increased our cash pay assumption from 2% to 5%, as we assume COCO's cash pay is sim ilar to ESI's, and we now have a hard data point fo r ESI. Otherwise, we made no other meaningful changes to our COCO gainful employment calculations. Please note that the Dept of Education has yet to release its Gainful Employment proposal. In the last version of the proposal in January, the Dept proposed requiring students of For-Profit Title IV eligible programs to be able to replay their total student debt w ith less than 8% of a graduates' expected annual income and be repayable over a 10 year period. With the publication of its Program Int egrity NPRM in mid-June, the Dept indicated its plans to release GE in a second NPRM later t his 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) 2) The number of credits the average student transfers in w ith from another institution, We do not assume that students have any debt associated w ith these transfer credits, w hich is not a correct assumption but one we have absolutely no data on to help guide us, We assume a percentage of cash tuition contribution per student, We assume starting graduate salaries for APOL, DV & ESI based on disclosed data by the companies and their peers (we use Standard Occupational Code-Bureau of Labor Statistics data, w hich may no longer be valid, fo r COCO), We are assuming no offsetting cost cuts or pot ential revenues, from increased tuition at certain programs or larger class sizes. In light of t his final assumption, our calculations may somewhat reflect a worst case scenario.

3) 4)

5)

We remind investors that the DoE's GE d raft proposed evaluating Title IV eligibility on an individ ual program by program basis, not on an institution-wide basis. Due to the lack of granular program data available, our GE estimates above are constrained to high level, school-wide calculations, w hich could lead to significant variation from the actual program by program impact. Finally, we note that although our analysis assumes that schools would c ut tuition costs in response to a GE proposal, schools may decide to eliminate specific programs, rather than lower tuition. We believe this is largely due to a school's inability to control or limit the amount of debt a student q ualifies for and may chose to take on. In Apollo's FY 3010 100 filing, the company makes the fo llowing comments in regards to Gainful Employment: "If this regulation is adopted in a form similar to the U.S. Department of Education's proposal in the negotiated rulemaking process, it could render many of our programs, and many programs offered by other proprietary educational institutions, ineligible for Title IV funding ... If a
Deutsche Bank Securities Inc. Page 3

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank

l/l

particular program ceased to be eligible for Tit le IV f unding, in most cases it would not be practical to continue offering t hat course under our current business model." We have included snapshots of our Gainful Employment analysis for Apollo, Corint hian, DeVry and ITI in Appendix 1, at the end of this note.

Page 4

Deutsche Bank Securities Inc.

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank

l/l

Appendix 1
Figure 2: Gainful Employment Calculations- Apollo Group Step 1 - Calculating potential tu1 t1on cuts

Source/Calc

APOL

APOL

APOL

Tuition & Fees source Program o/o 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

$

DB ests. DoE DoE DB ests. calc 7% calc sum

67,000 $ 54,400 $ 22,200 online avg. ground online website website website BA Assoc BA 4% 38% 40% 2,695 $ 55% 2.00 2,695 $ 55% 1.50 2,695 55% 0.20

$

$

33,500 2,345 2,960 28,195

$

34,000 2,380 3,700 27,920

$

19,980 1,399 2,664 15,917

Monthly payments over 10 years at 6.8% interest rate mort calc $ 324 $ 321 $ 183 -------------~--~~--~'~r-~~~~--~~~~~--~ Implied Requu-ed Salary to meet mont y pay:· e 12% Assumed starting salary Total monthly student debt payments Max Debt Load Cash/out of pocket payments add Avg. PelI Grants Total Tuition & Fees Implied Pr'ice.Cut @ -8% ofsalary over 10yrs Step 2- Reven ue Reduct1on Estimate of impact of current Gainful Employment PhD & Master's Online Bachelor's degrees* On campus Bachelor's degrees* Online associates** On campus associates Total revenue impact St ep 3 - Impact 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
NOt<> PriCes as ol July 19" r PM E1 I'JP-cut sc t1>3t star11trg b#l:hell>t'ss.l.,yls$501:

DB est. Mort. Calc.

$ $

$

50,000 $ 500 $ 43,448 2,345 2,960 48,753 $ 46%

50,000 $ 500 $ 43,448 2,380 3,700 49,528 $ 46%

25,000 250 21,724 1,399 2,664 25,787 29%

o/o of Revs 19% 4% 38% 39%

0%
100% EPS

Price Cut Rev impact 0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0% 0.0% 0.0% PE 8.6x 8.6x

$ $

5.66 5.66

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

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

Deutsche Bank Securities Inc.

Page 5

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank

l/l

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 Step 2 - Revenue Reduction Estimate of impact of current Gainful Employment Ross Medical Keller Graduate School Bachelor's degrees·><: Associate's degrees** US Healthcare & Chamberlain Becker CPNCFA & Other (Fanor, Advanced Academics HS) Total revenue impact 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
Note Pn·ces as of July 1ft" 1 PM ET t•JPrice cur .1ssummg starTing bdchelor's saldl"f tS $50~ ( • •JPnce cur >SSum"'g sr.ttJ119 .s•cNre·s salary 1$ $2 71<

Source/Calc Co. comments
$

DV 30% 61,700 $ 10-K BA 52% 2,572 $ 77% 0.75
$

DV 30% 35,038 10-K Assoc . 15% 2,572 77% 0.25 30,658 3,066 3,457 24,135 33,288 333 28,926 3,066 3,457 35,449 16%

DoE DoE DB est. calc 10% calc sum est, See Calc A

$

50,131 $ 5,013 6,420 38,698 50,071 501
$ $

$ $ $

I

12%

mort calc from above from above

$

43,510 $ 5,013 6,420 54,943 $ 10%

%of Revs 12% 14% 40% 12% 15% 7% 100% EPS
$

Price Cut Rev impact 0% 0.0% 0.0% 0% 0% 0.0% 0% 0.0% 0% 0.0% 0% 0.0% 0.0% PE

4.48 4.48 0%

11 .9x 11 .9x 0%

$

Scutce

Cc!'~?Pinr datil •fKI Oe<tlxl>o 8ank eSttn><les

Page 6

Deutsche Bank Securities Inc.

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank

l/l

Figure 4: Gainful Employment Calculations -ITT Education
Step 1 -ca lculation Exposure to HS Grads Tuition & Fees source Program % of Total Enrollment Avg. Pell Grant '08-'09 (DoE) Percent of Students getting Pell Assumed yea rs of cred1 tra nsferred ts Total Tuition & Fees Cash/out of pocket payments Pell Grants Avg. Debt from School (D) Average Starting Salary Implied monthly payments to cover d ebt (D) (8%. 1Oyrs. 6 8%) Implied starting salary by debt (D) 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 lmphed Price Cvt@ S'f(• of salary ove1 10 1rs Step 2- Revenue ReductiOn Estimate of impact of current Gainful Employment Bachelors Associates Total revenue impact Step 3- Impact to EPS and PE Current Ca lendar 201 OE DB EPS EPS impact from revenue decrease w ith no cost offset Estimated impact f rom Gainful Employment
Noll!! Ptices as o/Juty IS", I PM ET SO<Jrce · Ccm,o.>ny data arK/ 0e<A$CI>e Bank eStrmatM

Source/Calc Co. comments
$

ESI 20.25% 69, 600 1o-K BA 15% 2.550 80% 0.75
$ $

ESI 20.25% 34,800 1o-K Assoc. 85% 2.550 80% 0.25
$

Company data DoE DoE DB ests.

calc

I
calc sum

5%

56.550 2.828 6,630 47,093 50.000
$ $

30.4 50 1.523 3.570 25,358 29.000
$ $

est. See Calc A

$

$

542 54.194
$

292 29.181 25.358 1,523 3,570 30.450

12% mort calc from above from above

$
$

500 43.448 $ 2,828 6, 630 52, 905 $ ,0%

290 25.200 $ 1.523 3,570 30,292 $

$

47.093 $ 2.828 6,630 56,550 $

·1 %

%of Revs 15% 85% 100% EPS 11.04 (0.36) 10.68 -3%

Price Cut Rev impact ,0% -1.0% -1% -0.4% -1 .4% PE 8.0x 8.3x 3%

$

$

Deutsche Bank Securities Inc.

Page 7

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 TUitiOn & Fees Souroa/Calc Co oomments
$

COCO 5%1010% 15.409 College Nav Med ASSISt 2.407 90% 15,409

COCO $31,000
$

COCO

COCO

COCO

COCO

source
Program %of Total Enrollment Avg Pell Grant '08- '09 (DoEI Petcent of Students gemng Pell Total Tuition & Fees CastVout or pod:et payments Pell Grants Avg Debt from School Average Starttn<J Salary DoE DB est calc

Assoc.
Biz& HC $2.407 90% $31,000 1,550 4,333 25.117 24.200 1 DB est
$
$

26,450 $ 26.450 $ 26.450 $ 19.026 College Nav College Nav College Nav College Nav AutoMech Dtesel Auto Body Electncian 2,407 $ 90% 26,450 $ 1,323 2.166 22.961 25.aa:J $ Bl.S 2.407 $ 90% 26,450 $ 1,323 2,166 22.961 32.660 $ BLS 2.407 $ 90% 26.450 $ 1,323 2.166 22.961 29.620 $ BLS 2,407 90% 19,026 951 2,166 15.900 35.990 BLS

-4%16% revsl <I% II% revs! <1% 11% revs! <1%ll%revsl
$

$

$

I
calc sum

5%

770
2.166 12.472
$

SOCoodes

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

24.060 1 $ BLS

$

289

$

28.905
$

Montnty ~~ at 891- of S<>iatY Max Debt Load. over 10 years. 68% tnt rate CastVout or pocket payments add Avg Pell Grants Total Tuition & Fees

I

12% mort calc

$
$

lromaeov" !rom abOve

241 $ 20.907 $ 770 2,166 23.844

242 21.029 $ 1.550 4,333 26.911

2$ $
22.489 $ 1,323 2.166 25.977

327 $.
28,38) $ 1,323 2,166 31,869

2$6$
25,739 $ 1,323 2166 29.227

360
31,274 951 21EO 34,391

25,117 $ 1.550 4,333 31.000

Estimate of impact of current Gainful E~loyme nt Certiltcate tn Healthcare Assoaate's 1n Bus1ness Associate's'" Cnmmal Just1oe Auto mechantc Otesel mechante+ Auto body Trades Total revenue impact
~r

%of Revs 56% 13% 16%
10% 2% 2% 1%

Price Cut

0% -t39'o · 13% ·2% 20% II% 0%

100%

Rev impact 00% -17% ·21% .02% 04% 02% 00% -34%

1

=

r

~t

EPS
$ $

PE
1.71
(0451

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

126 -26%

S.lx na

Note Pn·ces ~s of 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

Page 8

Deutsche Bank Securities Inc.

19 July 2010

Business Services & Education DB Education Services

De utsche Ba nk

l/l

Appendix 2
Important Disclosures
Additional information available upon req uest
Disclosure checklist Company
Apollo Group

Ticker
APOL.OO

Recent price*
45.56 (USD) 16 Jul 10

Disclosure
2

* Prices are sourced from local exchanges via Reuters. Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.

Important Disclosures Required by U.S. Regulators
Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See " Important Disclosures Required by Non-US Regulators" and Explanatory Notes. 2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by this company.

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 affiliate(s) makes a market in securities issued by this 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 the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Paul Ginocchio

Deutsche Bank Securities Inc.

Page 9

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank

l/l

Historical recommendations and target price: Apollo Group (APOL.OQ)
(as of 7/16/2010j

no.oo ~----------------------------------------------------------~
00.00 +-~----~~----~~----~~--~~~----~~----~~----~~-4

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

00.00 +-----w---~------------------~~~~-------------------------4

Q)

.2 ....
a...

60.00 50.00 40.00

.~ ....
::1
() Q)

(/)

0.00 +---~----~---r----~--~--~~--~--~----,---~----~--~

Jul 07

Oct 07 Jan 08 Apr 08

Jul 08

Oct 08 Jan 09 Apr 09

Jul 09

Oct 09

Jan '0 Apr '0

Date
1. 4/20/2009: Buy, Target Price Change US080.00 2. 7/1/2010: Buy, Target Price Change US075.00

Eq u1ty ratmg key

Equ1 ratmg d1 ty spers1 and bank1ng relat1 on onsh1 ps

Buy: Based on a current 12- month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected d ividend yield), we recomm end that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1 . Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (includ ing dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of10% or worse over a 12-month period

500 400 300 200 100
0

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

1%27%
- j ----L--

Buy

Hold

Sell

0 Companies Covered lil'il Cos. w/ Banking Relationship
North American Universe

Page 10

Deutsche Bank Securities Inc.

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank

l/l

Regulatory Disclosures 1. Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures 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 trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://qm .db.com.

3. Country-Specific Disclosures
Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name- Deutsche Securities Inc. Registration number- Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, The Financial Futures Association of Japan. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of the New Zealand Securities Market Act 1988. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation .

Deutsche Bank Securities Inc.

Page 11

Deutsc he Bank Deutsche Bank Securities Inc. North American locations
Deutsche Bank Securities Inc. 60 Wall Street New York. NY 10005 Tel: (212) 250 2500 Deutsche Bank Securities Inc. 225 Frankli n Street 25th Floor Boston, MA 02110 Tel (617) 988 6100 Deutsche Bank Securities Inc. 222 South Riverside Plaza 30th Floor Chicago. IL 60606 Tel: (312) 537-3758 Deutsche Bank Securities Inc. 3033 East First Avenue Suite 303, Thi rd Floor Denver, CO 80206 Tel: (303) 394 6800

l/l

Deutsche Bank Securities Inc. 1735 Market Street 24th Floor Philadelphia. PA 19103 Tel: (215) 8541546

Deutsche Bank Securities Inc. 101 California Street 46th Floor San Francisco, CA 94111 Tel (415) 617 2800

Deutsche Bank Securities Inc. 700 Louisiana Street Houston. TX 77002 Tel: (832) 239-4600

International locations
Deutsche Bank Securities Inc. 60 Wall Street New York. NY 10005 United States ol America Tel: (1) 212 250 2500 Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EO United Kingdom Tel: (44) 20 7 545 8000 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 Streets Sydney, NSW 2000 Australia Tel: (61) 2 82581234

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

Global Disclaimer
The information and opinions in this r~port were prepared l:tf Deutsche Bank AG <X one of its affiliates (oolleclivety 'Deutsche Bank'). The information herEin is beli~ to be reliable and has been obtained from public sources believed to be reliable. Oeutsehe S~nk ~Ices no representa1ion as to the &ceur&ey or e¢mpleteness of suel"l inlorm~tion

OeutS<:he Bank I'MY engage in securitieS tr&ns&ctions. on~ proprietaty b&Si$ or othe.wise. in a manner inoonslslent with the vif1!N taken in thiS rese~rel"l report In &ddilion. others w1thin Deutsche S~nk. including sales staff, mt!tf take a vtw~ that is Inconsistent with that taken in this research r~pon

sv~egists ~nd

Opinions. estii'Mtes ~nd proJections in thiS repOrt constitute the eurrent 1udgement of the ~uthor as ot the dbte of thiS report. They do not neces.s&rily retleet the opiniOns ot OeutS<:he S&nk and are subJeet to c::l"'&nge w1thout notioe. Deutsche Bank has no obligation to update. modify or amend this report or to otherwise notify a rec1pient thereof in the event that arry opinion. forecast or estimate set forth herein. changes or subsequently becomes i~<x:urete. Pric::es and &v&ilabihty ot lin~ncial instruments ~re subJeet to Change w1thout n~i<:e. ThiS report iS provided for into~tion~l puri)O$e$ only It i$ not an otter or a SQii¢it&tion ot Motter to buy or sell any tin~ncial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst Judg~ment

As a result of Deutsche Bank's recent acquisition of BHF--Bank AG. a security m?J1f be covered by more than one analyst within the Deutsche Bank group. Each of these analysts may use diff~ring methodologies to value the security; ~sa result.. the reeornmendationsl'l"'ay differ Md the price ~rgets ~nd eStil"l'l:etes of eachl"l'l:ey vary widely
Deutsche Bank has instituted a new policy wher~by analysts may choose not to set <X maintain a target price of certain issuers und~r <::OVerage with a Hold rating In particular. this will typically oocur fcr 'Hold' rated stocks Mving a l"l'l:etket c::ap Sl'l"'&ller th:en most other companies in itS seetor or region. we believe th:et such pOliCy will aliO'N us to !"~'~:eke beSt use ot our resources. Please viSit our webSite bt http:/~m.db.eom to determine the target price of any stock. The financial instruments discussed in this report may ncx be suitable for all investors and investors must make their OW"n infcrmed inV$Stment decisions. Stock transactions can lead to losses as a result of prioe fluctuations and other l&e:tors. 11 ~ liMn<::~ I instrul'l"'ent iS denomin~ted in a c::urreney other th:en ~n investor's currency. a eMnge in e»:Mnge rates l"l'l:eY ~dversely ~Hect the investment Pest per1orl"l'l:ence i$ not necessarily indicative ot tuture results. Deutsche Bank mttt wnh respect to securities ~red by this r~pon. sell to or buy from customers on a principal basis. and oonsid&r this report in deciding to trade on a proprietary basis Unless governing law provides otherw-ise. ~~~ transac::tions ShOuld be executed through the OeutS<:he Bank entity in the investor-s home 1unsdic::tion. In the U.S. thi$ report i$ approved and/Or diStributed by OeutS<:he ~nk Securities Inc.• a member of the NYSE. the NASD. NFA and SIPC. In Germany this report is approved andfi;>r communicated by Deutsche Bank AG Frankfurt authorized by the BaFin. In the United Kingdom this report is apprOV$d ~ndlor eommunicbted by OeutS<:he Bank AG London. ~ member of the London Stoc::k Ex<:l"'&nge ~nd regulbted by the Fin~ncial Serviees Authority tor the eonduc::t of investment business in the UK ~nd ~uthOtited by the B&Fin This report is distributed in Hong Kong by Deutsche Bank AG. Hong Kong Branch. in Kcrea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG. Singapore Branch. and recipi&nts in SingapOre of thiS report are to <x>ntact OeutS<:he ~nk AG. SingapOre Srench in respeet ot any mbtters ~ti$ing frol'l\ or in <x>nnection with. thiS report Where thiS report iS i$$ued or promulgated in Singapore to a person whO i$ not an accredited investor. expert investor or institutional investcr (as d~fined in the applicable Singapore lav¥S and regulations). Deutsche Bank AG. Singapore Branch aocepts legal responsibility to such person for the contents ot thiS report In Japan thiS report i$ approved ~ndlor di$ltibuted by OeutS<:he Sec::utities lne. The infori'MtiOn contained in thiS report does not <x>nst•tute the provision of invest ~'~"lent advi<:e. In Austr&li&. ret~il clients should ob~in a C(;fJ'f of a Product Disclosure Stat&ment tpDS) r~lating to any financial product referred to in this r~pon and consider the POS befcre making any decision about whether to a<:x:~uire the product Deutsche Bank AG JoMnnesburg i$ incorpQreted in the Federal Republic ot Germany <Sr&neh Register Number in South Attie~ 1999JOCX3299/10). Additional intorm~tion rel~tive to securitieS. other ti~nci&l prOducts or i$$uers di$¢.1$Sed in thiS r~port is available upon request. This r~pon may not be reproduced. distributed or published by any person for any purpose without Deutsche Bank's pricr written oonsent. Please cite source whoen quoting Copfrtght C 2010 Deutsche Bank AG

From:

To: CC: Date: 4/12/2010 5:33 :50 PM
Subject:

James Bob Finley, Steve

FYI Comments? Robert H. James Liaison for Career Institutions of Higher 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

April 12,2010

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

Dear Secretary·Miller: Thank you for soliciting input on the Department of Education's (ED) proposed Gainful Employment (GE) regulation at our recent meetings. We are writing on behalf of our institutions (Kaplan, DeVry, and Education Management Corporation), which together offer opportunities for over three hundred thousand students to attend college annually. We are deeply committed to educating and preparing our students for the new jobs of the 21st century, and to ensuring that our students receive high-quality, results-oriented education, without being burdened by excessive debt. We understand and support what you are trying to accomplish. We believe that together we can 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 nontraditional 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-toincome 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 would preclude for-profit colleges from offering Bachelor 's degree programs. It would also eliminate many Associate 's degree programs at for-profit colleges. Even non-frofit calleges would find it difficult to satisfy this standard if they were subjected to it. "

Kantrowitz further found that:
"The proposed use ofBureau of Labor Statistics wage data ... will disproportionately harm minority andfemale students. " 3

Kantrowitz also points out that the proposed GE rule tasks institutions with a job without providing the tools necessary to complete the job:

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.

1

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
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.
4

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 has failed a debt-service-to-incomeratio 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.

7

Kantrowitz, pp. 20-21 .

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 longterm 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 debtservice-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 postgraduate employment rates. We believe that the proposal contained in this letter provides an innovative and effective way to protect students from institutions that over promise and under deliver to students, thus leaving students with too much debt and not enough return on investment.

8

How Much Debt Is Too Much, Sandy Baum and Saul Schwartz, The College Board, 2006, p. 12.

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 cc: The Honorable Martha J. Kanter Mr. Robert Shireman

APPENDIX 1
INSTITUTIONAL DISCLOSURES RELATED TO EXPECTED EARNINGS AND DEBT

You have requested information about our _.....:...:.:c::..:co=-u=.:n~t:.:.:in"""g._____ program A Program Level: 0 Associates [g)Bachelors 0Masters Ocertificate/Diploma June 30, 2010

Here are some important disclosures for the award year ending

During the year ended June 30, 2009 , 75.8 %of students enrolled in this program graduated or continue to be actively enrolled at the institution while 24.2 % ceased enrollment. Of the students who graduated, 88.6 % were employed in their field of study, or a related field, within six months of graduation with an average annual salary of approximately$ 46,300 per year. This academic program corresponds to the following Standard Occupational Classification (SOC} codes as reported by the Bureau of Labor Statistics (BLS): 13~2011 . The weighted annual salaries for these SOC codes at the 25th and 75th percentiles are $ 45,900 and $ 78,210 . respectively. For information related to salaries from these and other occupations, please visit http:llwww.bls.gov/oeslcurrentloes_nat.htm. The cost of this program of study for a student enrolled full-time and with no transfer credits is $ 62.040 . The average annual tuition increase for the most recently concluded three years was 4.6 % The average education loan debt of students incurred at this institution and who graduated from this program during the prior award year was $ 33,100 . This amount includes $ 30,900 of federal student loan debt and $ 2.200 of institutional loan debt. This does not include any debt incurred while attending another institution. Additionally, 4.6 %of graduates obtained private student loans from third parties. If this average education loan debt was 100% federal loans with an average interest rate of 6.8% and you chose to repay using a 10 year standard repayment term, the annual total of 12 monthly payments would be$ 4,571.04 . If you chose to pay using a graduated repayment plan (over 10 years), the total of your first 12 monthly payments would be $ 3,138.60 . For more information concerning repayment options on federal loans, please visit https:IIstud entloans.govImyDi rectLoa n/i ndex.action. 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 loans. PLEASE NOTE THAT YOUR ACTUAL EXPERIENCE MAY BE DIFFERENT THAN THE AVERAGES AND STATISTICS PRESENTED ABOVE.

From: To:

Robert MacArthur <nnacarthur@altresearch com> Wittman Donna Woodward Jennifer 6/23/2010 8:49:58 AM

CC:
Date: Subject:

North America United States Industrials Business Services & Education

Deutsche Bank

l/l

Apollo Group (A POL.OO), USD48.01 Bu y, Price Target USD80.00 American Public Ed. Inc (APEI.OO), USD48.00 Hold, Price Target USD44.00 Corinthian Colleges Inc (COCO.OO),USD11 .21 Buy, Price Target USD24.00 DeVry (DV N), USD56 58 Hold, Price Target USD70.00 ITT Ed ucation Services (ESI.N), USD93.42 Buy, Price Targe t USD125.00

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 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. 1) Based on the info being disseminated, there w ill likely be a call for tougher cohort default rate (CDR) thresholds as witnesses reportedly believe the "true" CDR is higher than published rates due to w idespread use of deferment 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 exam without 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 experience. 3) Testimony suggests Reiter may cite data from a settled complaint against COCO in 2007, and claim for-profit abuses and fraud are wide-spread. 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 beyond w hat is currently proposed .

Paul Ginocchio, CFA
Research Analyst

Adrienne Colby
Associate Analyst () 212 250-0948 adrie nne.colbyCdb.com

(+1) 415617-4207 paul.ginocchioCdb.com

Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading session unless otherw ise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business w ith companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. THE VIEWS EXPRESSED ABOVE ACCURATELY REFLECT PERSONAL VIEWS OF THE AUTHORS ABOUT THE SUBJECT COM PANY(IES) AND ITS(TH EIR) SECURITIES. THEY HAVE NOT AN D WILL NOT RECEIVE ANY COMPENSATION FOR PROVIDING A SPECIFIC RECOMMENDATION OR VIEW IN THIS REPORT. FOR OTHER DISCLOSU RES PLEASE VISIT HTTPI/ GM.DB.COM M ICA(P) 007/05/2010

From: To:

Robert MacArthur <nnacarthur@altresearch com> Robert MacArthur 7/20/2010 9:45:08 PM

CC:
Date: Subject:

North America United States Industrials Business Services & Education

Deutsche Bank
Industry Update

19 July 2010

DB Education Services Gainful Employment Update
Paul Ginocchio, CFA
Research Analyst (+ 1) 415617-4207 paul.ginocchio@db.com

Adrienne Colby
Associate Analyst ( ) 212 25()-0948 adrienne.colby@db.com

At 12% over 10 years, Gainful Employment is less onerous A Washington political analyst reported to day that Gainful Employment (GE) could now potentially be a debt repayment metric of 12% of income over 10 years, vs the previous 8%. At 12%, using our GE model, we calculate no CY1 OE EPS impact fo r APOL and DV, a 3% impact for ESI, and "only" a 26% hit to COCO. We also updated our original EPS impact, assuming 8% over 10 years, correcting an inconsistency in our m odel and updating f or new info - this significantly reduced the EPS hit for DV and ESI. Our top pick in the sector remains APOL. We also updated our original Gainful Employment 8% calculations In our July 2"d not e, we showed a very significant 80% negative impact to EPS for ESI and DV from a Gainful Employm ent w ith debt repayment at 8% of income over 10 years. We showed transfer credits in our model, but d id not actually include them in our calculations. Correcting this error, plus updating assumptions fo r other new information, reduced the negative EPS impact under the 8% over 10 years scenario. For Apollo, the CY1 OE EPS impact we originally calculated was 14%, our updated EPS impact is -10% . For DV, the im pact goes from -79% to41 %, for ESI from -80% t o -66%, and for COCO from -1 20% to -109%. For a copy of our fully-dynamic Gainful Employment EPS impact model, please email us. No update yet on the next Senate hearing on For Profits At the last Senate hearing on the For Profit industry on J une 24th, Senator Harkin stated there would be another one in J uly and at least one more after that. We had heard from contacts that August 4th was the next likely date, with another one in September. Due t o the required 2-week notice period and the August recess which starts on the 9th, the hearing has t o be announced by Friday or the next one will not occur until September. An announcement is now likely in the next f our days . Apollo remains our favorite idea in the sector We find APOL attractive as 1) it is addressing most of its issues already through the University Orientation pro gram, which weeds out uncommitted students befo re they take on student debt, 2) our updated Gainful Employment calculations (at 12% over 10 years) suggest no impact on revenues and EPS, and 3) Apollo's 3year draft CDR is rising but manageable. We value APOL using relative valuation scatter plots of CY1 OE PEs versus peers . We support our relative valuation work with a DCF analysis. Our DCF calculations include explicit 10-yr forecasts. In our terminal value we use a 3.5% long-term g rowth rate. Our WACC uses a beta of 1.0, a 4 o/o risk free rate, and an elevated 8% risk premium. Key risks include: negative regulat ory developments that are not already priced in, higher 2009 CDRs than expected, a bigger negative growth impact from the orientation program or bachelor's degree focus, or a stronger than expected recovery in job growth.

Apollo Group (APOLOQ),US045.56 Buy 2009A 2010E 2011E EPS (USD! 3.79 5.35 5.53 18.0 8.5 8.2 P E !xl / EV/EBITDA (x) 8.1 3.9 3.5 Am erican Public 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) 0.82 1.63 2 04 P E !xl / 19.4 6.4 5.1 EV/EBITDA (x) 7.0 3.0 1.9 OeVry (0V.N),US052.85 Hold 2009A 2010E 2011E EPS (USD! 2.30 3.78 5.12 P E !xl / 22 .2 14.0 10.3 EV/EBITDA (x) 12.2 7.4 4.9 ITT Education Services (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

Deutsche Bank Securities Inc. All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Reuters, Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies. Deutsche Bank does and seeks to do business w ith companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. M ICA(P) 007/05/2010

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank

l/l

Gainful employment calculations at 12% of income over 10 years
We have updated our analysis of the estimated effects of the Department of Education's (DoE) Gainful Employment (GE) proposal on revenues and EPS for Apollo, Corinthian, DeVry and ITT at a 12% income repayment threshold. There were reports out today from a Washington political analyst suggesting gainful employment's metrics on debt repayment could be 12% of income over 10 years, versus the previous 8% over 10 years. Due to this news, we felt it would be helpful to run this potential new scenario through our Gainful Employment EPS impact model (please see our assumptions in the next section which are important to understanding our EPS impact). We believe that under this potential new scenario, that Gainful Employment is less onerous. The EPS im pact to Apollo and DeVry, we believe, could be zero, at ITT it is very minor, and at COCO the im pact is vastly reduced- from wiping out earnings to "only" a 26% EPS impact.
Figure 1: Summary of impact of Gainful Employment under various scenario's

Impact APOL

coco
DV
ESI
0% -1% -3%

-3% -14% -1 0% -29%

-10% -109% -41% -66%

-4% -16% -19% -35%

-14% -120% -79% -80%

Updated debt repayment calculations at 8% over 10 years versus Original scenario We have updated our EPS impact calculations for 8% over 10 years versus what we published originally on 2 July 201 0. Even though we showed transfer credits in our worksheet, our original gainful employment calculations for ITT and DeVry did not include these transfer credits. This was a significant oversight on our part and this change alone took the EPS impact for DeVry from -79% to about -40%, while for ESI the EPS impact moved from -80% t o -50%. In addition to now correctly including transfer credits, we have m ade some other adjustments to our assumptions for all the companies which we outline below.

These changes take us from the "original" 8% calcs to the "updated" 8% calcs in Figure 1 above. • Apollo Group: We reduced APOL's online BA enrollment exposure from 14% to 4% as on APOL's last earnings call they stated most of their on-ground students were BA's and most of their online students were Associates' . We also increased our transfer credit assumptions for the online BA program due to its higher cost versus on-cam pus. We assume students who chose this higher cost program would not need many credit s to graduate. Apollo did disclose on its website that its average debt per bachelor graduate in 2007-2008 was $25,200, while for associates was $14,200. We are still 11% and 12% above these averages in our model, which should generally account for the 2-years of tuition increases that have occurred . DeVry: We slightly decreased DeVry's transfer credit assumptions from 1 year in the BA program to 0.75, to be 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 the Associate salary to $33,288, which is the low end of the starting salaries disclosed in DeVry's 1OK. ITT Technical Institute: We slightly decreased ITT Tech's transfer credit assumptions from 1.25 years in the BA program to 0.75, to be conservative. Due to their slightly

Page 2

Deutsche Bank Securities Inc.

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank

l/l

lower High School student exposure, ITI's transfer credits may be slightly higher than DV's, but we assume the same to reduce complexity. We lowered the cash pay assumption from 10% of tuition to 5% as there is commentary in the 1OK that suggests this level; something we overlooked in the first go around. Finally, we slightly lowered salaries as the $32,800 average salary in 2008, disclosed in the 2009 1OK, is likely the product of a 80/20 mix of associates/bachelor's, not the 85/15 that we originally assumed. • Corinthian Colleges: We increased our cash pay assumption from 2% to 5%, as we assume COCO's cash pay is sim ilar to ESI's, and we now have a hard data point fo r ESI. Otherwise, we made no other meaningful changes to our COCO gainful employment calculations. Please note that the Dept of Education has yet to release its Gainful Employment proposal. In the last version of the proposal in January, the Dept proposed requiring students of For-Profit Title IV eligible programs to be able to replay their total student debt w ith less than 8% of a graduates' expected annual income and be repayable over a 10 year period. With the publication of its Program Int egrity NPRM in mid-June, the Dept indicated its plans to release GE in a second NPRM later t his 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) 2) The number of credits the average student transfers in w ith from another institution, We do not assume that students have any debt associated w ith these transfer credits, w hich is not a correct assumption but one we have absolutely no data on to help guide us, We assume a percentage of cash tuition contribution per student, We assume starting graduate salaries for APOL, DV & ESI based on disclosed data by the companies and their peers (we use Standard Occupational Code-Bureau of Labor Statistics data, w hich may no longer be valid, fo r COCO), We are assuming no offsetting cost cuts or pot ential revenues, from increased tuition at certain programs or larger class sizes. In light of t his final assumption, our calculations may somewhat reflect a worst case scenario.

3) 4)

5)

We remind investors that the DoE's GE d raft proposed evaluating Title IV eligibility on an individ ual program by program basis, not on an institution-wide basis. Due to the lack of granular program data available, our GE estimates above are constrained to high level, school-wide calculations, w hich could lead to significant variation from the actual program by program impact. Finally, we note that although our analysis assumes that schools would c ut tuition costs in response to a GE proposal, schools may decide to eliminate specific programs, rather than lower tuition. We believe this is largely due to a school's inability to control or limit the amount of debt a student q ualifies for and may chose to take on. In Apollo's FY 3010 100 filing, the company makes the fo llowing comments in regards to Gainful Employment: "If this regulation is adopted in a form similar to the U.S. Department of Education's proposal in the negotiated rulemaking process, it could render many of our programs, and many programs offered by other proprietary educational institutions, ineligible for Title IV funding ... If a
Deutsche Bank Securities Inc. Page 3

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank

l/l

particular program ceased to be eligible for Tit le IV f unding, in most cases it would not be practical to continue offering t hat course under our current business model." We have included snapshots of our Gainful Employment analysis for Apollo, Corint hian, DeVry and ITI in Appendix 1, at the end of this note.

Page 4

Deutsche Bank Securities Inc.

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank

l/l

Appendix 1
Figure 2: Gainful Employment Calculations- Apollo Group Step 1 - Calculating potential tu1 t1on cuts

Source/Calc

APOL

APOL

APOL

Tuition & Fees source Program o/o 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

$

DB ests. DoE DoE DB ests. calc 7% calc sum

67,000 $ 54,400 $ 22,200 online avg. ground online website website website BA Assoc BA 4% 38% 40% 2,695 $ 55% 2.00 2,695 $ 55% 1.50 2,695 55% 0.20

$

$

33,500 2,345 2,960 28,195

$

34,000 2,380 3,700 27,920

$

19,980 1,399 2,664 15,917

Monthly payments over 10 years at 6.8% interest rate mort calc $ 324 $ 321 $ 183 -------------~--~~--~'~r-~~~~--~~~~~--~ Implied Requu-ed Salary to meet mont y pay:· e 12% Assumed starting salary Total monthly student debt payments Max Debt Load Cash/out of pocket payments add Avg. PelI Grants Total Tuition & Fees Implied Pr'ice.Cut @ -8% ofsalary over 10yrs Step 2- Reven ue Reduct1on Estimate of impact of current Gainful Employment PhD & Master's Online Bachelor's degrees* On campus Bachelor's degrees* Online associates** On campus associates Total revenue impact St ep 3 - Impact 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
NOt<> PriCes as ol July 19" r PM E1 I'JP-cut sc t1>3t star11trg b#l:hell>t'ss.l.,yls$501:

DB est. Mort. Calc.

$ $

$

50,000 $ 500 $ 43,448 2,345 2,960 48,753 $ 46%

50,000 $ 500 $ 43,448 2,380 3,700 49,528 $ 46%

25,000 250 21,724 1,399 2,664 25,787 29%

o/o of Revs 19% 4% 38% 39%

0%
100% EPS

Price Cut Rev impact 0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0% 0.0% 0.0% PE 8.6x 8.6x

$ $

5.66 5.66

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

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

Deutsche Bank Securities Inc.

Page 5

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank

l/l

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 Step 2 - Revenue Reduction Estimate of impact of current Gainful Employment Ross Medical Keller Graduate School Bachelor's degrees·><: Associate's degrees** US Healthcare & Chamberlain Becker CPNCFA & Other (Fanor, Advanced Academics HS) Total revenue impact 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
Note Pn·ces as of July 1ft" 1 PM ET t•JPrice cur .1ssummg starTing bdchelor's saldl"f tS $50~ ( • •JPnce cur >SSum"'g sr.ttJ119 .s•cNre·s salary 1$ $2 71<

Source/Calc Co. comments
$

DV 30% 61,700 $ 10-K BA 52% 2,572 $ 77% 0.75
$

DV 30% 35,038 10-K Assoc . 15% 2,572 77% 0.25 30,658 3,066 3,457 24,135 33,288 333 28,926 3,066 3,457 35,449 16%

DoE DoE DB est. calc 10% calc sum est, See Calc A

$

50,131 $ 5,013 6,420 38,698 50,071 501
$ $

$ $ $

I

12%

mort calc from above from above

$

43,510 $ 5,013 6,420 54,943 $ 10%

%of Revs 12% 14% 40% 12% 15% 7% 100% EPS
$

Price Cut Rev impact 0% 0.0% 0.0% 0% 0% 0.0% 0% 0.0% 0% 0.0% 0% 0.0% 0.0% PE

4.48 4.48 0%

11 .9x 11 .9x 0%

$

Scutce

Cc!'~?Pinr datil •fKI Oe<tlxl>o 8ank eSttn><les

Page 6

Deutsche Bank Securities Inc.

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank

l/l

Figure 4: Gainful Employment Calculations -ITT Education
Step 1 -ca lculation Exposure to HS Grads Tuition & Fees source Program % of Total Enrollment Avg. Pell Grant '08-'09 (DoE) Percent of Students getting Pell Assumed yea rs of cred1 tra nsferred ts Total Tuition & Fees Cash/out of pocket payments Pell Grants Avg. Debt from School (D) Average Starting Salary Implied monthly payments to cover d ebt (D) (8%. 1Oyrs. 6 8%) Implied starting salary by debt (D) 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 lmphed Price Cvt@ S'f(• of salary ove1 10 1rs Step 2- Revenue ReductiOn Estimate of impact of current Gainful Employment Bachelors Associates Total revenue impact Step 3- Impact to EPS and PE Current Ca lendar 201 OE DB EPS EPS impact from revenue decrease w ith no cost offset Estimated impact f rom Gainful Employment
Noll!! Ptices as o/Juty IS", I PM ET SO<Jrce · Ccm,o.>ny data arK/ 0e<A$CI>e Bank eStrmatM

Source/Calc Co. comments
$

ESI 20.25% 69, 600 1o-K BA 15% 2.550 80% 0.75
$ $

ESI 20.25% 34,800 1o-K Assoc. 85% 2.550 80% 0.25
$

Company data DoE DoE DB ests.

calc

I
calc sum

5%

56.550 2.828 6,630 47,093 50.000
$ $

30.4 50 1.523 3.570 25,358 29.000
$ $

est. See Calc A

$

$

542 54.194
$

292 29.181 25.358 1,523 3,570 30.450

12% mort calc from above from above

$
$

500 43.448 $ 2,828 6, 630 52, 905 $ ,0%

290 25.200 $ 1.523 3,570 30,292 $

$

47.093 $ 2.828 6,630 56,550 $

·1 %

%of Revs 15% 85% 100% EPS 11.04 (0.36) 10.68 -3%

Price Cut Rev impact ,0% -1.0% -1% -0.4% -1 .4% PE 8.0x 8.3x 3%

$

$

Deutsche Bank Securities Inc.

Page 7

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 TUitiOn & Fees Souroa/Calc Co oomments
$

COCO 5%1010% 15.409 College Nav Med ASSISt 2.407 90% 15,409

COCO $31,000
$

COCO

COCO

COCO

COCO

source
Program %of Total Enrollment Avg Pell Grant '08- '09 (DoEI Petcent of Students gemng Pell Total Tuition & Fees CastVout or pod:et payments Pell Grants Avg Debt from School Average Starttn<J Salary DoE DB est calc

Assoc.
Biz& HC $2.407 90% $31,000 1,550 4,333 25.117 24.200 1 DB est
$
$

26,450 $ 26.450 $ 26.450 $ 19.026 College Nav College Nav College Nav College Nav AutoMech Dtesel Auto Body Electncian 2,407 $ 90% 26,450 $ 1,323 2.166 22.961 25.aa:J $ Bl.S 2.407 $ 90% 26,450 $ 1,323 2,166 22.961 32.660 $ BLS 2.407 $ 90% 26.450 $ 1,323 2.166 22.961 29.620 $ BLS 2,407 90% 19,026 951 2,166 15.900 35.990 BLS

-4%16% revsl <I% II% revs! <1% 11% revs! <1%ll%revsl
$

$

$

I
calc sum

5%

770
2.166 12.472
$

SOCoodes

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

24.060 1 $ BLS

$

289

$

28.905
$

Montnty ~~ at 891- of S<>iatY Max Debt Load. over 10 years. 68% tnt rate CastVout or pocket payments add Avg Pell Grants Total Tuition & Fees

I

12% mort calc

$
$

lromaeov" !rom abOve

241 $ 20.907 $ 770 2,166 23.844

242 21.029 $ 1.550 4,333 26.911

2$ $
22.489 $ 1,323 2.166 25.977

327 $.
28,38) $ 1,323 2,166 31,869

2$6$
25,739 $ 1,323 2166 29.227

360
31,274 951 21EO 34,391

25,117 $ 1.550 4,333 31.000

Estimate of impact of current Gainful E~loyme nt Certiltcate tn Healthcare Assoaate's 1n Bus1ness Associate's'" Cnmmal Just1oe Auto mechantc Otesel mechante+ Auto body Trades Total revenue impact
~r

%of Revs 56% 13% 16%
10% 2% 2% 1%

Price Cut

0% -t39'o · 13% ·2% 20% II% 0%

100%

Rev impact 00% -17% ·21% .02% 04% 02% 00% -34%

1

=

r

~t

EPS
$ $

PE
1.71
(0451

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

126 -26%

S.lx na

Note Pn·ces ~s of 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

Page 8

Deutsche Bank Securities Inc.

19 July 2010

Business Services & Education DB Education Services

De utsche Ba nk

l/l

Appendix 2
Important Disclosures
Additional information available upon req uest
Disclosure checklist Company
Apollo Group

Ticker
APOL.OO

Recent price*
45.56 (USD) 16 Jul 10

Disclosure
2

* Prices are sourced from local exchanges via Reuters. Bloomberg and other vendors. Data is sourced from Deutsche Bank and subject companies.

Important Disclosures Required by U.S. Regulators
Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See " Important Disclosures Required by Non-US Regulators" and Explanatory Notes. 2. Deutsche Bank and/or its affiliate(s) makes a market in securities issued by this company.

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 affiliate(s) makes a market in securities issued by this 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 the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Paul Ginocchio

Deutsche Bank Securities Inc.

Page 9

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank

l/l

Historical recommendations and target price: Apollo Group (APOL.OQ)
(as of 7/16/2010j

no.oo ~----------------------------------------------------------~
00.00 +-~----~~----~~----~~--~~~----~~----~~----~~-4

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

00.00 +-----w---~------------------~~~~-------------------------4

Q)

.2 ....
a...

60.00 50.00 40.00

.~ ....
::1
() Q)

(/)

0.00 +---~----~---r----~--~--~~--~--~----,---~----~--~

Jul 07

Oct 07 Jan 08 Apr 08

Jul 08

Oct 08 Jan 09 Apr 09

Jul 09

Oct 09

Jan '0 Apr '0

Date
1. 4/20/2009: Buy, Target Price Change US080.00 2. 7/1/2010: Buy, Target Price Change US075.00

Eq u1ty ratmg key

Equ1 ratmg d1 ty spers1 and bank1ng relat1 on onsh1 ps

Buy: Based on a current 12- month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected d ividend yield), we recomm end that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1 . Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (includ ing dividends) between -10% and 10% over a 12-month period Sell: Expected total return (including dividends) of10% or worse over a 12-month period

500 400 300 200 100
0

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

1%27%
- j ----L--

Buy

Hold

Sell

0 Companies Covered lil'il Cos. w/ Banking Relationship
North American Universe

Page 10

Deutsche Bank Securities Inc.

19 July 2010

Business Services & Education DB Education Services

Deutsche Bank

l/l

Regulatory Disclosures 1. Important Additional Conflict Disclosures
Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures 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 trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://qm .db.com.

3. Country-Specific Disclosures
Australia: This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. EU countries: Disclosures relating to our obligations under MiFiD can be found at http://globalmarkets.db.com/riskdisclosures. Japan: Disclosures under the Financial Instruments and Exchange Law: Company name- Deutsche Securities Inc. Registration number- Registered as a financial instruments dealer by the Head of the Kanto Local Finance Bureau (Kinsho) No. 117. Member of associations: JSDA, The Financial Futures Association of Japan. Commissions and risks involved in stock transactions - for stock transactions, we charge stock commissions and consumption tax by multiplying the transaction amount by the commission rate agreed with each customer. Stock transactions can lead to losses as a result of share price fluctuations and other factors. Transactions in foreign stocks can lead to additional losses stemming from foreign exchange fluctuations. New Zealand: This research is not intended for, and should not be given to, "members of the public" within the meaning of the New Zealand Securities Market Act 1988. Russia: This information, interpretation and opinions submitted herein are not in the context of, and do not constitute, any appraisal or evaluation activity requiring a license in the Russian Federation .

Deutsche Bank Securities Inc.

Page 11

Deutsc he Bank Deutsche Bank Securities Inc. North American locations
Deutsche Bank Securities Inc. 60 Wall Street New York. NY 10005 Tel: (212) 250 2500 Deutsche Bank Securities Inc. 225 Frankli n Street 25th Floor Boston, MA 02110 Tel (617) 988 6100 Deutsche Bank Securities Inc. 222 South Riverside Plaza 30th Floor Chicago. IL 60606 Tel: (312) 537-3758 Deutsche Bank Securities Inc. 3033 East First Avenue Suite 303, Thi rd Floor Denver, CO 80206 Tel: (303) 394 6800

l/l

Deutsche Bank Securities Inc. 1735 Market Street 24th Floor Philadelphia. PA 19103 Tel: (215) 8541546

Deutsche Bank Securities Inc. 101 California Street 46th Floor San Francisco, CA 94111 Tel (415) 617 2800

Deutsche Bank Securities Inc. 700 Louisiana Street Houston. TX 77002 Tel: (832) 239-4600

International locations
Deutsche Bank Securities Inc. 60 Wall Street New York. NY 10005 United States ol America Tel: (1) 212 250 2500 Deutsche Bank AG London 1 Great Winchester Street London EC2N 2EO United Kingdom Tel: (44) 20 7 545 8000 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 Streets Sydney, NSW 2000 Australia Tel: (61) 2 82581234

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

Global Disclaimer
The information and opinions in this r~port were prepared l:tf Deutsche Bank AG <X one of its affiliates (oolleclivety 'Deutsche Bank'). The information herEin is beli~ to be reliable and has been obtained from public sources believed to be reliable. Oeutsehe S~nk ~Ices no representa1ion as to the &ceur&ey or e¢mpleteness of suel"l inlorm~tion

OeutS<:he Bank I'MY engage in securitieS tr&ns&ctions. on~ proprietaty b&Si$ or othe.wise. in a manner inoonslslent with the vif1!N taken in thiS rese~rel"l report In &ddilion. others w1thin Deutsche S~nk. including sales staff, mt!tf take a vtw~ that is Inconsistent with that taken in this research r~pon

sv~egists ~nd

Opinions. estii'Mtes ~nd proJections in thiS repOrt constitute the eurrent 1udgement of the ~uthor as ot the dbte of thiS report. They do not neces.s&rily retleet the opiniOns ot OeutS<:he S&nk and are subJeet to c::l"'&nge w1thout notioe. Deutsche Bank has no obligation to update. modify or amend this report or to otherwise notify a rec1pient thereof in the event that arry opinion. forecast or estimate set forth herein. changes or subsequently becomes i~<x:urete. Pric::es and &v&ilabihty ot lin~ncial instruments ~re subJeet to Change w1thout n~i<:e. ThiS report iS provided for into~tion~l puri)O$e$ only It i$ not an otter or a SQii¢it&tion ot Motter to buy or sell any tin~ncial instruments or to participate in any particular trading strategy. Target prices are inherently imprecise and a product of the analyst Judg~ment

As a result of Deutsche Bank's recent acquisition of BHF--Bank AG. a security m?J1f be covered by more than one analyst within the Deutsche Bank group. Each of these analysts may use diff~ring methodologies to value the security; ~sa result.. the reeornmendationsl'l"'ay differ Md the price ~rgets ~nd eStil"l'l:etes of eachl"l'l:ey vary widely
Deutsche Bank has instituted a new policy wher~by analysts may choose not to set <X maintain a target price of certain issuers und~r <::OVerage with a Hold rating In particular. this will typically oocur fcr 'Hold' rated stocks Mving a l"l'l:etket c::ap Sl'l"'&ller th:en most other companies in itS seetor or region. we believe th:et such pOliCy will aliO'N us to !"~'~:eke beSt use ot our resources. Please viSit our webSite bt http:/~m.db.eom to determine the target price of any stock. The financial instruments discussed in this report may ncx be suitable for all investors and investors must make their OW"n infcrmed inV$Stment decisions. Stock transactions can lead to losses as a result of prioe fluctuations and other l&e:tors. 11 ~ liMn<::~ I instrul'l"'ent iS denomin~ted in a c::urreney other th:en ~n investor's currency. a eMnge in e»:Mnge rates l"l'l:eY ~dversely ~Hect the investment Pest per1orl"l'l:ence i$ not necessarily indicative ot tuture results. Deutsche Bank mttt wnh respect to securities ~red by this r~pon. sell to or buy from customers on a principal basis. and oonsid&r this report in deciding to trade on a proprietary basis Unless governing law provides otherw-ise. ~~~ transac::tions ShOuld be executed through the OeutS<:he Bank entity in the investor-s home 1unsdic::tion. In the U.S. thi$ report i$ approved and/Or diStributed by OeutS<:he ~nk Securities Inc.• a member of the NYSE. the NASD. NFA and SIPC. In Germany this report is approved andfi;>r communicated by Deutsche Bank AG Frankfurt authorized by the BaFin. In the United Kingdom this report is apprOV$d ~ndlor eommunicbted by OeutS<:he Bank AG London. ~ member of the London Stoc::k Ex<:l"'&nge ~nd regulbted by the Fin~ncial Serviees Authority tor the eonduc::t of investment business in the UK ~nd ~uthOtited by the B&Fin This report is distributed in Hong Kong by Deutsche Bank AG. Hong Kong Branch. in Kcrea by Deutsche Securities Korea Co. This report is distributed in Singapore by Deutsche Bank AG. Singapore Branch. and recipi&nts in SingapOre of thiS report are to <x>ntact OeutS<:he ~nk AG. SingapOre Srench in respeet ot any mbtters ~ti$ing frol'l\ or in <x>nnection with. thiS report Where thiS report iS i$$ued or promulgated in Singapore to a person whO i$ not an accredited investor. expert investor or institutional investcr (as d~fined in the applicable Singapore lav¥S and regulations). Deutsche Bank AG. Singapore Branch aocepts legal responsibility to such person for the contents ot thiS report In Japan thiS report i$ approved ~ndlor di$ltibuted by OeutS<:he Sec::utities lne. The infori'MtiOn contained in thiS report does not <x>nst•tute the provision of invest ~'~"lent advi<:e. In Austr&li&. ret~il clients should ob~in a C(;fJ'f of a Product Disclosure Stat&ment tpDS) r~lating to any financial product referred to in this r~pon and consider the POS befcre making any decision about whether to a<:x:~uire the product Deutsche Bank AG JoMnnesburg i$ incorpQreted in the Federal Republic ot Germany <Sr&neh Register Number in South Attie~ 1999JOCX3299/10). Additional intorm~tion rel~tive to securitieS. other ti~nci&l prOducts or i$$uers di$¢.1$Sed in thiS r~port is available upon request. This r~pon may not be reproduced. distributed or published by any person for any purpose without Deutsche Bank's pricr written oonsent. Please cite source whoen quoting Copfrtght C 2010 Deutsche Bank AG

From:

To: CC: Date: 7/26/2010 9:29:50 AM
Subject:

James Bob Finley, Steve

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

~Eir~t~nalysis

Online Research: www.research-driven.com Research: (800) 866-3272 • Trading: (800) 322-3272 • (312) 258-0660 One South Wacker Drive • Suite 3900 • Chicago, IL 60606

July 26, 2010

Post-secondary education
Analyst: Corey Greendale

Important disclosures and certifications begin on page 11 of this report.

Further thoughts on gainful employment NPRM
• • We summarize here our thoughts upon review of the full gainful employment NPRM. We view the proposal as less draconian than the proposal floated during the negotiated rulemaking, but also more onerous than suggested by the summary press release DOE issued Friday morning last week. Analysis is complicated by lack of data (particularly around repayment metric) , as well as by ambiguities in the NPRM. Among our covered companies, we expect the proposed regulation would have relatively little impact on APEI, CPLA, DV (ex Carrington), STRA, and UTI. For the most part, view likely impact as more-than-factored into current stock prices of other covered companies.

• •

COMPANY

TICKER

RATING CURRENT YR EST (OLD NEW~ PRICE (OLD NEW~

FORWARD YR EST (OLD NEW~

TARGET MARKET CAP PRICE (MILLIONS~

American Public Education Inc. Apollo Group Inc. Capella Education Co. Career Education Corp. DeVrylnc. Education Management Corp. ITT Educational Services Inc. Strayer Education Inc. Universal Technical Institute

$46.03 $49.27 $89.69 CECO $25.41 DV $59.29 EDMC $16.31 ESI $85.44 STRA $236.49 UTI $21.79
APE I APOL CPLA

0 0 0 0 0 0 0 0 0

$ 1.74 $5.34 $3.57 $2.89 $1.45 $ 11 .12 $9.63 $1.19

$2.40 $5.43 $4.53 $3.55 $1 .86 $12.64 $11 .80 $ 1.65

$873.6 $7,503.4 $1 ,528.9 $2,112.0 $4,282.6 $2,347.6 $2,949.8 $3,246.8 $533.8

Given the complexity, and, in some instances, ambiguity of the proposed regulations on gainful employment, we thought it would be helpful to summarize our understanding of the Notice of Proposed Rulemaking (NPRM), as well as providing analysis. The NPRM proposes measuring all programs that are required, under the Higher Education Act, to lead to gainful employment in a recognized occupation (i.e., all non-liberal arts programs at for-profit schools, as well as non-degree programs at non-profit schools) on two criteria: 1) repayment rate, and 2) debt-to-income.
(800) 866-3272

1

First Analysis Securities Corporation

Post-secondary education

July 26, 2010

Repayment rate
Under the proposed regulation , a repayment rate would be calculated annually for each program. The denominator of the repayment rate is the outstanding balance (including accrued interest) of all Federal Family Education Loan (FFEL) and direct loans entering repayment, on the date they entered repayment, in the preceding four federal fiscal years. The numerator is the original outstanding balance of any FFEL and direct loans that entered repayment in the preceding four federal fiscal years on which 1) the entire balance has been paid in full , or 2) payments were made during the year that reduced the principal balance. (Some ambiguities: It isn't clear to us whether the intention of the regulation is to include only loans on which the principal balance at year end is lower than the principal balance at the beginning of the year, or all loans on which principal-reducing payments are made, regardless of whether later interest accrued drives the year-end balance above the balance at the beginning of the year. Also, we note the proposed regulation stipulates principalreducing payments must be "made by a borrower;" it's not clear if, or why, the Department of Education (DOE) intends to disqualify loans on which payments are made by someone other than the borrower, such as a relative.) The balance of any loans whose borrowers' employment qualify them for public service loan forgiveness are also included in the numerator. Excluded from both the numerator and denominator would be: 1) Loan balances of students with military or in-school deferment, and 2) balances of borrowers who entered repayment during the final six months of the most recent fiscal year. While we expect high repayment rates, using this definition, would generally correlate with low cohort default rates, we note several differences between the two, including 1) cohort default percentages measure borrowers, whereas repayment rate percentages measure borrowed dollars, 2) the repayment rate is measured over a longer period of time, and 3) students in forbearance , deferment, and who make interest payments but don't reduce their loan principal balance aren't counted in the cohort default metric but WOULD be counted against a program's repayment rate. Lack of school-specific data on these latter items makes direct analysis of this metric challenging (for the schools themselves as well as for investors).

Debt-to-income
Under the proposed regulation, two different debt-to-income ratios would be calculated annually for each program. In both calculations, the numerator is the annual debt service cost of students who completed the program during the three most recently completed financial aid award years prior to the earningsmeasurement year. This calculation would use the median debt level of students who completed the program during those three years, a 10-year repayment period, and the interest rate on unsubsidized Stafford loans (currently 6.8%). The median debt level includes all Title IV loans other than parent PLUS loans, as well as private loans and institutional loans. Excluded from the median debt level would be debt incurred at other institutions, unless they're under common ownership with the institution in question. This differs from , and is less onerous than, the proposal floated at the negotiated rulemaking earlier this year, which called for including all debt incurred at all postsecondary institutions. In the first debt-to-income measure, the denominator is the average earnings in the most recent calendar year of graduates from the previous three years. The same calculation would also be performed using median debt and earnings of students who completed the program during the prior three years (i.e. , four, five, and six years ago). The proposal suggests graduates' annual
(800) 866-3272

2

First Analysis Securities Corporation

Post-secondary education

July 26, 2010

earnings would be obtained directly from the Social Security Administration or other federal agency, rather than using 25th percentile Bureau of Labor Statistics (BLS) data as suggested in an earlier proposal. (This proposal is more onerous in this regard, as the prior proposal would have allowed schools to substitute actual graduate earnings for BLS data, and the BLS option has been eliminated in the current version . We note the proposal leaves open the question of how students for whom earnings data can't be obtained would be treated: whether they'd be omitted from the average or treated as zeros.) The second debt-toincome measure also uses median debt in the numerator, but uses discretionary income in the denominator. Discretionary income is defined as average annual earnings minus 150% of the poverty guideline for a single person in the continental U.S., which is $10,830 at present. The proposal also indicates earnings of students who graduated four, five, and six years ago may be substituted for earnings of students who completed in the most recent three years if the school can demonstrate (via employer or student survey or other means) earnings increase "substantially" after an initial employment period. (It's unclear to us why the DOE would require the burden of proof to fall to an institution to demonstrate substantial improvement when such improvement would, presumably, be evident in the earnings data the DOE proposes tracking for purposes of making the debt-to-income calculation.)

Eligibility categories
Table 1 below summarizes programs' eligibility under the proposed gainful employment regulation, depending on outcomes of the debt-to-income and repayment calculations. Programs that have a 45% or better repayment rate AND an 8% or lower debt-to-income ratio (or 20% or lower debt-to-discretionaryincome ratio) would be fully eligible, with no restrictions. Programs that have a 45% or better repayment rate OR an 8% or lower debt-to-income ratio (or 20% or lower debt-to-discretionary-income ratio), but not both, would be fully eligible but would have to warn current and prospective students that that they may have difficulty repaying their loans under certain circumstances, as well as the most recent debt-to-income and loan repayment data.
Table 1 Summary of gainful employment eligibility criteria Above 12% AND Above 30% of discretionary income Debt-to-income Between 8% and 12% OR Between 20% and 30% of discretionary income Eligible (with warning) Equal to or below 8% OR Equal to or below 20% of discretionary income Eligible (no warning)

45%+

Eligible (with warning)

35%to 45%

Restricted

Restricted

Eligible (with warning)

Below35%

Ineligible

Restricted

Eligible (with warning)

Source: Federal Register

Programs with repayment rates between 35% and 45% would be termed "restricted," unless they also have an 8% or lower debt-to-income ratio (or a 20% or lower debt-to-discretionary income ratio). Programs with restricted status would have to provide the DOE annual documentation from employers indicating the curriculum aligns with their businesses and that they anticipate openings in the job areas for which the programs prepare students. Additionally, enrollment
(800) 866-3272

3

First Analysis Securities Corporation

Post-secondary education

July 26, 2010 of Title IV recipients in such programs would be limited to the average number of such recipients enrolled during the prior three years. For programs with growing enrollment, this suggests enrollment would decline at first and would ultimately reach equilibrium. (We would point out to the DOE two [possibly] unintended consequences of this regulation: 1) it could provide a financial incentive to schools with programs at risk of being restricted to grow as aggressively as possible between now and the 2012-13 school year, when the restrictions would be implemented, to raise the average enrollment level before that time [indeed, the fact that this concept has been proposed may already have provided such an incentive]; 2) for programs with growing enrollment, the institution may have to terminate some enrolled students at the beginning of the restriction period in order to meet the enrollment restriction. It's unclear to us how students would be well-served by being forced out of a program mid-stream so the program can meet an arbitrary enrollment cap.) Programs with repayment rates below 35% would remain eligible if they have debt-to-income ratios below 8% (or debt-to-discretionary-income ratios below 20%). Such programs would be restricted if they have debt-to-income ratios between 8% and 12%, or debt-to-discretionary-income ratios between 20% and 30%. And these programs would be ineligible for T itle IV if they have debt-toincome ratios above 12% or debt-to-discretionary-income ratios above 30%. Programs could also use median debt and earnings of students who graduated four, five, and six years ago, rather than those who graduated in the most recent three years, but if the prior-three-year data is used, the debt-to-income hurdle to avoid ineligibility is 8% and the debt-to-discretionary-income hurdle is 20%. The proposed regulation would cap the programs that could be declared ineligible in the first year of implementation (2012-2013) to those serving 5% of students in programs subject to the regulation. (The programs deemed ineligible would be the ones at each degree level with the lowest repayment rates, and others that would , in the absence of the cap, become ineligible, would instead be restricted in that first year.) The NPRM contains estimates of the percentage of programs and students attending those programs that would fall into each category. However, the methodology used to determine these numbers isn't explained particularly well , and, it appears, extrapolates data from a single state (M issouri) to the entire U.S. , leaving room for doubt as to the estimates' accuracy. For what it's worth, the NPRM estimates 84% of students in programs subject to gainful employment regulation are in programs that would remain eligible and unrestricted, 8% are in programs that would become restricted, and 8% are in programs that would become ineligible. However, a comment later in the N PRM makes it sound as though these estimates may assume programs close to "restricted" and "ineligible" cutoffs implement across-the-board tuition cuts in order to avoid missing the necessary hurdles. (We hope members of Congress ask for clarification of the assumptions underlying these estimates and for lists of programs that would fall in each category, to assure themselves that the estimates are realistic and that significantly greater numbers of students aren't going to get displaced if these regulations are implemented as proposed.)

Other details
• The public comment period for the gainful employment NPRM ends on Sept. 9, and the goal is to publish a final regulation by Nov. 1, 2010, for implementation on July 1, 2011. While we view the proposal as somewhat less onerous (in terms of outcomes requirements, not necessarily in terms of data collection or simplicity) than the one floated during the negotiated rulemaking sessions, the language of
4
First Analysis Securities Corporation

(800) 866-3272

Post-secondary education

July 26, 2010 the NPRM suggests a bias toward negative revisions. The NPRM says the DOE seeks questions on whether the current "restricted" category is too lenient and whether programs in this category should, instead, lose access to Title IV. It doesn't, on the other hand, specifically solicit comments on whether the proposal is too onerous, though we expect it will receive comments to this effect from the sector, as well as from some policymakers. We see no indication in the NPRM on whether schools will receive information ahead of time about how their programs are perform ing on relevant metrics. We're hopeful the DOE would provide access to such data, if the proposal were implemented as written, so students aren't blindsided by their programs losing Title IV eligibility. The proposed regulation would allow students enrolled in programs that become ineligible to continue receiving Title IV funds for the remainder of the award year in which the program becomes ineligible and the award year following the DOE's notice of ineligibility. Timeline of changes: As of July 1, 2011 , institutions would have to begin providing to the DOE information about students who completed programs in the past three years. DOE would use this information to compute average annual earnings and median debt. Also, institutions would have to put information on their websites about occupations for which the programs prepare students, graduation rates , and median debt levels. (All of these requirements are listed in the NPRM issued in June addressing the broader range of issues discussed at the program integrity negotiated rulemaking.) Then, as of July 1, 2012, programs serving up to 5% of students could be terminated, and other programs would become restricted or have to issue warnings to current and prospective students under the gainful employment regulation. As an editorial aside , we believe the proposal is extremely convoluted, and that it's unclear it meets original Congressional intent (particularly given that the "gainful employment" language has been in the legislation for several iterations of the Higher Education Act with no elaboration deemed necessary by either the DOE nor Congress) or the definition of "gainful employment." If the DOE views as practical the collection of earnings data for individual programs, we believe a metric that compares students' pre-enrollment earnings to their earnings three-to-five years after graduation would both more clearly meet the definition of "gainful employment" and measure whether the programs are providing economic value to students. (These calculations could be benchmarked against average increases in earnings among people without a college degree as a control.) Such a measure would weed out programs that aren't leading to enhanced earnings prospects, which, we believe, should be the purpose of any sort of regulation around gainful employment. We note that under the current proposal , a vocational program at a community college could get zero students jobs or income increases, but remain eligible because students take on very little debt (though this doesn't account for the taxpayer subsidies wasted on the program). We find it hard to believe such a program would meet any reasonable definition of "gainful employment," though it would do so under the current proposal.

Overall and company-specific analysis
We provide thoughts on the relative exposure of each of our covered companies to the gainful employment reg ulation if it's implemented precisely as proposed. We note several caveats to any analysis: • As discussed above, while we expect low cohort default rates would
(800) 866-3272

5

First Analysis Securities Corporation

Post-secondary education

July 26, 2010

generally correlate with high repayment rates , the two metrics are quite different, and we aren't aware of any publicly available data that would allow company-specific projection of repayment rates, as defined in the NPRM. While we believe the proposed regulation would have little impact on several of our covered companies at present, even these companies could be exposed in the future due to 1) changes in Stafford loan terms (i.e., an increase in the unsubsidized Stafford loan rate would make it more difficult to meet the debt-to-income requirement) , or 2) a recession hurting graduates' earnings or ability to make principal-reducing payments in a given year. We also note the proposed regulation could limit the ability of even unaffected companies to raise tuition prices in the future even if non-profit schools are doing so aggressively, or motivate them to borrow a tactic from many non-profit schools and raise sticker prices, while offering more scholarships as offsets. While restricted programs remain eligible for Title IV, the proposed regulation would allow the DOE to put schools on provisional certification if one or more programs are restricted or ineligible. The proposal also suggests that this would be a factor when the DOE considers the schools' application for renewal of their program participation agreements. In other words, we believe schools with restricted programs could ultimately become ineligible at the discretion of the DOE, suggesting that operating in a semi-permanent restricted state may not be a viable option. The proposal also calls for institutions to apply to the DOE before they can offer new Title IV-eligible programs, to ensure the programs will be consistent with gainful employment requirements. Under the proposal, institutions would have to provide the DOE 1) projected enrollment for each location, 2) documentation from employers that the curriculum aligns with projected job openings, and 3) if the program is a substantive change, documentation of approval of the change from the accrediting agency. The proposed regulation would also allow the DOE to restrict approval for an initial period based on enrollment projections and demonstrated ability to offer other programs that lead to gainful employment. In other words, it sounds as though the proposal would allow the DOE to slow approval of new programs and to restrict growth in those new programs, pending proof of compliance with gainful employment metrics. We don't expect the warnings some programs would be required to issue current or future students to have a material negative effect. (Unlike the DOE, apparently, we doubt most students would find the prospect of having to devote 9% of their income to servicing their student loans soon after they graduate to be alarming.) However, the possibility exists that such warnings could dampen enrollment prospects even at schools that wouldn't have restricted or ineligible programs. We continue to believe providing more information to students about metrics like graduation rates and typical debt levels makes sense for all schools, and it's unclear to us why the DOE would require only schools subject to gainful employment regulation to provide such data to students. Also in the category of "for what it's worth," the NPRM suggests DOE's analysis indicates programs that may require adjustments (presumably to tuition levels) in order to remain in compliance with gainful employment requirements are concentrated in the following curriculum areas: cosmetology, vehicle maintenance, legal support services, culinary, ground transportation, audiovisual technology, and medical assisting services (though the latter appears to be based on so little data that we note the DOE's conclusion only reluctantly).
6
First Analysis Securities Corporation

(800) 866-3272

Post-secondary education

July 26, 2010

While we would love to be able to answer the question "What would Company X's earnings be if this regulation is implemented as proposed?" we believe there are at this point, for many of the companies, too many unknowns to provide an answer with any degree of confidence. We expect to do more analysis as we receive more data. For the moment, we provide at least directional commentary below: • American Public. We believe the proposed regulation would have little impact on American Public. Given the large number of active duty military in its population, we believe the median debt of many programs is likely at or close to zero, and that even as the company expands outside the military, as we anticipate, its relatively low tuition costs would keep it in compliance with the requirements of the proposal. This is particularly true given that it appears its recently announced Wai-Mart relationship may be a significant source of enrollment growth and that, under terms of the partnership, Wai-Mart employees will receive a 15% discount off American Public's already low tuition rates . Apollo. We view Apollo as relatively challenging to analyze, given that 1) University of Phoenix has such a wide diversity of programs, and 2) the company has never, to the best of our knowledge, provided data on typical graduate debt levels, nor on typical graduate earnings. (University of Phoenix has provided information on typical salary increases of bachelor and masters students during the time they're enrolled in programs.) In the absence of more information, we're reluctant to extrapolate and draw conclusions from national data. As such, we see more uncertainty around gainful employment for Apollo than for some of our other covered companies. However, we note 1) Apollo's cohort default rates are better than proprietary averages, suggesting at least some of its programs may meet required repayment thresholds, 2) University of Phoenix has such a diversity of programs that it would likely be able to reallocate resources toward programs that meet gainful employment thresholds and away from programs that don't meet those thresholds. While we acknowledge the uncertainty around Apollo, we believe the most likely outcomes are more than factored into the stock at current levels, trading at just 8.8x our calendar 2011 EPS estimate. Career Education. Like Apollo, Career Education has not disclosed specific details on typical student debt levels nor on graduate earnings. The company has said that the portions of its business most exposed to gainful employment regulation are its culinary and art & design segments. While it communicated this belief prior to release of the current gainful employment proposal, we note this conclusion is consistent with the programmatic areas the DOE indicates are most exposed in the NPRM. The culinary and art & design segments account for approximately 20% of our 2010 operating income estimate. At AIU & CTU, which combined account for 72% of our 2010 operating income estimate, we believe more than 30% of students are military-affiliated (either active-duty and veterans) and thus have access to non-Title IV sources of tuition assistance, such as the military's active-duty tuition assistance program, the Montgomery Gl Bill, and the post-9/11 Gl Bill, all of which would reduce typical debt loads, helping programs at those schools remain within required debt-to-income parameters. As such, we continue to believe Career Education stock, at 7.2x our 2011 EPS estimate, more than incorporates the likely regulatory outcomes. Capella. While we've noted cohort default rates don't necessarily translate directly to repayment rates, we expect the bulk of Capella's programs would
7
First Analysis Securities Corporation

(800) 866-3272

Post-secondary education

July 26, 2010 meet the proposed repayment hurdles, given its average cohort default rates are so low. Its fiscal 2007 draft three-year cohort default rate was just 5.5%, well below that of any other company in our coverage universe, except American Public, which had relatively few students borrowing under Title IV at that point. Other than Capella and American Public, the lowest draft threeyear cohort default rate in our public coverage universe belonged to Strayer, at 13.0%. DeVry. We expect Keller, Ross, and Chamberlain would be able to meet the repayment rate requirements of the gainful employment proposal, given their low draft fiscal 2007 cohort default rates (4.7%, 0.5%, and 4 .1%, respectively) . With average starting salaries in a range of $45,000 and typical graduate debt balances that we believe are slightly over $40,000, we believe DeVry University's undergraduate programs would, on average, be able to clear a 20% debt-to-discretionary-income threshold and remain eligible under the current proposal. Other portions of the business, including Becker, Advanced Academics , and Fanor, would not be subject to gainful employment regulation. The company has not, to the best of our knowledge, provided detail on Carrington (formerly U.S. Education Corp) graduates' typical starting salaries or debt balances. Education Management. We believe that some of Education Management's programs, particularly bachelor programs at the Art Institutes, would be among the most challenged in our coverage universe to meet a debt-toincome requirement, given median graduate debt of $41 ,000 and starting salaries in a range of $31,500. With these parameters, we calculate average debt-to-discretionary-income of 37%. The current proposal is more favorable toward Education Management than the prior proposal, however, given the inclusion of the repayment option. The Art Institutes' average fiscal 2007 twoyear cohort default rate was 7.2%, well below the proprietary-school average in a range of 12%, and Argosy's draft three-year cohort default rate was just 5.3%, suggesting programs at both these schools may be able to make required repayment thresholds. ITT. With typical graduate debt loads in a range of $30,000 and starting salaries in a range of $31,600, we calculate a debt-to-discretionary income average of approximately 27%. (The actual number may be higher, as graduate earnings would likely trend up from starting-salary levels.) This suggests ITT's programs would, in general, remain eligible for Title IV, but some might be restricted in the absence of business model changes. We suspect ITT would respond to the current proposal, if enacted, in part by 1) giving more selective scholarships to students in programs in danger of being restricted and who would otherwise have to borrow the most money to attend school, and 2) perhaps lowering tuition on programs that lead to lower earnings prospects, such as criminal justice. In any event, we continue to believe the most likely outcomes are more than factored into the current stock price, at 6.8x our 2011 EPS estimate. Strayer. Strayer has disclosed that its typical graduates earn $50,000 annually within three years after completing school. At that level of earnings, graduates could borrow nearly $49,000 and maintain a debt-to-discretionaryincome below the 20% required to remain eligible. Given that a full bachelor degree at Strayer costs on the order of $60,000, that students tend to come in with a considerable amount of prior-earned credit on average, and that some 20% of Strayer's revenue comes from tuition assistance provided by employers, we believe Strayer's programs would generally have no issues with the proposed gainful employment regulations . UTI. Management had stated publicly that 90% of its programs should be fine
8 First Analysis Securities Corporation


(800) 866-3272

Post-secondary education

July 26, 2010

under an 8% debt-to-income requirement. The only material change on that metric from the original proposal to the current proposal is the use of actual graduate earnings rather than BLS data. While UTI has not, as far as we know, ever disclosed a specific starting salary average, we note that according to BLS data, the 25th percentile earnings of auto mechanics are about $26,000, and we believe UTI graduates earn at least in that range (in the time horizon measured by the proposed regulation, if not immediately upon graduation) . As such , we believe the impact of the proposed regulation on UTI, if enacted, would be relatively minor.

COMPANYDESCffiPTION American Public Education Inc. American Public Education, based in Charles Town, W .Va., provides online education for the military and those interested in public-service related programs. Apollo Group Inc. Apollo Group Inc., headquartered in Phoenix, is a leading for-profit provider of college education to working adults, primarily through its University of Phoenix subsidiary. Capella Education Co. Capella Education Co., based in Minneapolis, provides online education through Capella University, a regionally accredited online university. Career Education Corp. Career Education Corp., headquartered in Hoffman Estates, Ill., offers associate, certificate, bachelor, and master's programs in visual communications, information technology, business studies, culinary arts, and allied-health. DeVry Inc. DeVry Inc., headquartered in Downers Grove, Ill. , is a leading provider of postsecondary education. It provides undergraduate and graduate technology-based programs; undergraduate and graduate business programs; allied health, medical, veterinary, nursing, and healthcare programs; CPA and CFA review courses; and online secondary education. Education Management Corp. Education Management Corp., headquartered in Pittsburgh, offers educational programs at the associate, bachelor, master, and doctoral levels through four school networks: 1) the Art Institutes, which provide education in creative and applied arts, 2) Argosy University, 3) Brown Mackie College, and 4) South University. ITT Educational Services Inc. ITT Educational Services Inc., headquartered in Carmel, Ind., is a premiere provider of technically oriented education nationwide. Strayer Education Inc. Strayer Education Inc., headquartered in Arlington, Va., provides accredited college degrees, mostly in business and information technology, to working adult students both in physical campuses and online. Universal Technical Institute Universal Technical Institute, based in Phoenix, is a nationwide provider of technical education training for students seeking careers as professional automotive, diesel, collision repair, motorcycle, and marine technicians.

(800) 866-3272

9

First Analysis Securities Corporation

Post-secondary education

July 26, 2010

Institutional sales: (800) 866-3272

FIRST ANALYSIS SECURITIES EQUITY RESEARCH
HEALTH CARE PR()Dl)CTIVITY LIFE SCIENCE TOOLS & DIAGNOSTICS Dan Leonard- dleonard@firstanalvsis com PBMs • HOME HEALTH SERVICES • SPECIALTY HEALTH CARE OUTSOURCING Tony Perkins- tperkins@firstanalysis.com HEALTH CARE IT Frank Sparacino- fsparacino@firstanalysis.com CLINICAL RESEARCH ORGANIZATIONS Todd Van Fleet- tvanffeet@firstanalysis.com
OFFENDER(BEHA~ORAL)MANAGEMENT

Todd Van Fleet- tvanffeet@firstanalysis.com James Macdonald - jmacdonald@firstanalysis.com

BROADBAND ENABLED BUSINESSES

- IT APPLICATIONS TRANSACTION PROCESSING Lawrence Berlin - lberlin@firstanalysis.com NETWORK SECURITY • CRM OPTIMIZATION Craig Nankervis - cnankervis@firstanalysis.com BUSINESS INTELLIGENCE Frank Sparacino- fsparacino@firstanalysis.com WIRELESS /INFRASTRUCTURE Howard Smith - hsmith@firstanalysis.com Lawrence Berlin - lberlin@firstanalysis.com

- OUTSOURCED SERVICESPOST-SECONDARY EDUCATION Corey Greendale - cqreendale@firstanalysis.com HR & ACCOUNTING SER~CES James Macdonald- jmacdonald@firstanalysis.com ACCOUNTS RECEIVABLE MANAGEMENT Lawrence Berlin - lberlin@firstanalysis.com CONTACT CENTER SER~CES Howard Smith- hsmith@firstanalysis.com

CLEAN-TECH /INFRASTRUCTURE RESOURCE MANAGEMENT Corey Greendale - cqreendale@firstanalysis.com ENERGY RELATED • WATER • SPECIALTY MATERIALS Michael J. Harrison - mharrison@firstanalysis.com Steven Schwarlz - sschwarlz@firstanalysis.com

(800) 866-3272

10

First Analysis Securities Corporation

Post-secondary education

July 26, 2010

IMPORTANT DISCLOSURES AND CERTIFICATIONS

PRICE, RATING, AND TARGET PRICE HISTORY* American Public Education Inc.
Date
3!712008 5/512008 8/1412008 11/14/2008 8/512009 212312010

Close
$29.49 $34.86 $45.35 $38.77 $33.57 $42.45

Tarqet Ratinq $39 0 $45 0 $59 0 S55 0 $52 0 $54 0
'C: 11.

$70 $60 . $50 " $40
u

0
E~ cr:

"'

$30 $20 $10 . $0

u
§ §
(:!

§
t:: ....
~

§

§
t::
'<"'
~

§
t::
~

§
"'
t::
~

§
(:!

§
t:: ....
~

§

§
t::
'<"'
~

"'

t::

~

"'

t::

"'

t::

~

~

~

"'
Date

t::

"'

t::

~

~

0

0

t::
~

~

0

0

"'

t::

~

0

0

(:!

0

0

"'

t::

t:: ....

~

Apollo Group Inc.
Date
712612007 6/1312008 711012008 10/29/2008 11912009 3/2312010 313012010 712012010

Close
$63.37 S52.24 $55.46 $65.01 S85.27 $63.97 $6228 $48.08

Target Rating
E

sao
S83 $84 $110 S83 $85 $75

0 0 0 0 0 0 0

$120 $100 $80

11.

" ·c:
u

$60 $40 $20

E~ cr:

"'

u

so

8 8 8 C!
U> U>

§ § § § § § § § § § § § C! C! C! C! C! C! C! C! C! 1:! "' 1:! "' "' C! C! "' C! 1:! 1:! 1:! "' "' "' "' "' 1:! 1:! 1:! C! C! C! C! ... "' <= "' "' ... ... <= Date "' "' ... ... <=
C! C!
ID ID

0

0

0

~
~

~

0
ID

ID

ID

C!

0
ID

C!

0

(:!

1:!

~

"' "'

1:!

"' C!

C!

(800) 866-3272

11

First Analysis Securities Corporation

Post-secondary education
Capella Education Co.
Date 7!26!2007 11/5!2007 2115!2008 5f212008 816!2008 1117!2008 211312009 7/28!2009 10/27/2009 2117!2010 4/27!2010 Close $40.57 $68.98 $55.46 $61.80 S52.89 $52.49 $59.48 $62.10 $71.40 $80.10 $93.30 Target Rating $57 0 S87 0 S72 0 $80 0 $65 0 $69 0 $73 0 $87 0 S89 0 S96 0 $1 13 0
$120 $100 $90
u "

July 26, 2010

~

$60
$.4 0

$20 $0

u

8 8 8
~ ~ ~
~

~ ~ ~ ~ § ~ § § § § § § ~ ~ ~ C! ~ ~ ~ C! C! C! "' "' "' "' "' C! ... "' c.o "' c.o .., ... C! C! "' C! ~ ~ C! C! ~ C! C! ~ ~ ~ ~ ... "' ... "' "' ... "' ...
~
to to
~

0

0

0

0

to

to

to

~

(')

~

~

(')

~

C! to C!
~

0

Date

"' .., "'
~

C! to C!

8

~

Career Education Corp.
Date 7!26!2007 9/26!2007 3/5!2008 3/29!2010 Close $31.23 $26.91 $14.02 $32.43 Target Rating $41 0 $37 0 $23 0 $51 0
$60 $50
$40

" .g
0..

$30 $20 $10 $0

8 8 8
C! ....
~ <D ~ <D

§ § § § § § § § § § § §
<D ~
~

C! a.

~ <D

~

...

C!

"' "'

<D ~

~

<D

~ ~

C! ....

<D

~

<D

~

C! a.

~ <D

C!
~

<D
~

~

C!

~ M

to

~

Date

"' "'

<D

C!

C!

'::! ....

<D

"'

C! <D C!

..
~

C! <D '::!

0

0

C! <D t'

0

0

0

"' "'

<D ~

~

0

<D ~

~

(800) 866-3272

12

First Analysis Securities Corporation

Post-secondary education
DeVrylnc.
Date 7!26!2007 11/1!2007 1217!2007 1129!2008 1218f2008 1127!2010 Close S35.11 S53.25 $57.89 $54.63 S54.15 S63.32 Target Rating S45 0 $65 0 S67 0 S69 0 0 S76 S83 0
u "

July 26, 2010

$90 $90 $70 $60 $50

~ $40
$.3 0 $20 $10 $0

u

8 8 8 C! C! C!
Ul Ul Ul

§ § § § § § § § § § § §
C! Ul C! C! Ul C!

0

0

0

C! ....

<1>

C!

.-

C!

- - "'

"'

C! Ul C!

....

C! Ul C!

C! Ul C!
<1>

.-

-Date

C! Ul C!

C! Ul C!

M

C! to C!

C! "' C!
<I>

C! "' C!

....

"' <1>

C! C!

"' "' .- - "'

C! C!

0

C! C!

C! Ul C!

0

"'

C! Ul C!

0

Education Management Corp.
Date 7!26!2007 1012612009 2111!2010 516!2010 Close
$24.12 $18.15 $21.39

Target Rating
$33 $24 $29 0 0 0
$35 $30
$26

" ·c
u

$20 $15 $10 $5 $0

0.

8 8 8 C! C! C!
~ ....
<D <D ~ <D

a.

.-

C!

0 0 0 § § § § § § § § § § § § 0 0 0 C! C! C! C! C! C! C! C! C! C! C! C! C! C! C! C! C! C! "' "' "' "' "' C! "' .... "' .- "' "' "' "' "' .... a. ~ Date "'
<D ~ <D ~ <D

~

<D

<D

~

<D ~

<D

~

<D ~ M

-

<D ~

<D ~

(800) 866-3272

13

First Analysis Securities Corporation

Post-secondary education
ITT Educational Services Inc.
Date 7!26!2007 1/2312008 1/24!2008 2125!2008 4/25!2008 10/17!2008 1/27!2009 4/14!2009 4/2412009 7/27!2009 8/2512009 4/2212010 7!2212010 Close $107.42 S72.54 S86.62 $54.02 $69.66 S70.02 $1 19.36 $101.29 $101.24 S95.52 $107.61 $1 12.69 S85.18 Target Rating
E

July 26, 2010

$108 $118 $101 $107 $1 40 $137 $1 43 $125 $135 $1 45 $132

0 0 0 0 0 0 0 0 0 0 0 0

$160 $140 $120 $100

~

"
u

$80 $60
$40

u

$20 $0

8 8 8
~ ~ ~
~

~ ~ ~ ~ § ~ § § § ~ ~ ~ C! ~ ~ ~ "' ~ "' ~ ~ ~ ~ C! ~ ~ "' ~ ~ ~ ... "' ... "' "' "' ... "' ... "' ~ .., "' "'
~
to to to
~

to

~

~

(')

~

(')

Date

Strayer Education Inc.
Date 7!26!2007 7130!2007 1112!2007 2115!2008 5/112008 7!24!2008 11/3!2008 4/30/2010 Close $157.68 $152.08 $185.00 $167.00 $197.38 $220.56 $224.75 $24312 Target Rating 0 $184 0 $208 0 $203 0 $225 0 $253 0 $279 0 $300 0
$350 $300

" $200 u ·c 0. $150 $100 $50 $0

u

8 8 8 C!
~
~

0 0 0 § § § § § § § § § § § § 5 5 5 C! 1::! C! C! 1::! 1::! 1::! C! 1::! "' "' "' 1::! t:l t:l t:l t:l c.< c.< t:l C! "' 1::! C! 1::! ... 1::! ;: "' "' "' ... 1::! ;: t:l "' "' ... t:l ;: "' "' "' "' "' Date
~ ~
U) U)

~

U)
~

~

U)

~

U)

~

U)

<1'1

<1'1

~

to

U)

U)

~

<1'1

M

(800) 866-3272

14

First Analysis Securities Corporation

Post-secondary education
Universal Technical Institute
Date
1/412008 8/20/2008 11/25/2008 8/2812009 12/2212009 5/412010

July 26, 2010

Close
S16.30 $16.99 $17.05 $20.23 $19.48 $2471

Target Rating
E

S21 S20 $25 S27 $31

0 0 0 0 0

$35 $30 $25 " $20

~

u

$15 $10 $5 $0

§ § §
C!
~
~

§
C!

§ §
C!

~ M

C!

C!

"'

~

.....

~

"'

~

C!

...
~

~

C!
~
~

~

~ M

C!

~

C!

~

"'
Date

~

~ C!
.....
~

*Left axis is stock price (gray area indicates 12-month price target); right axis is rating (line indicates rating level). When no rating is indicated in the chart or table, then the stock was unrated at that time. 12-month price targets, if any, are effective with respect to the dates on which they are issued. First Analysis Securities Corp. does not provide 12-month price targets for stocks rated equal-weight or underweight. It usually provides 12-month price targets for stocks rated overweight. The data in this chart are current as of the last trading date prior to the date of this report.

(800) 866-327 2

15

First Analysis Securities Corporation

Post-secondary education

July 26, 2010

ANALYST CERTIFICATION I, Corey Greendale, attest the views expressed in this document accurately reflect my personal views about the subject securities and issuers. I further attest no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by me herein.

correspond to buy, hold, and sell, respectively. Please refer to "RATINGS DEFINITIONS" above for an explanation of the FASC rating system. USE OF THIS DOCUMENT: Investors should consider this document as only a single factor in making their investment decision. Past performance and any projections herein should not be taken as an indication or guarantee of future performance. With the exception of information about FASC, the information contained herein was obtained from sources we believe reliable, but we do not guarantee its accuracy. As a subscriber or prospective subscriber, you have agreed not to provide this document in any form to any person other than employees of your immediate organization. FASC is a broker-dealer registered with FINRA and member SIPC. It provides research to its institutional clients as a service in connection with its other business activities. This document is provided for informational purposes only. Neither the information nor any opinion expressed constitutes a solicitation by us of the purchase or sale of any securities. More information is available on request from FASC 800-866-3272. Copyright 2010 First Analysis Securities Corp. To residents of Canada: The contents hereof are intended solely for the use of, and may be only be issued or passed on to, persons to whom FASC is entitled to distribute this document under applicable Canadian securities laws. To residents of the United Kingdom: This document, which does not constitute an offer of, or an invitation by or on behalf of any person to subscribe for or purchase, any shares or other securities in any of the companies mentioned in this document, is for distribution in the UK only to persons who fall within any one or more of the categories of persons referred to in Article 8 of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) (No. 2) Order 1995 (SI 1995/1536) or in Article 11 of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (SI 1996/1586). ABBREVIATIONS AND ACRONYMS: The meaning of the following abbreviations and acronyms has been identified as not common knowledge, and we therefore provide these explanations. DCF: Discounted cash flow (model). DSOs: Days sales outstanding. EBITDA: Earnings before interest, taxes, depreciation, and amortization. G&A: General and administrative (expense). OEM: Original equipment manufacturer. R&D: Research and development (expense). SG&A: Selling, general, and administrative (expense). IF YOU WISH REMOVAL FROM OUR DISTRIBUTION LIST, PLEASE E-MAIL TO optout@firstanalysis.com OR CALL 312463-6404.

OTHER DISCLOSURES American Public Education Inc.: FASC expects to receive or intends to seek compensation for investment banking services from this company within the three months following the publication date of this document. Education Management Corp.: FASC expects to receive or intends to seek compensation for investment banking services from this company within the three months following the publication date of this document. The compensation of the research analyst(s) principally responsible for the preparation of this document is indirectly based on (among other factors) the general investment banking revenue of FASC. FASC considers all the companies covered in its research reports to be potential clients. RATINGS DEFINITIONS*: Overweight (0): Purchase shares to establish an overweighted position: Stock price expected to perform better than the S&P 500 over the next 12 months. Equal-weight (E): Hold shares to maintain an equal-weighted position: Stock price expected to perform in line with the S&P 500 over the next 12 months. Underweight (U): Sell shares to establish an underweighted position: Stock price expected to perform worse than the S&P 500 over the next 12 months. *Stock target prices may at times be inconsistent with these definitions due to short-term stock price volatility that may not reflect large-holder/buyer valuations of the security. DISTRIBUTION OF RATINGS: The following was the distribution of ratings for companies rated by FASC as of 6/30/2010: 57% had buy (overweight) ratings, 43% had hold/neutral (equal-weight) ratings, and 0% had sell (underweight) ratings. Also as of 6/30/2010, FASC had provided, within the prior 12 months, investment banking services to 6% of the companies rated that had buy (overweight) ratings and 0% of the companies rated that had hold (equal-weight) ratings. For purposes of the FINRA ratings distribution disclosure requirements, our stock ratings of overweight, equal-weight, and underweight most closely

(800) 866-3272

16

First Analysis Securities Corporation

From: To:

Robert MacArthur <nnacarthur@altresearch com> Wittman Donna Woodward Jennifer 8/10/2010 12:14:00 PM

CC:
Date: Subject:

Industry Overview
Equity IUnited States I Business, Education & Professtooal Services 10 August 2010

Bank of America~ Merrill Lynch
• DOE to release data on gainful employment 8/13
The Department of Education (DOE) will hold a call on 8/11 at 5pm ET on the proposed gainful employment (GE) regulation (NPRM). The purpose of the call will be to provide an overview of the NPRM and to clarify the proposal in response to public comments it has received. The DOE will then release additional data around the impact of GE on late afternoon on Friday, 8/13. We expect most of the data to be centered around the principal repayment rate calculation and while we don't yet know the extent of detail that will be provided, we are hopeful that it will enable us to better analyze the potential impact on schools. Lack of data around actual graduate salaries and student principal repaym ent rates has made it difficult for schools to assess the potential impact of GE fully.
Sara Gubins Research Analyst MLPF&S sara gubins@baml.oom David Chu Research Analyst MLPF&S davtd j.chu@baml.com David Ridley-lane Research Analyst MLPF&S david.ridleytane@baml.com
+1 646 855 1961

+1 646 855 2589

+1 646 855 2907

Table 1: BofAML ratings vs. consensus BofAML No. of opinions Rating Buy Z2 APOL ARCL Buy 7 Buy CECO 17 15 coco Neutral Buy 18 CPLA DV Buy Z2 EDMC Neutral 16 Neutral 19 ESI Neutral LINC 10 LOPE Buy 11 LRN Buy 9 Buy 17 STRA Underperform UTI 11 Ticker
Soun:e: Bloombe<g

ABC News to air segments on for-profits
We understand that ABC News is preparing segments on the for-profit postsecondary education sector that could run on several programs. The timing of airing is not yet clear, but we expect it could be soon (later this week or next week). While we don't know the slant they will take, most press on the sector has been negative. Aside from potentially bolstering the case against for-profits in Washington, another risk is that negative press on such a widely-viewed network could lower demand trends as well.

% breakdown Buy Neutral Sell 59% 41% 0% 57% 43% 0% 47% 41% 12% 33% 47% 20% 67% 33% 0% 59% 41% 0% 44% 56% 0% 47% 53% 0% 60% 40% 0% 82% 18% 0% 67% 33% 0% 44% 56% 0% 27% 55% 18%

Expect continued volatility in ed stocks
Companies continue to analyze the potential impact of the gainful employment regulation but it is challenging given limited available information. Given continued scrutiny, we generally continue to prefer what we view as high-quality, lesscountercyclical names such as Strayer, Grand Canyon, DeVry, & Capella given the continued broader regulatory overhang. We also view deep-value names Apollo & Career Education as attractive. They have more overhangs and will require patience but present an attractive risk/reward profile in our view.

Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a connict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making t heir investment decision. Refer to important disclosures on page 6 to 8. Analyst Certification on Page 4. Price Objective Basis/Risk on page 2. Link to Definitions on page 4. 10964181

Bank of America ~ Merrill Lynch
10 August 20 10

Business, Education & Profess ional Services

Price objective basis & risk
Apollo Group (APOL)
Our $68 target is based on 12.6x CY1 OE EPS, a significant discount to Apollo's 3year forward multiple of 17x. We apply a discounted multiple given broader regulatory risk and two key company specific overhangs - an informal SEC inquiry into revenue recognition and its transition to a higher degree/higher quality mix which will limit growth in FY11 as it rolls out its orientation program. Risks are: 1) SEC informal inquiry around revenue recognition practices. 2) Uncertainty in future growth as APOL shifts towards higher level programs. 3) Greater competition and limited growth in APOL's core working adult market. 4) Headline and regulatory risk. 5) Legal risks. 6) Concerns about the federal and private student lending markets, though this issue has largely subsided.

Capella Education (CPLA)
Our $110 price objective is based on 24x CY11 E EPS, below its 30x historical forward multiple, and a slight discount to our 25% CY 11E EPS growth forecast. While this represents a premium to its peer group, we believe a premium multiple is warranted given the company's pure online model, less countercyclical nature, margin expansion potential and attractive position from a regulatory perspective. Risks are: 1) Gainful employment risk 2) Funding risk: changes in corporate tuition reimbursement programs are a risk. Another is that if students lose their jobs they might drop out or postpone school. 3) Increasing competition in the online education market as market growth slows. 4) Popularity of programs. 5) Increasing mix of bachelors degree students could dilute revenue per student and lower graduation rates. 6) Capella operates in a highly regulated sector and is currently awaiting the outcome of a Federal Student Aid review of its financial aid.

Career Education (CECO)
Our $35 PO is based on 12x our 2010 EPS estimate and is a discount to peers given the continued regulatory overhang around the Dept. of Education gainful employment proposal. Risks to our price objective are: 1) execution risk, 2) higher than anticipated costs and decreased cash flow associated with internal financing of students, and 3) headline, regulatory, and legislative risks.

Corinthian Colleges Inc (COCO)
Our $18 PO is based on 10x CY10E, a significant discount to COCOs 3-year historical forward multiple of 21x. It compares favorably to our 28 percent 5-year EPS CAGR off of a low margin base, given lingering regulatory concerns for the sector. We believe upside could be limited near term until there is more clarity around potential outcomes to upcoming regulatory events. Risks to the price objective are: 1.) execution risk, 2.) higher than anticipated costs and decreased cash flow associated with internal financing of students, 3.) disruptions in federal loan availability, and 4.) headline and regulatory risk.

DeVry Inc (DV)
Our $82 PO is based on 20x CY10E EPS of $4.08, below OeVry's 23x average 3year forward multiple. We expect OV to surpass its 17.1 percent peak operating margin in FY10 and forecast earnings power of $5.19 in FY12. We maintain our positive fundamental view on OeVry as a high quality margin expansion & diversification story with a strong management team.

2

Bank of America ~ Merrill Lynch
10 August 20 10

Business, Education & Profess ional Services

Risks are 1.) potential negative impact of any regulatory changes, 2.) faster than expected decline in enrollment trends, 3.) pressure on DV's countercyclical segments as the economy improves, 4.) declining job placement rates, 5.) integration risk of recent acquisitions, 6.) increasing competition.

Education Management Corporation (EDMC)
Our $22 target is based on EDMC achieving 7x CY10E EV/EBITDA, a slight discount to peers. We continue to be impressed by its operations and believe that its diversified offerings should help protect the company from countercyclical headwinds. However, we believe that EDMC is most exposed to the Department of Education proposal on gainful employment as relatively high tuition at the Art Institutes leads to high student debt loads relative to salaries. Risks are: 1) higher-than-anticipated costs and decreased cash flow associated with internal financing of students, 2) disruptions in federal loan availability, 3) relatively high tuition levels, 4) slowing market growth and increasing competition in the on-line education market, 5) continued popularity of programs, 6) headline and regulatory risk, including the recently-disclosed qui tam action.

Grand Canyon Education (LOPE)
Our $27 PO is based on 21x CY10E EPS or 16x CY11 E, a discount to forecasted growth given the broader regulatory and legislative overhang as well as the DOE program review. We continue to believe LOPE is a high-growth high-quality story and that it is well positioned vs peers on key regulatory risks given low tuition & low default rates. Risks are: 1) execution risk, 2) slowing market growth and increasing competition, 3) popularity of programs, 4) heavy reliance on federal financial aid, 5) regulatory risk, including an Office of Inspector General investigation, a DOE program review and a false claims lawsuit, and 6) the broader legislative overhang.

ITT Educational Services (ESI)
Our $90 PO is based on ITT achieving 7x CY11 E, a deep discount to its 15x 3year historical forward multiple. The multiple accounts for slowing demand trends and gainful employment risks, which will likely limit a return to more robust historical valuation multiples near term . Risks are 1) gainful employment risks: could result in tuition cuts or elimination of programs, 2) higher than anticipated costs and decreased cash flow associated with internal financing of students, 3) any disruptions in federal loan availability, 4) increasing competition and relatively high tuition levels vs peers, 5) limited online presence in a market in which online is the fastest growing segment and 6) ITT operates in a heavily regulated sector.

Lincoln Educational Services Corp (LINC)
Our $18 price objective is based on 7x 2011 E EPS. Our price objective represents a significant discount to Lincoln's 15x historical forward 3 year multiple. We believe a discount is warranted given potential for slowing enrollment growth in shorter-term vocational programs as the economy improves, the broader regulatory overhang, and execution risk around its new initiatives. Risks to the price objective are weaker-than-forecast auto enrollments, a slowdown in demand for health science programs, slowing enrollment growth in an improving economy, broader regulatory and DC concerns, and execution risk.

3

Bank of America ~ Merrill Lynch
10 August 20 10

Business, Education & Profess ional Services

Strayer Education Inc. (STRA)
We believe Strayer should continue to warrant a premium multiple to the peer group given its ample growth prospects, superior profitability and strong track record. Our $280 price objective is based on a multiple of 23x our 2011 EPS estimate of $12.03, or a 1.1x PEG ratio. Risks are: 1) changes to the industry business model from gainful employment, 2) execution as the company scales and enters new markets and rolls out a new global online operations center, 3) increased competition, 4) increased regulatory scrutiny, and 5) longer-term DC risks.

Universal Technical Institute (UTI)
Our $21 price objective is based on 14x our CY 11 EPS estimate of $1 .53. Our target valuation multiple is more inline with peers as EPS has improved and investors no longer need to assign as much of a premium in anticipation of a more normalized profit environment. We see downside risk from the company's concentrated automotive/transportation curriculum, execution risk for an upcoming curriculum overhaul and new campus expansion, while competition and the regulatory environment represent other risks. Upside risks are better than expected improvement in capacity utilization and increased demand if job prospects in the auto industry improve.

Link to Definitions
Industrials
Click here for definitions of commonly used terms.

Analyst Certification
I, Sara Gubins, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.
US-Business, Education & Professional Services Coverage Cluster Investment rating BUY Company
Apollo Group Archipelago Learning Capella Education Career Education Corporate Executive Board DeVry Inc Ecolab Inc Grand Canyon Education K1 2 Manpower Resources Connection Strayer Education Inc. TrueBiue

BofAML ticker
APOL ARCL CPLA CECO EXBD DV ECL LOPE LRN MAN RECN STRA TBI CBG

Bloomberg symbol
APOLUS ARCLUS CPLA US CECOUS EXBDUS D VUS ECLUS LOPE US LRN US MAN US RECNUS STRA US TBIUS CBG US

Analyst
Sara Gubins Sara Gubins Sara Gubins Sara Gubins David Ridley-Lane Sara Gubins David Ridley-Lane Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins

NEUTRAL
CB Richard Ellis Group Inc Corinthian Colleges Inc Education Management Corporation ITI Educational Services

coco
EDMC ESI

coco us
EDMCUS ESIUS

4

Bank of America~ Merrill Lynch

Business, Education & Profess ional Services

10 August 2010

US-Business, Education & Professional Services Coverage Cluster Investment rating Company
Jones lang LaSalle Inc Lincoln Educational Services Corp UNDERPERFORM Robert Half International Universal Technicallnslilule

BofAML ticker
Jll LING RHI UTI

Bloomberg symbol
JLLUS LING US RHIUS UTI US

Analyst
Sara Gubins Sara Gubins Sara Gubins Sara Gubins

5

Bank of America~ Merrill Lynch

Business, Education & Professional Services

10 August 20 10

Important Disclosures
Investment Rating Distribution: Education & Training Services Group (as of 01 Jul 2010) Coverage Universe Count Percent lnv. Banking Relationships· Count Percent 60.0()0,{, Buy 10 55.56% Buy 6 Neutral 6 33.33% Neutral 5 83.33% Sell 2 11.11% Sell 2 100.00% Investment Rating Distribution: Global Group (as of 01 Jul 2010) lnv. Banking Relationships· Coverage Universe Count Percent Count Percent Buy 1922 54.14% Buy 1042 59.85% 24.62% Neutral 874 Neutral 496 62.78% 754 21.24% Sell Sell 362 51.86% *Com panies in respect of which MLPF&S or an affiliate has received compensa tion for investment banking services within the pasl12 months. For purposes of this distribution, a stock rated Underperformis included as a Sell. FUNDAMENTAl EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A -low, B ·Medium and C • High. INVESTMENT RATINGS reflect the analyst's assessment of a stock's: (Q absolute total return potential and (iQ attractiveness for investment relative to other stocks within its Coverage Cluster(detined below). There are three investment ratings: 1 • Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster; 2 • Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 • Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a stock and the firm's guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst's view of the potential price appreciation (depreciation). Total return expectation (within 12-month period of date of initial rating) Ratings dispersion guidelines for coverage cluster· Investment rating Buy ;:: 10"k s; 70"k Neutral ;:: 0% s; 30"k Underperform N/A ;:: 20"k • Ratings dispersions may vary fromlime to time where BofAML Research believes it beHer reflects the investment prospects of stocks in a Coverage Cluster.

INCOME RATINGS, indicators of potential cash dividends, are: 7 • same/higher (dividend considered to be secure), 8 • same/lower (dividend not considered to be secure) and 9 ·pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock's coverage cluster is included in the most recent BofAML Comment referencing the stock.
Price charts for the securities referenced in this research report are available at ht1p:l/www.ml.com/research/pricecharts.asp, or caii1 -888-ML-CHART to have them mailed.

MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, Grand Canyon, ITI, Lincoln, Strayer, Universal Tech. MLPF&S or an affiliate was a manager of a public offering of securities of this company within the last 12 months: Education Mgmt, Grand Canyon. The company is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: Apollo Group, Career Education, Corinthian Coli, DeVry, Education Mgmt, Lincoln. MLPF&S or an affiliate has received compensation from the company for non-investment banking services or products within the past 12 months: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, ITI, Strayer, Universal Tech. The company is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, ITI, Strayer, Universal Tech. MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months: Apollo Group, Career Education, Corinthian Coli, DeVry, Education Mgmt, Lincoln. MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company or an affiliate of the company within the next three months: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, Lincoln. MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the company on a principal basis: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, Grand Canyon, ITT, Lincoln, Strayer, Universal Tech. The company is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: Apollo Group, Career Education, Corinthian Coli, DeVry, Education Mgmt, ITT, Strayer, Universal Tech. The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Bank of America Corporation, including profits derived from investment banking revenues. Merrill Lynch is affiliated with an NYSE Designated Market Maker (DMM) that specializes in one or more securities issued by the subject companies. This affiliated NYSE DMM makes a market in, and may maintain a long or short position in or be on the opposite side of orders executed on the Floor of the NYSE in connection with one or more of the securities issued by these companies: Corinthian Coli

6

Bank of America~ Merrill Lynch 10 August 20 10

Business, Education & Professional Services

Other Important Disclosures
SofA Merrill Lynch (BofAML) Research refers to the combined Global Research operations of Merrill Lynch and BAS. Officers of MLPF&S or one or more of its affiliates (other than research analysts) may have a financial interest in securities of the issuer(s) or in related investments. Merrill Lynch Research policies relating to conflicts of interest are described at http://www.ml.comlmedia/43347.pdf. "Merrill l ynch" includes Merrill l ynch, Pierce, Fenner & Smith Incorporated ("Ml PF&S") and its affiliates, including SofA (defined below). "SofA" refers to Bane of America Securities llC ("BAS'~, Bane of America Securities limited ("BASl'~ and their affiliates. Investors should contact their Merrill lynch or SofA representative if they have questions concerning this report. Information relating to Non-US affiliates of Merrill l ynch and Distribution of Affiliate Research Reports: MLPF&S, BAS, and BASL distribute, or may in the future distribute, research reports of the following non-US affiliates in the US (short name: legal name): Merrill Lynch (France): Merrill Lynch Capital Markets (France) SAS; Merrill Lynch (Frankfurt): Merrill Lynch International Bank Ltd, Frankfurt Branch; Merrill Lynch (South Africa): Merrill Lynch South Africa (Pty) Ltd; Merrill Lynch (Milan): Merrill Lynch International Bank Limited; MLPF&S (UK): Merrill Lynch, Pierce, Fenner & Smith Lim~ed; Merrill Lynch (Australia): Merrill Lynch Equ~ies (Australia) Limited; Merrill Lynch (Hong Kong): Merrill Lynch (Asia Pacific) Limited; Merrill Lynch (Singapore): Merrill Lynch (Singapore) Pte ltd; Merrill Lynch (Canada): Merrill Lynch Canada Inc; Merrill Lynch (Mexico): Merrill Lynch Mexico, SA de CV, Casa de Bolsa; Merrill Lynch (Argentina): Merrill Lynch Argentina SA; Merrill Lynch (Japan): Merrill Lynch Japan Securities Co, Ltd; Merrill Lynch (Seoul): Merrill Lynch International Incorporated (Seoul Branch); Merrill Lynch (Taiwan): Merrill Lynch Securities (Taiwan) Ltd.; DSP Merrill Lynch (India): DSP Merrill Lynch Limited; PT Merrill Lynch (Indonesia): PT Merrill Lynch Indonesia; Merrill Lynch (Israel): Merrill Lynch Israel Limited; Merrill Lynch (Russia): Merrill Lynch CIS Limited, Moscow; Merrill Lynch (Turkey): Merrill Lynch Yatirim Bankasi A.S.; Merrill Lynch (Dubai): Merrill Lynch International, Dubai Branch; MLPF&S (ZOrich rep. office): MLPF&S Incorporated ZOrich representative office; Merrill Lynch (Spain): Merrill Lynch Capital Markets Espana, S.A.S.V.; Merrill Lynch (Brazil): Banco Merrill Lynch de lnvestimentos S.A. This note has been approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited and BASL, which are authorized and regulated by the Financial Services Author~y; has been considered and distributed in Japan by Merrill Lynch Japan Securities Co, ltd and Bane of America Securities- Japan, Inc., registered securities dealers under the Financial Instruments and Exchange Law in Japan; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Limited and Bane of America Securities Asia Limited, which are regulated by the Hong Kong SFC and the Hong Kong Monetary Authority; is issued and distributed in Taiwan by Merrill Lynch Securities (Taiwan) Ltd.; is issued and distributed in India by DSP Merrill Lynch Limited; and is issued and distributed in Singapore by Merrill Lynch International Bank Limited (Merchant Bank), Merrill Lynch (Singapore) Pte ltd (Company Registration No.'s F 06872E and 198602883D respectively) and Bank of America Singapore Limited (Merchant Bank). Merrill Lynch International Bank Limited (Merchant Bank), Merrill Lynch (Singapore) Pte ltd and Bank of America Singapore Limited (Merchant Bank) are regulated by the Monetary Authority of Singapore. Merrill Lynch Equities (Australia) Limited (ABN 65 006 276 795), AFS License 235132 provides this note in Australia in accordance w~h section 911 B of the Corporations Act 2001 and neither it nor any of ~s affiliates involved in preparing this note is an Authorised Deposit-Taking lnstttution under the Banking Act 1959 nor regulated by the Australian Prudential Regulation Authority. No approval is required for publication or distribution of this note in Brazil. This research report has been prepared and issued by MLPF&S and/or one or more of ~s non-US affiliates. MLPF&S is the distributor of this research report in the US and accepts full responsibility for research reports of its non-US affiliates distributed to MLPF&S clients in the US. Any US person (other than BAS and its respective clients) receiving this research report and wishing to effect any transaction in any security discussed in the report should do so through MLPF&S and not such foreign affiliates. BAS distributes this research report to its clients and accepts responsibility for the distribution of this report in the US to BAS clients. Transactions by US persons that are BAS clients in any security discussed herein must be carried out through BAS. General Investment Related Disclosures: This research report provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options, futures, warrants, and contracts for differences). This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person. Investors should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Any decision to purchase or subscribe for securities in any offering must be based solely on existing public information on such security or the information in the prospectus or other offering document issued in connection with such offering, and not on this report. Securities and other financial instruments discussed in this report, or recommended, offered or sold by Merrill Lynch, are not insured by the Federal Deposit Insurance Corporation and are not depos~s or other obligations of any insured depository institution (including, Bank of America, N.A.). Investments in general and, derivatives, in particular, involve numerous risks, including, among others, market risk, counterparty default risk and liquidity risk. No secur~. financial instrument or derivative is suitable for all investors. In some cases, securities and other financial instruments may be difficult to value or sell and reliable information about the value or risks related to the secur~y or financial instrument may be difficult to obtain. Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment. Past performance is not necessarily a guide to future performance. Levels and basis for taxation may change. This report may contain a short-term trading idea or recommendation, which highlights a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company. Short-term trading ideas and recommendations are different from and do not affect a stock's fundamental equity rating, which reflects both a longer term total return expectation and attractiveness for investment relative to other stocks w~hin its Coverage Cluster. Short-term trading ideas and recommendations may be more or less positive than a stock's fundamental equity rating. SofA Merrill Lynch is aware that the implementation of the ideas expressed in this report may depend upon an investor's ability to "short'' securities or other financial instruments and that such action may be limited by regulations prohibiting or restricting "shortselling" in many jurisdictions. Investors are urged to seek advice regarding the applicability of such regulations prior to executing any short idea contained in this report Foreign currency rates of exchange may adversely affect the value, price or income of any secur~ or financial instrument mentioned in this report. Investors in such secur~ies and instruments, including ADRs, effectively assume currency risk. UK Readers: The protections provided by the U.K. regulatory regime, including the Financial Services Scheme, do not apply in general to business coordinated by Merrill Lynch entities located outside of the United Kingdom. These disclosures should be read in conjunction with the BASL general policy statement on the handling of research conflicts, which is available upon request Officers of MLPF&S or one or more of its affiliates (other than research analysts) may have a financial interest in securities of the issuer(s) or in related investments. Merrill Lynch is a regular issuer of traded financial instruments linked to securities that may have been recommended in this report. Merrill Lynch may, at any time, hold a trading position (long or short) in the securities and financial instruments discussed in this report. Merrill Lynch, through business units other than BofAML Research, may have issued and may in the future issue trading ideas or recommendations that are inconsistent with, and reach different conclusions from, the information presented in this report. Such ideas or recommendations reflect the different time frames,

7

Bank of America~ Merrill Lynch

Business, Education & Professional Services

10 August 20 10

assumptions, views and analytical methods of the persons who prepared them, and Merrill Lynch is under no obligation to ensure that such other trading ideas or recommendations are brought to the attention of any recipient of this report. In the event that the recipient received this report pursuant to a contract between the recipient and MLPF&S for the provision of research services for a separate fee, and in connection therewith MLPF&S may be deemed to be acting as an investment adviser, such status relates, if at all, solely to the person with whom MLPF&S has contracted directly and does not extend beyond the delivery of this report (unless otherwise agreed specifically in writing by MLPF&S). MLPF&S is and continues to act solely as a broker-dealer in connection with the execution of any transactions, including transactions in any securities mentioned in this report. Copyright and General Information regarding Research Reports: Copyright 2010 Merrill Lynch, Pierce, Fenner & Smith Incorporated. All rights reserved. iQmethod, iQmethod 2.0, iQprofile, iQtoolkit, iQworks are service marks of Merrill Lynch & Co., Inc. iQanalytics®, iQcustom®, iQdatabase® are registered service marks of Merrill Lynch & Co., Inc. This research report is prepared for the use of Merrill Lynch clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express written consent of Merrill Lynch. Merrill Lynch research reports are distributed simultaneously to internal and client websites and other portals by Merrill Lynch and are not publiclyavailable materials. Any unauthorized use or disclosure is prohibited. Receipt and review of this research report constitutes your agreement not to redistribute, retransmi~ or disclose to others the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets) without first obtaining expressed permission from an authorized officer of Merrill Lynch. Materials prepared by Merrill Lynch research personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Merrill Lynch, including investment banking personnel. Merrill Lynch has established information barriers between BofAML Research and certain business groups. As a result, Merrill Lynch does not disclose certain client relationships with, or compensation received from, such companies in research reports. To the extent this report discusses any legal proceeding or issues, it has not been prepared as nor is it intended to express any legal conclusion, opinion or advice. Investors should consult their own legal advisers as to issues of law relating to the subject matter of this report. Merrill Lynch research personnel's knowledge of legal proceedings in which any Merrill Lynch entity and/or its directors, officers and employees may be plaintiffs, defendants, co-defendants or co-plaintiffs with or involving companies mentioned in this report is based on public information. Facts and views presented in this material that relate to any such proceedings have not been reviewed by, discussed with, and may not reflect information known to, professionals in other business areas of Merrill Lynch in connection with the legal proceedings or matters relevant to such proceedings. This report has been prepared independently of any issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of any securities. None of MLPF&S, any of its affiliates or their research analysts has any authority whatsoever to make any representation or warranty on behalf of the issuer(s). Merrill Lynch policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer prior to the publication of a research report containing such rating, recommendation or investment thesis. Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional. The information herein (other than disclosure information relating to Merrill Lynch and its affiliates) was obtained from various sources and we do not guarantee its accuracy. This report may contain links to third-party websites. Merrill Lynch is not responsible for the content of any third-party website or any linked content contained in a third-party website. Content contained on such third-party websites is not part of this report and is not incorporated by reference into this report. The inclusion of a link in this report does not imply any endorsement by or any affiliation with Merrill Lynch. Access to any third-party website is at your own risk, and you should always review the terms and privacy policies at third-party websites before submitting any personal information to them. Merrill Lynch is not responsible for such terms and privacy policies and expressly disclaims any liability for them. Subject to the quiet period applicable under laws of the various jurisdictions in which we distribute research reports and other legal and Merrill Lynch policyrelated restrictions on the publication of research reports, fundamental equity reports are produced on a regular basis as necessary to keep the investment recommendation current. Certain outstanding reports may contain discussions and/or investment opinions relating to securities, financial instruments and/or issuers that are no longer current Always refer to the most recent research report relating to a company or issuer prior to making an investment decision. In some cases, a company or issuer may be classified as Restricted or may be Under Review or Extended Review. In each case, investors should consider any investment opinion relating to such company or issuer (or its security and/or financial instruments) to be suspended or withdrawn and should not rely on the analyses and investment opinion(s) pertaining to such issuer (or its securities and/or financial instruments) nor should the analyses or opinion(s) be considered a solicitation of any kind. Sales persons and financial advisors affiliated with BAS, MLPF&S or any of their affiliates may not solicit purchases of securities or financial instruments that are Restricted or Under Review and may only solicit securities under Extended Review in accordance with firm policies. Neither Merrill Lynch nor any officer or employee of Merrill Lynch accepts any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use of this report or its contents.

8

From:

To: CC: Date:
Subject:

James Bob Finley, Steve
8/25/2010 11:40:38 AM

FYI 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

.~~APOLLO ~J~ GROUP, INC.
Higher Education at a Crossroads

August 2010 Apollo Group, Inc.

The Current State of Higher Education in America and the Vital Role of Proprietary Colleges and Universities
America is at a crossroads with respect to how the nation's higher education system will adapt to meet the needs of today's learners. At Apollo Group, we are concerned that the country will not meet the national education goals set forth by President Obama without an adaptable postsecondary system that operates differently than it has in the past-a system that embraces diversity and innovation. More Americans than ever need a college degree and are seeking access to higher education. Jobs today require higher education, yet out of 132 million people in the labor force, more than 80 million don't have a bachelor's degree, and 50 million adults have never even started college. These individuals are increasingly looking for ways to remain competitive and advance in their careers in today's global economy. Those seeking access to higher education are less prepared than in the past and require greater support. High school dropout rates are now approximately 55% in many major cities like New York and Los Angeles. Even more concerning, many students who do graduate cannot perform at the twelfth grade level in reading or math. Over 70% of today's students are now categorized as "non-traditional" students. Our colleges and universities must meet the needs of today's learners who have families and professional obligations that make it incrementally challenging to pursue a college degree. Traditional colleges and universities are the backbone of the U.S. higher education system, but they alone cannot meet the country's needs. This system, which is exclusive by design, was built to meet the needs of a different era when only a small portion of the nation's workforce needed a college degree. Today's globally competitive, knowledgebased economy requires a more broadly educated society. President Obama has set forth three important goals for the U.S. higher education system which are critical to the country regaining its standing as a global leader in education. On a sobering note, we estimate that without proprietary schools, meeting these goals would cost U.S. taxpayers more than $800 billion over the next ten years. Accredited, degree-granting proprietary institutions, which have been a strong source of innovation, play a critical role in the future of education. These institutions provide access to students who previously have been left behind by or excluded from the traditional higher education system. Well managed proprietary institutions can meet the demand for education at a significantly lower cost to society. At Apollo Group, we strive to demonstrate responsible, ethical leadership in higher education. We agree that thoughtful and consistent regulation is critical to the future success of the higher education system. Apollo Group is focused on ensuring regulatory compliance at University of Phoenix and our other institutions, providing robust student protections for our current and prospective students, and delivering quality educational offerings to today's non-traditional learners.

Gregory W. Cappelli Co-Chief Executive Officer of Apollo Group and Chairman of Apollo Global

Legal Disclosure: The statements and claims made are the position of Apollo Group, Inc. based on information and analysis from vanous sources referenced in the Appendix of this report, rncluding the U.S. Department of Education, various independent third-parties, and Apollo Group company data. For more information, please refer to the Appendi>< of this report.

~~GROUP. INC.

,\.~APOLLO

August 2010

Table of Contents
Executive Summary ....................................................................................................... 3 The Current State of Higher Education ........................................................................... 8
Why Does Higher Education Matter? ...................................................................................................................... 8 Can the Higher Education System Stand Still When the World is Changing Around It? ......................................... 8 What is Needed for America to Remain Competitive? .......................................................................................... 10 Why is the Solution Easier Said than Done? .......................................................................................................... 10 Can America's Higher Education System Rise to Meet These Challenges? ........................................................... 12

The Role of Proprietary Institutions ............................................................................. 14
What are the Realities ofToday's "Non-traditional" Students? ............................................................................ 14 Do Students at Proprietary Institutions Receive a Disproportionate Share of Student Aid Funding? .................. 16 Do Proprietary Institutions Overburden Students with Debt? .............................................................................. 18 Do Students of Proprietary Institutions Default Too Frequently? ......................................................................... 19 Are Proprietary Institutions a Good Investment for Taxpayers? ........................................................................... 20 Can America Meet Its Educational Goals Without Proprietary Institutions? ........................................................ 22

Apollo Group is Leading

by Example ............................................................................ 24

Aligning Our Educational Offerings with the Realities ofToday's "Non-traditional" Students ............................. 24 Embracing Ethical Enrollment Practices ................................................................................................................ 24 Implementing Enhanced Student Protections throughout the Student Experience ............................................. 26 Offering a Quality Education that is Valued by Employers .................................................................................... 27 Investing in the Future of Higher Learning ............................................................................................................ 30 Recognizing the Importance of Regulatory Compliance ....................................................................................... 31 What is Management's Philosophy? ..................................................................................................................... 32

Conclusion ................................................................................................................... 33
Appendix ..................................................................................................................... 34

Apollo Group, Inc.

I Higher Education at a Crossroads

2

~~GROUP. INC.

,\.~ APOLLO

August 2010

Executive Summary
What kind of nation will we be a decade or two from now? Will our system of higher education be the bridge that takes us to a safer, stronger future, or will it be a burden that holds us back? We will address these questions in this report.

At Apollo Group, we believe America is at a crossroads with respect to the future direction of higher education. We find ourselves at a point in time when we-as a nation, as citizens, as policy makers and as leaders in education-must make a choice between defining ourselves 51 as a nation in the 21 century with a limited, educated elite class who enjoy the benefits of a college degree (and all of the corresponding professional, finan cial and personal benefits that a degree brings) or a society with a broadly educated, productive and globally competitive workforce. The choice is clear. It is imperative to recognize that the world and the labor force of today is much different than the one of a century ago when much of the traditional higher education system was established and when the United States was still a largely agrarian economy, or even several decades ago when it was the world's manufacturing powerhouse. Salient evidence supports this position. In 1950 (when the U.S. economy was largely driven by manufacturing and assembly line workers) only about 20% of jobs required a skilled or educated worker. Today, with knowledge as the backbone of our information-based 1 economy, more than 60% of jobs require advanced skills training or education. And not surprisingly, it is expected that the fastest growing jobs in the coming decade will require a 2 college level degree or higher. As a result, more Americans than ever need a college degree and are seeking access to higher education in order to remain competitive and advance in their careers. However, despite the shift in educational requirements for jobs over the years, currently only 35% of American workers over the age of 25 have achieved a four-year degree. There are approximately 132 million Americans in the U.S. labor force over the age of 25, of whom over 80 million do not have a bachelor's degree. What's worse, 50 million Americans have never started college 3 and more than 30 million have never completed their degree. According to the World Economic Forum's Global Competitiveness Report, the U.S. has lost its number one 4 competitive ranking in the world. Recognizing this problem, the Obama administration last year set forth three important goals 5 for the U.S. higher education system that are critical to the country regaining its standing as a leader in education and to remain competitive in an increasingly global economy. Those goals include: To have every American receive at least one year of college education; To once again have the highest graduation rate among developed countries by 2020; and • To encourage lifelong learning.

"Let me be crystal clear: forprofit institutions play a vital role in training young people and adults for jobs. They are critical to helping America meet the President's 2020 goal. They are helping us meet the explosive demand for skills that public institutions cannot always meet. "
- Secretary of Education Arne Duncan, May 11, 2010

We applaud these goals and agree with the President's recognition of the importance of fostering a broadly educated society in order to keep America competitive as a nation.

"At the start of my administration I set a goal for America: by 2020, this nation will once again have the highest proportion of college graduates in the world. We used to have that. We're going to have it again."
- President Barack Obama, July 14, 2010

Unfortunately, the country faces numerous challenges in achieving these goals. First among them is a K-12 system that is not preparing students for college-level study as well as it once did . The nationwide dropout rate of high school students in 2008-2009 was

Apollo Group, Inc.

I Higher Education at a Crossroads

3

~~GROUP. INC.

,\.~ APOLLO

August 2010

approximately 30% and it was significantly higher in major urban areas, reaching 55% in both 6 New York City and Los Angeles. Equally striking, of students who make it to the twelfth grade, 65% of them cannot read at a twelfth grade level and 77% are not proficient in math at 7 a twelfth grade level. Despite the U.S. spending more on K-12 education per pupil than almost any other country, deficiencies at the K-12 level have caused the U.S. position in international testing to slip when compared to other nations, and we now rank 21st out of 30 OECD (Organization for Economic Co-operation and Development) countries in science scores and 25th out of the 9 same 30 countries in math scores (both measured at age 15). In addition to more students being inadequately prepared for college-level study, increasing numbers of working learners who never started or never completed their college education (many of whom have not been in a classroom environment in years) are now recognizing the need for a college degree in order to retool their skills or advance in their careers. Both of these factors-a greater number of less prepared high school graduates and a greater number of working adults now looking to attain a degree-are placing burdens on a higher education system that was not built to accommodate the needs of these individuals. And these burdens come at a time when public funding for higher education is under pressure and budgets and capacity are being cut at traditional schools. Without the skills essential to a knowledge-driven economy, America will continue to lose ground in its economic competitiveness.
8

At Apollo Group, we are concerned that our country will not meet the national education goals set forth by the President without a postsecondary system that can serve the needs of more non-traditional students than was originally intended. Traditional schools-public and independent private colleges and universities-are the backbone of the U.S. higher education system, but they alone cannot meet the demands of our society. We believe innovation and new alternatives are required to adapt to our rapidly changing world. In order to meet just one of President Obama's national education goals-ensuring that every American receives one year of college-we estimate it would require the traditional education system to provide access to more than 50 million first-time students, hire and train 500,000 new faculty members, create 1-2 million additional classes, and build the equivalent 1 of thousands of new colleges and universities. Furthermore, we estimate that utilizing public institutions alone would cost the taxpayers more than $BOO billion over the next ten years to educate the additional 13.1 million graduates necessary to meet President Obama's goal of America once again having the highest graduation rate among developed 11 countries by 2020.

°

Achieving this feat would be monumental in itself, but to do so at a time when traditional schools' resources are under pressure makes the task a near impossibility. Thirty-nine states 12 have cut funding to public colleges and universities in the past year alone and schools are being forced to cut faculty positions and student seat capacity just to remain viable.

Accredited, degree-granting proprietary institutions (also known as for-profit institutions) play a critical role in the future of education by providing access to students who previously have been left behind by or excluded from the traditional higher education system in the U.S. Today's students have families and professional obligations that make it challenging to pursue a college degree and successfully make it through to graduation. Already, 73% of U.S.

Apollo Group, Inc.

I Higher Education at a Crossroads

4

~~GROUP. INC.

,\.~ APOLLO

August 2010

students are classified as non-traditional by the Department of Education, meaning they have risk factors that make it more difficult to reach graduation, such as working while attending school or having dependents of their own. Proprietary institutions like University of Phoenix (a subsidiary of Apollo Group) are meeting the needs of today's working learners, and students are responding to the value proposition of this educational offering. We do this by providing flexible scheduling, a choice of onl ine or campus-based classrooms, small class sizes, degree programs relevant to today's workforce, faculty who have professional experience in their field of instruction, and high levels of student support to help students succeed. These adaptations and innovations have enabled University of Phoenix to provide strong academic outcomes as well as career enhancement opportunities to students who in many cases carry a higher level of educational risk as defined by the Department of Education. This does not mean that these students are less talented or incapable of learning, but rather it's a recognition that sometimes life gets in the way. Funding for education is provided directly to students, and students are choosing to attend certain proprietary institutions because of the factors mentioned above. By questioning whether proprietary institutions are the recipients of too much financial aid funding, critics are actually questioning whether non-traditional and socioeconomically disadvantaged individuals deserve the right to have access to the same student financial aid funds, and thus access to an education, as more affluent students do. If we are to meet any of President Obama's goals, we believe the answer must be yes. It is important to note that proprietary institutions do not burden the taxpayer nearly as much as traditional publicly funded or independent private universities, as they do not receive direct state subsidies and do not benefit from tax-free endowment contributions. Rather, proprietary institutions pay significant taxes back to the public coffers. We estimate the annual net cost to society, inclusive of defaults on student loans, is approximately $1,509 per student at University of Phoenix compared with a cost of $7,051 per student at 14 independent private institutions and $11,340 per student at public institutions. Given these figures, we estimate that having a properly regulated and healthy proprietary postsecondary education system in this country would allow the President to reach his higher education goals while spending less than half the $800 billion necessary to do the same thing through 15 the traditional college system alone.

13

Apollo Group is playing a leadership role in higher education, and we are proud of our heritage in helping to pioneer higher education for the working learner over 35 years ago, followed by the introduction of online education over 20 years ago. In addition, we are currently investing hundreds of millions of dollars into the next-generation of learners by developing a world-class adaptive learning platform designed for the classroom of tomorrow. Critics of the proprietary postsecondary sector have raised concerns about industry recruiting practices, student outcomes and student debt levels. While Apollo Group and University of Phoenix strive for excellence in all of these areas, we recognize that we can continue to improve. In this paper, we discuss some of the misperceptions about University of Phoenix and our students, as well as some of the initiatives we have undertaken to deliver continued improvement. Importantly, we are committed to delivering a quality education to those who are willing to work hard enough to realize its benefits. Recognizing that we were experiencing an increasing number of students who were less prepared for the rigors of our degree programs, in early 2009 University of Phoenix began testing and recently announced the full implementation of a University Orientation program. This three week program will be offered at no cost to students and is designed to ensure that prospective students understand the time and commitment required to be successful in our rigorous programs of study prior to

Apollo Group, Inc.

I Higher Education at a Crossroads

5

~~GROUP. INC.

,\.~ APOLLO

August 2010

enrolling in our University. This is especially important as it allows students to make a fully informed decision about attending our University before taking on college debt. Apollo Group and University of Phoenix strive to always act in the best interests of our students. Our goal is to help educate some of the SO million Americans in our labor force today who have never attempted college either because they didn't realize it was available to them or didn't think it was possible. And, importantly, we understand that simply enrolling students for the sake of financial gains will never prove successful in the end. Why? Because we believe that only by consistently providing a strong value proposition to our students can our shareholders generate sustainable returns over time. It's that simple. To that end, we've implemented a series of additional student protections including financial literacy tools such as our Responsible Borrower Calculator, which encourages students to borrow only the amount they need for their education. Critics are right to point out that the cost of college has increased dramatically over the past several decades, causing students in certain institutions to take on unusually high levels of debt. At University of Phoenix, the majority of our degree granting programs are either at or below the federal Title IV loan limits set by Congress. And, importantly, despite the fact that we cannot restrict a student's ability to borrow up to the federally set Title IV limits, total student debt levels at University of Phoenix are within national averages when compared to both public and independent private four-year colleges and universities. Robust and enforced regulatory compliance is critical to the future of any university, and our universities are no exception. Our students have access to a compliance hotline 24 hours per day, and we monitor over 30,000 conversations per day between our current as well as prospective students and our counselors. To further reinforce that our counselors are not pressured in any way to enroll a student who is not ready or prepared for University of Phoenix, we have announced that a new evaluation and compensation plan for our counselors will be rolled out University wide beginning this fall. In this new plan, no part of a counselor's compensation will have any link to the number of students they enroll at our University. Rather, our counselors will be evaluated on and compensated for always acting in the best interest of the student-essentially, advising the student the way they would a brother, sister, son, daughter, or close friend. We feel strongly that the new plan will further solidify our goal of always putting the student first. At Apollo Group, we strive to demonstrate responsible, ethical leadership in higher education. We recognize that it is Apollo Group's role to ensure regulatory compliance at University of Phoenix and our other institutions. To help ensure this, we have a large dedicated team of full-time compliance professionals at Apollo Group. Compliance starts at the top, and we are striving to be the best in this critical area. Further, on occasions where we find mistakes or compliance violations, we strive to handle them with the urgency, care and attention they deserve.

Above all, University of Phoenix invests heavily in its students' education and student services, as well as in building the learning environment of tomorrow. Educational and instructional spending is by far our highest category of expenditure, while our marketing costs 16 to enroll a new student are generally in-line with the average of all schools in the U.S. Ultimately, the value of the education we deliver to our students is the determinant of the long-term success of our institution, as positive outcomes yield success for our graduates. The University delivers value to its students and transparently publishes its outcomes so that students can make informed decisions. We are proud of our record and highlight the following achievements:

Apollo Group, Inc.

I Higher Education at a Crossroads

6

~~GROUP. INC.

,\.~ APOLLO

August 2010

University of Phoenix students enter with lower average assessment scores than the national average but substantially close that gap by their senior year, meaning they 17 demonstrate a greater rate of learning compared to national averages; University of Phoenix associate students graduate at a slightly higher rate than the national average, and bachelor's students graduate below the national average owing, in part, to the greater numbers of risk factors (as defined by the Department of Education) 18 that non-traditional students like ours exhibit; University of Phoenix students' two-year loan default rate for the 2008 cohort is 19 estimated to be just 6.7% on a dollar-based calculation; For students who have graduated with a University of Phoenix degree, we estimate our cumulative default rate is less than 1% (using the official 2005, 2006 and 2007 cohort 20 files); and University of Phoenix students realize average increases in annual compensation of 8.5% for bachelor's graduates and 9.7% for master's graduates during the course of their 21 program compared to the 3.8% national average increase during that same period.

In today's world we need on-demand, rapidly deployed, effective education. Today's working learners need industry-adaptive faculty and curriculum-faculty who are active in their fields of instruction and teach curriculum that can immediately be applied in the workforce. Educational programs need to prepare students for today's economy, not the economy of yesterday. By providing an accessible, high quality education, University of Phoenix is producing successful outcomes-graduates who are better positioned to enjoy the professional, financial and personal benefits that a degree brings, as well as a more educated, competitive society as a whole. Through a framework of thoughtful and consistent regulation, well managed proprietary colleges and universities-those that are committed to responsible, ethical practices and regulatory compliance-play a vital role in the future of America's higher education system, helping it to rise to the challenge of meeting the needs of the millions of non-traditional learners and producing the graduates necessary to achieve the nation's shared educational and economic goals. Apollo Group is committed to leading the nation towards this future.

Apollo Group, Inc.

I Higher Education at a Crossroads

7

~~GROUP. INC.

,\.~ APOLLO

August 2010

The Current State of Higher Educat1on
We believe America is at a crossroads with respect to the future direction of higher education in this country. We are standing at a point in time when we-as a nation, as citizens, as policy makers and as leaders in education-must make a choice. We must either define ourselves as a nation with only a small, educated elite class who enjoy the benefits of a college degree (and all of the corresponding professional, financial and personal benefits that it brings) or as a society with a broadly educated, productive and globally-competitive workforce.

Why Does Higher Education Matter? In case that choice isn't clear, it is imperative to recognize that postsecondary education brings considerable benefits to both individuals who attain higher degrees, as well as society as a whole. Individuals benefit from greater professional opportunity, higher earnings 22 potential and a lower incidence of unemployment.
Exhibit 1: Unemployment Rate and Earnings by Level of Educational Attainment Unemployment Rate
!

Median Weekly Earnings
Doctoral degree
$1,532 $1,529

2.5% -

3.9% 5.2% 6.8% 8.6% ...__ _ _ _ __ 9.7% ....__ _ _ _ __

Master"s degree Bachelor's degree Associate degree Some college High school diploma
$761 $699 $626

$1,257 $1,025

_ o- - - - - - - - - - - - t No high school diploma 14 6

---

s454

Source: Bureau of Labor Statistics, Current Population Survey. Data are 2009 annual averages for persons age 25 and over. Earnings are for full-time wage and salary workers.

Society as a whole benefits from widespread productivity increases, a higher tax base at the local, state and federal levels from increased earnings, and reduced dependence on public 23 assistance programs, according to the College Board report Education Pays.

Can the Higher Education System Stand Still When the World is Changing Around It? Despite the obvious personal and societal benefits of higher education, it is imperative to recognize that the world and the labor force of today is much different than the one of a century ago. The traditional higher education system was originally established when the United States was still a largely agrarian economy and thrived as America became the manufacturing powerhouse of the world. The world, and our economy, has changed significantly.

Apollo Group, Inc.

I Higher Education at a Crossroads

8

~~GROUP. INC.

,\.~APOLLO

August 2010

Consider a few facts. In 1950 (when the U.S. economy was largely driven by manufacturing and assembly line workers) only about 20% of jobs required a skilled or educated worker. But the days when an individual could raise a family on an unskilled manufacturing or assembly line job are in rapid decline. Today, with knowledge as the backbone of our information24 based economy, more than 60% of jobs require advanced skills training or education. Exhibit 2: Jobs of the Past versus Today

Jobs in 1950

Jobs Today

Unskilled

Semi-skilled

Skilled

Unskilled

Semi-skilled

Skilled

Source: Milken Institute, 2010 Global Conference.

And not surprisingly, it is expected that the fastest growing jobs in the coming decade are 25 those that will require a college level degree or higher. Exhibit 3: Future Job Growth by Education Level (2008-2018)

Associate First professional Master's Doctoral Bachelor's Vocational award Related work experience On-the-job training

19% 18% 18% 17% 17% 13% 8% 8%

Source: U.S. Bureau of Labor Statistics, Occupational Outlook Handbook, 2010-11 Edition.

As a result, more Americans than ever need a college degree and are seeking access to higher education in order to remain competitive and advance in their careers. However, despite this shift, currently only 35% of American workers have achieved a four-year degree. The remaining two-thirds of all U.S. workers over the age of 25 (more than 80 million people in the labor force today) do not have a four-year degree. Of those individuals, approximately 50 26 million never started college and an additional 30+ million never completed their degree.

Apollo Group, Inc.

I Higher Education at a Crossroads

9

~~ GROUP. INC.

,\.~ APOLLO

August 2010

Exhibit 4: Educational Attainment of the U.S. Labor Force
(132 million workers over 25 years of age)

Bachelor's degree or ___ higher, 35%

Less than bachelor's degree, 65%

Source: U.S. Bureau of Labor Statistics, Current Population Survey.

Importantly, today's knowledge-based jobs are portable across geographic boundaries. If American workers do not have the necessary education and skills to meet the job requirements, it is likely someone else will. Unfortunately, according to the World Economic Forum's Global Competitiveness Report, the U.S. has already lost its number one competitive 27 ranking in the world.

What is Needed for America to Remain Competitive?
Recognizing this problem, the Obama administration last year set forth three important goals 28 for the U.S. higher education system that are critical to the country regaining its standing as a leader in education and to remain competitive in an increasingly global economy. Those goals include: To have every American receive at least one year of college education; To once again have the highest graduation rate among developed countries by 2020; and • To encourage lifelong learning.

We applaud these goals and agree with the President's recognition of the importance of fostering a broadly educated society in order to keep America competitive as a nation.

Why is the Solution Easier Said than Done?
Unfortunately, the country faces numerous challenges in achieving these goals. Students Less Prepared for College Level Study. First among these challenges is a K-12 system that is not preparing students for college-level study as well as it once did. The 29 nationwide dropout rate of high school students in 2008-2009 was approximately 30%, and significantly higher in major urban areas.

Apollo Group, Inc.

I Higher Education at a Crossroads

10

~~GROUP. INC.

,\.~ APOLLO

August 2010

Exhibit 5 : High School Dropout Rates (2008-2009)

Source: Milken Institute, 2010 Global Conference.

Equally striking, for students who make it to the t welfth grade, 65% of them cannot read at a 30 twelfth grade level and 77% are not proficient in math at a twelfth grade level. Despite the U.S. spending more on K-12 education per pupil than almost any other country, deficiencies at the K-12 level have caused t he U.S. position in international testing to slip 51 when compared to other nations, and we now rank 21 out of 30 OECD countries in science 1 32 scores and 25 h out of the same 30 countries in math scores (both measured at age 15).
Exhibit 6: International Science and Mathematics Assessment Scores
31

Science scores (at age 15)
1. 2. 3. 4. 5. 6. 7.
Antand
C~U'8d.{t

Math scores (at age 15)
1. 2.
Finland

563
534 531 530 527 525

New Zealand Austmtro Nvthwtands

J""'n

3.
4. 5. 6. 7. 8.

South Korea Netl>et1ands SWfU:e1land

548 547
$31 530 527 523

c.noo.
Jap!lfl

e.

9.
10. 11. 12. 13. 14. 15. 16. 17. 18. 19.

Soue>Korea Germ•ny Unlt>d Klngdam
Czoch~IIC

522 516
515 513 512 511

9.
10. 11. 12 . 13. 14. 15. 16. 17. 18. 1&. 20.

NewZoalancl Belgl<m Aus1ralla
Czec;h

$20 520
513 510 506 $05 $04 502 501

522

SWitz.e1land AustM

Belgium
troland
HUngl!IY

510
5()6

Denmark Rspublic Iceland Austria
lr'eland

S.vedEHl

504 503

Germany sw.otn

OECD average
P Oland Denma1 k

500
498 496 498 491

OECD average
FI"':f'IC. Unl1ed Kitlgdom

498
496 495

FraMe
Iceland Slovak Ros>ubllc
Spain Norway
luxt~nbotdg

20.

Potond Stovai<Republk:
Hu~ry

-495 492

21. United States
Italy

489
48e 48e 487 486 475 474 473 424 410

21.
22. 23.

22. 23. 24. 25. 26. 27. 28. 29. 30.

L-.-.rg
Norway

24.
26.
27. 28. 29. 30.

Spain

25. United States
Porlugol

Portugol Greece Turkey MoJUco

JtWy
Greece
Tu~y

MexiCO

474
482 459 424 406

491 400 490 480

Source: U.S. Department of Education, National Center for Education Statistics, Highlights from Program for International Student Assessment (PJSA) 2006.

Apollo Group, Inc.

I Higher Education at a Crossroads

11

~~GROUP. INC.

,\.~ APOLLO

August 2010

In addition to more students leaving the K-12 system inadequately prepared for college-level study, increasing numbers of working learners who never started or never completed their college education (many of whom have not been in a classroom environment in years) are now recognizing the need for a college degree in order to retool their skills or advance in their careers.

Can America's Higher Education System Rise to Meet These Challenges?
Greater numbers of less prepared high school graduates and greater numbers of working learners now looking to attain a degree are placing burdens on a higher education system that was not built to accommodate the needs of these individuals, as it requires significantly expanding capacity to reach greater numbers of students who also require a higher level of academic and student support services than students of the past. In addition to this dynamic, these factors are placing increased burdens on the traditional postsecondary system at a time when public funding for higher education is under pressure and budgets and capacity are being cut at traditional schools.
Traditional Schools Cannot Meet the Demand Alone. Traditional schools-public and independent private colleges and universities-are the backbone of the U.S. higher education system, but they alone cannot meet the demands.

In order to meet just one of President Obama's national education goals-ensuring that every American receives one year of college-we estimate the traditional education system would have to provide access to more than SO million first-time students, hire and train 500,000 new faculty members, create 1-2 million additional classes, and build the equivalent of thousands 33 of new colleges and universities. Furthermore, to increase the capacity of public institutions to meet President Obama's goal of America once again having the highest graduation rate among developed countries by 2020, we estimate that it would cost hundreds of billions of 34 dollars over the next ten years, as we detail later in this report.
Exhibit 7: What Obama's National Education Goals Would Require
Access for over
50 million students 500,000

new teachers

1-2 million additional classes

Thousands of new colleges and universities

Source: Apollo Group estimates.

Achieving this feat would be monumental in itself, but to do so at a time when traditional schools' resources are under pressure makes the task a near impossibility. Thirty-nine states 35 have cut funding to public colleges and universities in the past year alone and schools are being forced to cut faculty positions and student seat capacity just to remain viable. During 2010, the California State University system alone is cutting enrollment by 40,000 students, and University of Illinois furloughed 11,000 employees earlier in the year when it was

Apollo Group, Inc.

I Higher Education at a Crossroads

12

~~ GROUP. INC.

,\.~ APOLLO

August 2010

reported that the State of Illinois owed its flagship University over $400 million in overdue 36 subsidies.

As we discuss in this paper, traditional public and independent private institutions play an important role within the higher education system; however, due to the physical and financial limitations of the traditional university model, they do so at a significantly higher cost to the taxpayer than proprietary institutions (even when considering higher student loan default rates at proprietary institutions). For traditional institutions, delivering quality education generally relies upon a high fixed-cost, ground-based system of learning that requires significant investments in physical infrastructure-dormitories, cafeterias, athletic centers, parking facilities, etc. It also requires both locally domiciled students and locally available faculty, meaning that it can serve only a limited population of students within a limited distance. This system-whether by design or due to resource constraint- is rigid and, at times, inflexible in the way that it adapts educational curriculum and incorporates advances in technology and information systems to meet the needs of today's working learners. As such, the economics underlying the traditional schools' asset-intensive, high cost structure have been essentially unchanged over time. We believe it would be extremely difficult to scale the traditional model to meet the increasing demand for higher education generated by a globally competitive, knowledgebased economy without either major public funding increases (borne by a tax revenue system currently under significant budgetary strain) or a dramatic restructuring of the way in which the entire postsecondary system currently operates. Given this, we are concerned that the country will not meet the national education goals set forth by the President without a postsecondary system that operates differently than it has in the past-one that is able to effectively and efficiently deliver quality academic programs and student service to best serve the needs of today's working learners. Proprietary colleges and universities are playing an increasingly critical role in meeting these needs.

Apollo Group, Inc.

I Higher Education at a Crossroads

13

~~GROUP. INC.

,\.~ APOLLO

August 2010

The Role of Propr" etary Institutions
Despite the staggering demand for higher education and the challenges that will need to be met in order to satisfy it, some industry observers have questioned the role proprietary institutions play in the postsecondary education system. The U.S. postsecondary education system is very sizeable with approximately 6,600 schools. Included in this number are approximately 4,400 degree-granting institutions and 2,200 nondegree granting institutions. The proprietary sector represents about 2,800 of the total, of 37 which approximately 1,100 are degree-granting and 1,700 are not. This sector is extremely diverse as it includes technical and vocational schools (massage, beauty and culinary) that are typically nationally accredited, as well as regionally accredited degree-granting institutions such as University of Phoenix. There are six regional accrediting bodies in the U.S. We firmly believe that while not all proprietary institutions are the same, accredited, degreegranting schools that comply with regulations play a critical role in meeting the needs of today's non-traditional students, and they do so at a significantly lower cost to the taxpayer than traditional public or private independent schools. Well managed proprietary institutions provide strong academic quality and career outcomes for their students, providing them with services and capabilities that are not found at many traditional institutions. These proprietary institutions have been strong sources of academic and educational innovation deploying new technologies including online and distance learning, networking and technology infrastructure, new learning models and systems, networked faculty, distributed campus footprints, and service and support critical to helping working learners complete their educational degrees. In fact, without proprietary colleges and universities, we believe America will not be able to meet President Obama's national education goals.

W hat are the Realities of Today's "Non-tradit ional" St udents?
Accredited, degree-granting proprietary institutions play a critical role in the future of education by providing access to students who previously have been left behind by or excluded from the traditional higher education system. Today's students have family and professional obligations that make it challenging to pursue a college degree and successfully make it through to graduation. Already, 73% of U.S. students are classified as non-traditional 38 by the Department of Education, meaning they have risk factors that make it more difficult to reach graduation, such as working while attending school or having dependents of their own.

Apollo Group, Inc.

I Higher Education at a Crossroads

14

~~GROUP. INC.

,\.~APOLLO

August 2010

Exhibit 8: Undergraduates with Non-traditional Characteristics
l'lly 1;.n..:red norel ~hir!l(:teisli'

73% 51% 48% 46% 39% 27% 13% ~

Fira'ICially lrceoerce"'t
A:terde<l pert-: -ne
Ce a~·~ en•cllrant

'"'orked lull-: :n~
1-< 9d cepancen:s
Sw~

&oare'1t

Nc h Jh scm c1p o-ne

7%
10%
2il\\>
~i)\\;

~·J\\1

5~

6()'1,

7(l'f

80'~

Source: U.S. Department of Education, National Center for Education Statistics, National Postsecondary Student Aid Study (NPSAS), 2000.

These non-traditional students are typically older, financially independent (meaning they lack parental financial support), from lower income families, minority and female. These demographic differences largely drive adverse reported quality metrics, such as lower retention and graduation rates, and higher loan default rates.
Exhibit 9: Student Demographics by Institution Type

F'lm;ent of Population Uncler .25
80%
70
60
• For-Proftt

Financial Status

80% 70 60

Fcr-Ptont

Public
Priva-ta

4YearPublle

50

so
40
30
20 10
0

R ZfnrPubhc

40

30
20

10

0
4Yo~r

2Year

lndopelldnnt

Depondont

Pvrcenl or Independent St~Jdente

with AnnWJIIncome < $30,000
100"/t

Non-Whit2 Students n Percent of Stutlent Body
50% -

80

40

0

For Profit

II

45 40 35 JO
25

-

For-Profit Public
Privato

20
15 10
-1

5
0

Public

Prfvato

4Yoor

2Yaar

Source: U.S. Department of Education, National Center for Education Statistics.

Apollo Group, Inc.

I Higher Education at a Crossroads

15

~~GROUP. INC.

,\.~APOLLO

August 2010

Proprietary institutions like University of Phoenix are meeting the needs of today's working learners by innovating to provide flexible scheduling, a choice of online or campus-based classrooms, small class sizes, degree programs relevant to today's workforce, faculty who have professional experience in their field of instruction, and high levels of student support to help students succeed. If we as a nation are to meet President Obama's goals of once again having the highest proportion of college graduates in the world by 2020, encouraging every American to have at least one year of college, and encouraging lifelong learning for all Americans, finding the means and capacity to successfully educate non-traditional students is essential.

Do Students at Proprietary Institutions Receive a Disproportionate Share of Student Aid Funding?
Some industry critics point to the growth in federal aid dollars that have gone to proprietary institutions in recent years, while not recognizing the fact that student aid dollars follow the students (not the institutions) and student demographics are a primary determinant of the amount of financial aid and student debt. Students from lower socioeconomic backgrounds, who are more prevalent at institutions that choose not to focus on only the elite, disproportionately qualify for need-based Pel I Grants. In addition, the recent introduction of the year-round Pell Grant program creates the potential for the neediest students to receive up to 100% of additional Pell Grants in the same award year provided they are continuously enrolled. Since many proprietary institutions are typically based on a continuous enrollment model, it is likely that even more Pell Grant funds will be granted to students attending these institutions. On the other hand, the traditional termbased institutions generally have limited numbers of students enrol led continuously (i.e., a small percentage of students attend the summer term). Additionally, institutions (proprietary or otherwise) have no legal right to limit the amount of debt a student is entitled to borrow, which inhibits an institution's ability to put controls on students who over borrow. For many students at University of Phoenix, this results in their being able to borrow up to the maximum of the Title IV loan limits, which are set by Congress. Not surprisingly, financial independence (the lack of parental financial support) of nontraditional students drives higher borrowing needs among students at proprietary institutions. Despite these needs, students at four-year proprietary institutions still borrow 39 less, on average, than those at four-year independent private institutions.

Apollo Group, Inc.

I Higher Education at a Crossroads

16

~~GROUP. INC.

,\.~APOLLO

August 2010

Exhibit 10: Average Student Debt Levels by Institution Type

$30,000
97%

120%
98%

25,000

100

20,000
61%

71%

80

15,000

64'/o

60

10,000

37%

40

5,000

20

0
.a Yeoi"PubUc4 'lear Privcrte Nol-for-Prollt
4 Ycor Private
For Profit
2Yctr PubJic

0
2 YcC!f Prlvote

Not-for.P"OHt

2 Vc:or Pfl¥otc For Profit

A\'*'89& Debt

Avaraae &p.tctaD Family Contribution

• % of SwCI&!U Bot'tOINtng

Source: U.S. Department of Education, National Center for Education Statistics, 2007-2008 National Postsecondary Student Aid Study (NPSAS: 08).

In addition, although total Pell Grant and Stafford loan usage has increased, the amount of total funding from the government per student relative to average tuition at proprietary 40 institutions is dramatically below previous highs. Exhibit 11 : Federal Loans and Pell Grant Funding at Proprietary Institutions
$12,6-JO

~"~"
n ti<
1U;;
8tl<l!>

Sl!t!hlG
7tJ('""'

_;..,n,,tf:To161F('dtt.Jfl<·"1'lt[).. l"dhlt)PW\ :ht · x
$A~O

6')V,-,

.ProJrt
-lo . tragt-rf'.b~PtiiGnnt~ror·PrOfi1

so~, -!>'ltt~lttltiM MHIF~P..-ld ~')f~t uflt

$60.)0
-t0(i':l
-t- P,ofl~ oan~~CJf).,;~T'-tllfiJI)

$• OdO


lO(;lo.,

l(l41U ~ Of /!l t!lt li~k.l l
l uitJ~n ~ofA't,~o!'>tl le

S2 o~~
10 0!>

$0
1~81 J ~~~

~0'~

t;'Jl

199~

2UUIJ

~U(14

ZW8

Source: U.S. Department of Education, National Center for Education Statistics, National Postsecondary Student Aid Study (NPSAS), Data Analysis System. Undergraduate Survey, 1987, 1990, 1993, 1996, 2000, 2004, 2008.

Apollo Group, Inc.

I Higher Education at a Crossroads

17

~~GROUP. INC.

,\.~APOLLO

August 2010

While t he average Pell Grant per eligible student at all inst itutions, including Universit y of Phoenix, has increased over time, the average Pell Grant per eligible student at University of Phoenix is below t he average for students at other inst itutions ($2,826 in fiscal 2009 41 compared with $2,971 at all institutions ). Exhibit 12: Average Pell Grant per Eligible Student
University of Phoenix versus All Institutions

$5,000 $4,500 $4,000 $3,500

..

$2,971 $3,000 + - - - - - - - - - - - - - - - - - - - - - - - - -$&,8211==-$2,500 $2,000 $1,500 2005 2006 2007
• A ll Institut ions

2008
Max Pell

2009

• University of Phoenix Average

Source: Apollo Group internal analysis; U.S. Department of Education Common Origination and Disbursement, 2008 - 2009 Federal Pel/ Grant Program End-of-Year Report: U.S. Department of Education, Office Postsecondary Education.

By questioning whether proprietary institutions are the recipients of too much financial aid funding, critics are actually questioning whether socioeconomically disadvantaged i ndividuals deserve the right to have access to the same student financial aid funds, and thus access to an education, as more affluent students do. If we are to meet any of President Obama's goals, we believe the answer must be yes.

Do Proprietary Institutions Overburden Students with Debt?
The average borrowing of students in proprietary bachelor's degree programs is $24,635, which equates to a mont hly loan payment of $283.50 over ten years (assuming t he current 6.8% interest rate associated with most student loans, as set by Congress). The net monthly cost to the student is even lower when taking into consideration the personal income t ax benefit t hey receive on deductible st udent loan expenses.
42

According to t he Bureau of Labor Stat ist ics (Current Populat ion Study), t he difference in weekly earnings between a high school graduate and a person with a bachelor's degree is 43 $399 per week, or $1,729 per month, well in excess of the cost of the average loan repayment. Furthermore, this higher level of earnings for a college graduate continues beyond just the ten-year loan repayment period.

Apollo Group, Inc.

I Higher Education at a Crossroads

18

~~GROUP. INC.

,\.~APOLLO

August 2010

Do St udents of Proprietary Institutions Default Too Frequently?
Some industry observers point to higher default rates for students of proprietary schools as evidence that proprietary institutions are not providing a quality education that is valued in the marketplace. These observers do not recognize that demographics (not institution type) have a more meaningful impact on default rates. According to a report by the Government Accountability Office (GAO), "Academic researchers have found that higher default rates at proprietary schools are linked to the characteristics of the students who attend these schools. Specifically, students who come from low income backgrounds and from families who lack higher education are more likely to default on their loans, and data shows that students from proprietary schools are more likely to come from low income families and have parents who do not hold a college degree." The report went on to say that "student age was also linked to default rates in some of the research studies, with borrowers who take out student loans at an older age being more likely to default on their loans ... because they tend to have other obligations besides paying for college. [The GAO] analysis of the Department of Education's data shows that proprietary schools serve a higher percentage of older students than public and private non-profit schools and the majority of students at proprietary schools are 25 years old and older." Academic research further indicates that normalizing for demographics would eliminate the reported cohort default rate (CDR) gap with traditional institutions: Herr and Burt (2005): "Individual student background characteristics outweighed school characteristics;" Flint (1997): "Once one statistically controls for the kinds of students who attend proprietary schools, that effect almost completely vanishes;" and Jennie Woo (2002): "Institutional type only accounts for approximately 5% of the total contribution to increased default for high-risk students. The remaining 95% is comprised of student risk factors." Exhibit 13: Relative Contribution of Major Factors to the Higher Default Rates of Riskier Students
47 46
45
44

tO

2~

1'11

ao
70

60
50

40
lO

34"4

~~

l' ..

.Jl.


H\;,

II

"'-"""

·~

20 10
Boseil'e
Race
F~~ntlljR~ti-la.

M alt

A RIC

113 H91 S'ho~l lilllltrtltlroll File fur Stootnh Sehool UnollpiCJ'"llll\ illlpc!ld<ol
\lntlsel~

2-Yro1 Colle;e

TGIII

Source: NASFAA Journal of Student Financial Aid, Jennie Woo, Factors Affecting the Probability of Default: Student Loans in California, 2002.
Note: Baseline is white, female, U.S . citizen , high school graduate, father attended college, completed postsecondary education at a non-graduate or professional private four- year school, did not study business or computers, did not file for unemployment, and did not have a loan in deferment or forbearance, sold, rehabilitated, or repurchased, did not default on a prior loan, and had average family assets, family income, GPA, age, dependents, delinquency periods, current wages, and number of servicers; two-year college contribution calculated usi ng a weighted average of two-year public, private, and proprietary and four-year public school change in probabilities.

Apollo Group, Inc.

I Higher Education at a Crossroads

19

~~ GROUP. INC.

,\.~ APOLLO

August 2010

Perhaps equally important, the official CDR, as reported by the U.S. Department of Education, is a measure of default incidence, not a measure of dollar default. Students who drop out drive CDRs, and based on our experience at University of Phoenix, drop-outs have lower average debt levels since those who drop tend to do so early in their programs. This is not an excuse or reason to manage an institution of higher learning with unacceptably high default rates, but we believe the early drop-outs represent well intentioned students who begin their program and quickly realize that they cannot meet the strict obligations we require to successfully complete one of our programs given their work or family obligations which can sometimes be overwhelming. As a result, the dollar-value default percentage (the true economic impact of defaults) is significantly lower than the incidence-of-default percentage at University of Phoenix. University of Phoenix students' two-year default rate for the 2008 48 cohort is estimated to be just 6. 7% on a dollar-based calculation.

Are Proprietary Institutions a Good Investment for Taxpayers?
Beyond the general societal benefits of education, which include a more productive and competitive workforce, lower unemployment rates and more stable communitiesproprietary institutions educate citizens more cost effectively than traditional institutions. Despite the fact that socioeconomic and other risk-factors impact the average amount of financial aid borrowed by non-traditional students and also the rate at which non-traditional students default on that debt, it is important to note that proprietary institutions do not burden the taxpayer as much as traditional publicly funded or independent private universities. Yes, it is true that the taxpayer must bear the losses on defaulted Title IV loans, but according to the recent budget submitted by the White House, the Department of Education recovers more than 100% of the principal amount on defaulted loans to students through the federal Title IV programs. After accounting for collection costs and unaccrued interest, we estimate 49 the net recovery rate ranges between 60-65%. The costs of student loans are further offset by corporate income taxes paid by proprietary institutions. Therefore, it's hard to imagine that proprietary institutions of higher learning are producing huge financial liabilities for taxpayers as suggested by critics of the sector. In fact, proprietary institutions cost the taxpayers significantly less than traditional schools, as they do not receive direct state subsidies and do not benefit from tax-free endowment contributions, but rather they pay significant taxes back to the public coffers. We have undertaken an extensive analysis (detailed below) based on publicly available sources to understand the relative cost to the taxpayer to educate students at various types of postsecondary institutions. We calculate the net cost to society, inclusive of defaults on student loans, is approximately $1,509 per student per academic year at University of Phoenix compared with a cost of $7,051 per student at independent private institutions and 50 $11,340 per student at public institutions.

Apollo Group, Inc.

I Higher Education at a Crossroads

20

~~ GROUP. INC.

,\.~ APOLLO

August 2010

Exhibit 14: Annual Per Student Taxpayer Costs by Institution Type
Public (2-and 4-year) Direct Government Support (Grants, Appropriations, etc.) Federal Support on Subsidized Loans Defaults on Title IV Loans Recovery on Title IV Loans Donor Tax Benefit on Gifts Sales and Other Taxes Taxes on CO !£Orate Profits Net Cost to Taxpayer per Student $1 0,785 Independent Private (2-and 4-year) $5,621 85 1,324 (802) 823 Proprietary (2-and 4-year) $3,751 146 4,515 (2,736) (65) (1,092) $11 ,340 $7,051 $4,519 University of Phoenix $1 .082

40
507 (307) 315

94
3,032 (1,838) (38) (824) $1 ,509

[vs]

Source: Apollo Group analysis.
Notes: Institutions: Analysis includes all U.S, degree granting institutions that are eligible for Title IV. Student Enrollment Data: Information obtained from IPEDS for all schools as reported under the IPEDS definition for Fall 2008 full-ti me equivalent students. Direct Government Support: Information obtained from IPEDS for GASB institutions and private non-profit institutions or public institutions using FASB includes federal/state/local government operating contracts and appropriations (Pell awards included). Information obtained from IPEDS for FASB proprietary institutions includes statenocal government grants and federal/state/local government appropriations (Pell awards excluded). Pell award information for FASB proprietary institutions was obtained from the Department of Education website . Interest on Subsidized Loans: Subsidized Title IV loan information obtained from the Department of Education website. The three m onth Treasury bill rate was used assuming a one year interest subsidy for amounts loaned. Loan Defaults: Assumes that although more than 100% is collected on average for each Tttle IV dollar loaned by the government, the government could eam the equivalent amount of interest through the issuance of treasury bills. In addition, data is not available to determine if interest repayment trends are different between institutional types. However, lifetime default rates vary significantly between institutional types. The lifetime budgeted default rates for the 2007 cohort of students , per a report by the Department of Education issued in December 2009, along with 2007 two year cohort default rates, also published b y the Department of Education, were used to determine expected default rates by institutional type. Public and Private Non-Profit: The lifetime budgeted default rates of 17.2% used for the public and private non-profit institu tions is based on an average of four-year freshman - senior rates. Proprietary: The lifetime budgeted default rate of 39.5% used for the proprietary institutions is based on the two-year proprietary institutions lifeti me budgeted default rate. The two-year proprietary institutions lifeti me budgeted default rate of 47% was weighted at 20% based on the number of full-ti me equivalent students in the two-year category as a percentage of the total in the proprietary institutions. The four-year proprietary institutions rate was determined based on the relationship of the four-year proprietary institutions 2007 cohort default rate of 9.8% as compared to the two-year proprieta ry institutions rate of approximately 12.25% and applyi ng this ratio to the two-year proprietary institutions lifetime budgeted default rate of 47%. This rate for the expected four-year proprietary institutions lifeti me budgeted default rate was then weighted at 80% based on the number of full-time equivalent students in the four-year category as a percentage of the total in the proprietary institutions . Recovery on Loans: The recovery rate used for defaulted loans is the same for all institutions, 60.6%. This was then multiplied by the defaulted loans total to get the recovery dollar amount. The recovery rate was calculated using information from the Department of Education - SFA Collections, The White House - Office of Management and Budget ("The President's Budget 20og•), student loan collection industry's collection fees, and Apollo Group estimates. Donor Tax Benefit: Public and private non-profit institutions adjusted for the estimated tax benefit that donors receive for the gifts at a 35% tax rate. The gift amounts were obtained from IPEDS. Sales & Other Taxes : Credit given to proprietary institu tions for sales and use tax paid based on total revenue as reported in IPEDS to make comparable to public and private non-profit institutions. Taxes on Corporate Profits: Credit given to proprietary institutions for corporate taxes based on net income as reported in IPEDS to make comparable to public and private non-profit institutions.

We note that this analysis is based on the most current, independent third-party data available to us (much of which comes directly from the Department of Education), and we believe it to be the most reasonable case scenario for the relative per student costs to taxpayers. Importantly, however, we would also direct readers to a recent study by Delta Cost 51 Project which reported comparable figures to our calculation for subsidies at public institutions ($10,267 for federal, state and local appropriations, grants and contracts at public community colleges and $10,302 for federal, state and local appropriations, grants and contracts at public master's institutions), which most closely relates to the Direct Government Support line item for public institutions in our analysis above. The similarity of our figures to other third-party studies provides us with greater comfort with the reasonableness of our figures.

Apollo Group, Inc.

I Higher Education at a Crossroads

21

~~GROUP. INC.

,\.~APOLLO

August 2010

Can America Meet Its Educational Goals Without Proprietary Institutions?
Meeting President Obama's national graduation goals would require an additional 13.1 52 million college graduates (including five million community college graduates} by 2020 according to the National Center for Higher Education Management Systems. The following graph shows the cumulative growth needed by state over the next 10 years to reach that goal. Exhibit 15: Number of Additional Graduates Needed per State by 2020 to Meet President Obama's National Education Goals

to f(l : : 0 .... tO" vo > ~ ~~~·g~~t!eiS

£~~ ~ §~-a !

·~ ~~ -;
~ ~1~
~~~

·~ "§

"'

:j i
::;

i~~~
:r z " ~ z z

~

~ ~i~ ~~5 tOt)~
u ~
~ r

~

$ .2

0

~ ·~~ ....

2~

~z

ro

o.«

..

c ... c 0
~

~

..

]5j~I~ ;E :::t:
0

vo.c~ .~ ~~

~

~~

• Total additional degrees and certificates needed by state by 2020

Source: National Center for Higher Education Management Systems and The Chronicle of Higher Education.

Furthermore, since not all students who start a degree program complete it, the system will need to accommodate tens of millions of additional new students in order to yield the incremental 13.1 million graduates. At a time when states are having difficulty even maintaining budgetary resources for higher education and are cutting both faculty positions and student enrollment capacity, how can states afford to educate tens of millions of additional students and produce 13.1 million additional college graduates? Using our previously discussed per student cost to the taxpayer estimate for public institutions of $11,340 (see Exhibit 14} and publicly available graduation rates, we estimate an additional five million community college graduates will cost the American taxpayer $214 billion over the next 10 years. In addition, we estimate an incremental 8.1 million four-year 53 college graduates will cost the American taxpayer $520 billion over the next 10 years. (And neither of these figures includes the capital spending to construct new classrooms and schools, nor cost increases at all over that 10-year period.}
In total, we estimate the cost to the U.S. taxpayer to educate the additional 13.1 million graduates necessary to meet the President's American Graduation Initiative utilizing public institutions would be an additional $734 billion in federal, state and local support over the next decade (assuming no cost increases). More realistically, assuming just 2% annual cost increases, we estimate the cost to the U.S. taxpayer would be more than $800 billion over the next decade.

Apollo Group, Inc.

I Higher Education at a Crossroads

22

~ ~GROUP. INC.

,\.~ APOLLO

August 2010

Exhibit 16: Cost to Government of President Obama's American Graduation Initiative
Using Only Public Schools
Cost of 5 Million Additional Community College Graduates Subsidy per Public two-year Student• Time to Complete Associate Degree Total Subsidy per Associate Deg ree Graduation Rate at Public Schoolsb Targeted Public two-year Graduates< Gross New Students Enrolledd Averaqe Lenqth of Stay for Dropouts" Cost to Government of 5 Million Public Two-Year Graduates $11 ,340 2 years $22,680 22.0% 5,000,000 22,727,273 6 months $213,913,636,364 Cost of 8.1 Million Additional Other Graduates Subsidy per Public four-year Student• Time to Complete Bachelor's Degree Total Subsidy per Bachelor's Degree Graduation Rate at Public Schoolsb Targeted Public four-year Graduates< Gross New Students Enrolledd Averaqe Lenqth of Stay for Dropouts• $11,340 4 years $45.360 54.9% 8,132,522 14,813.337 2 years

Cost.to Government of 8.1 Million $ 520' 412 ' 081 ' 583 Public Four-Year Graduates

I

Total Cost to Government in 2008 Dollars of American Graduate Initiative if Onl~ Using Public Schools

$734,325,717,947
I

Total Cost to Government assuming 2% annual cost increases of American Graduate Initiative if On I~ Using Public Schools
Source: Apollo Group analysis.
Notes:

$820,147,496,914

• •

I

"Apollo Group estimates (see Exhibit 14: Per Student Taxpayer Costs I (Benefits) by Institution Type). bNCES, Enrollment in Postsecondary Institutions, Fall 2008, based on 2004 cohort for associates and 2002 cohort for bachelor's completing in 150% of normal program completion time. "National Center for Higher Education Management Systems. dBased on 5 million targeted 2-year graduates at a 22% graduation rate and 8.1 million targeted 4-year graduates at a 54.9% graduation rate. "Apollo Group estimate.

Using this same framework, but assuming our previously discussed per student cost to the taxpayer estimate for proprietary institutions of $4,519 (see Exhibit 14), we estimate the comparable cost to the taxpayer to meet the President's American Graduation Initiative with proprietary institutions would be $293 billion in 2008 dollars (assuming no cost increases) or $327 billion assuming just 2% annual cost increases. Thus, meeting the goal of educating an additional 13.1 million graduates through proprietary institutions instead of public institutions could save taxpayers nearly $500 billion dollars over the next ten years (assuming 2% annual cost increases). And as noted previously, the per student cost to the taxpayer of $1,509 for University of Phoenix (see Exhibit 14) is lower than the proprietary institution average. Accredited, degree-granting proprietary colleges and universities serving non-traditional students, alongside the traditional public and private independent institutions, are essential to expanding capacity within the higher education system and meeting President Obama's goal of having the largest percentage of college graduates in the world by 2020.

Apollo Group, Inc.

I Higher Education at a Crossroads

23

~~GROUP. INC.

,\.~ APOLLO

August 2010

Apolfo Group ;s I .eading by Example
Apollo Group is playing a leadership role in higher education and is an important part of the future of higher education in America. Apollo Group is proud of its heritage in helping to pioneer higher education for the working learner more than 35 years ago and introducing online education 20 years ago, and we are currently investing hundreds of millions of dollars into the next-generation of learners. Critics of the proprietary postsecondary sector have raised concerns about industry recruiting practices, student outcomes and student debt levels. While Apollo Group and University of Phoenix strive for excellence in all of these areas, we recognize that we can continue to improve. Below, we discuss some misperceptions about University of Phoenix and our students, as well as some of the initiatives we have undertaken to deliver continued improvement.

Aligning Our Educational Offerings with the Realities of Today's "Non-traditional" Students
Our students choose to attend University of Phoenix because our learning model and our educational offering is tailored to the unique educational needs of today's working learner. The majority of University of Phoenix students are working, or actively looking for work. If these students attended school full time at a community college or state university, it would mean a loss of income, which is simply not an option for most working adults who have rent or mortgage payments and are raising a family. To help meet the needs of today's working learners, University of Phoenix offers: • Flexible scheduling (courses offered throughout the day and evening; classes starting throughout the year rather than just two times per year); Choice of online or campus-based classrooms (over 200 locations conveniently located throughout the U.S.); Small class sizes (average of 15 students); Degree programs relevant to today's workforce; Faculty who have professional experience in their field of instruction (nearly all of whom have either master's or doctoral degrees); and High levels of student support to help students succeed.

Embracing Ethical Enrollment Practices
While advertising informs and drives interest, it alone does not drive enrollment. Today, the internet affords students the opportunity to do a tremendous amount of research about University of Phoenix and other institutions, enabling them to make more fully informed decisions about their educational options.
Comparable Marketing Spending. Enrollment costs at University of Phoenix are generally inline with those of other institutions. The average cost to enroll a new student at University of 54 55 Phoenix was $2,606 in fiscal 2008 compared with $2,383 for all colleges and universities (which excludes certain promotional efforts used by traditional schools, such as athletic programs that can cost as much as $100 million annually). More specifically, the average marketing and advertising spend per new enrollment at University of Phoenix was $1,127 in

Apollo Group, Inc.

I Higher Education at a Crossroads

24

~~GROUP. INC.

,\.~ APOLLO

August 2010

fiscal 2008 compared with $1,648 for all colleges and universities certain promotional efforts used by traditional schools).
Exhibit 17: Average Marketing Spend per New Enrollment
$3,000

56

57

(which, again, excludes

$2,606 $2,500

$2,000

$1,500

$1,000

$500

$0
All Colleges & Universities • Marketing & Advertising University of Phoenix • Total Enrollment Costs

Source: National Association for College Admission Counseling, 2009 State of College Admission, and Apollo Group SEC filings and internal data.

Purpose of Marketing is to Inform. We believe that ethical advertising serves the purpose of informing students of the options they have in higher education. We view this as an important part of helping working learners, who may have both professional and family responsibilities, to understand that there is an option in higher education specifically designed to meet their needs. We also believe it is critically important for us, as a nation, to ensure that individuals who came from backgrounds in which they never thought they had an opportunity to go to college, individuals who for financial reasons had to start working or chose to join the military immediately after high school, or who simply did not appreciate the value of an education until later in life, recognize that there is a way for them to attain a college degree, and thus an opportunity to improve their position in life. That Being Said, Not Everyone is Prepared for College. University of Phoenix is committed to delivering a high value education to those who are willing to work hard enough to realize its benefits. That means that while we are committed to our mission of providing access and opportunity, we do not want to enroll students who we do not believe have a reasonable chance of succeeding at our institution. It does not benefit the student, and it does not benefit us. Students who drop out adversely impact important quality metrics such as cohort default rates and graduation rates for which we are accountable to our students and our regulators. Furthermore, from a purely economic standpoint, students who drop out tend to do so early in their programs at University of Phoenix, which adversely impacts us financially. It is not beneficial to us over the long term to enroll students who we do not believe will succeed.

Recognizing that, over the past couple of years, we were seeing increasing numbers of students who were less prepared for college-level study, we began to develop certain initiatives to help deter unprepared or uninformed students from enrolling in our programs.

Apollo Group, Inc.

I Higher Education at a Crossroads

25

~~GROUP. INC.

,\.~APOLLO

August 2010

Investing in More Sophisticated Evaluation Tools. As a result, a portion of the cost of enrolling a student for University of Phoenix has gone to enhancing and developing sophisticated tools and data analytics that we can use to help students identify their likelihood of success. University Orientation. University Orientation provides prospective students with the opportunity to make sure college, and specifically University of Phoenix, is right for them without incurring any extra cost. It is a free, three-week non-credit bearing course that all students with less than 24 credit hours will be required to take. Recognizing that we were experiencing an increasing number of students who were less prepared for the rigors of our degree programs, in early 2009 University of Phoenix began testing and recently announced the planned implementation of this program which is designed to ensure that prospective students understand the time and commitment required to be successful in our degree programs before they enroll and, importantly, before they take on debt.

After 18 months of testing and preparation with over 30,000 students having gone through our pilot, we plan to roll out this Orientation program to all incoming students with fewer than 24 credit hours, as these are the students who have limited experience with college-level study. Based on the results of our Orientation pilot, approximately 20% of all prospective students going through the program opt out and do not enroll at University of Phoenix. We are implementing this program because it is the right thing to do for our students.
Student-centric Advisors. In addition to the University Orientation program, in early 2009, we initiated a comprehensive review of how our counselors, who advise and enroll students, perform their duties and how they are evaluated and compensated. We have announced the planned rollout of a new evaluation and compensation structure for our counselors this fall that is consistent with our goal of focusing on the student and enhancing the student experience. We are committed to completely eliminating admission targets as a component of compensation for our counselors. Our primary goal is to ensure that students receive informative counseling and advice in a non-pressure environment to help them make wise decisions about their academic future.

Implementing Enhanced Student Protections throughout the Student Experience
The University has proactively implemented several other initiatives focused on student protections and we will continue to add protections on an ongoing basis. One tool that we use during the admissions process (in states where it's allowed) is our digital call recording system. This system monitors over 30,000 conversations per day between students and our admissions advisors and counselors for quality control and compliance purposes to help ensure we are interacting with current and prospective students in a manner that is consistent with our institutional policies and procedures. Additionally during the admissions process, we strive to provide prospective students with accurate and informed advice with respect to their financial aid opportunities (and the corresponding obligations). To this end, while we cannot legally restrict the amount a student borrows under the Title IV funding program, we tested and implemented a Responsible Borrower Calculator in 2009, which teaches and encourages students to borrow only the amount they need for their education. Since the implementation of this new tool, the percentage of students who choose to borrow the maximum allowed has significantly declined. We estimate that the percentage of students who now choose to borrow the maximum amount of student financial aid allowed has dropped from approximately 90% to 58 approximately 60-70%.

Apollo Group, Inc.

I Higher Education at a Crossroads

26

~~GROUP. INC.

,\.~ APOLLO

August 2010

In addition to the Responsible Borrower Calculator, in the coming months we plan to roll out an enhanced, user-friendly tool, that will transparently show the total program costs (including tuition and fees} for any of our degree programs at any location, as well as any expected borrowing costs associated with student loans and the expected interest rates on those loans. Beyond these student protections, we are also developing a pair of videos for students to view prior to enrolling, which we expect to roll out in the coming months. These videos-one delivered during the admissions process that will reinforce the required time commitments and other information necessary for success in our programs, and the other delivered during the financial aid process that will explain the key components of financial aid, the importance of responsible borrowing, and repayment obligations on loans-are intended to ensure that prospective students are fully informed prior to making an enrollment decision or taking on debt. Finally, our focus on student protections does not stop once students are enrolled and attending classes. For example, during the past year we implemented a new self-service withdrawal process so that students do not feel pressured into remaining enrolled if they determine University of Phoenix is not right for them.

Offering a Quality Education that is Valued by Employers
Investments in Education. University of Phoenix invests heavily in its students' education and student services, as well as the learning environment of tomorrow. Educational and instructional spending is by far our highest category of expenditure. In fiscal 2009, approximately 55% of our total expenses (or slightly higher when excluding the impact of 59 certain litigation expenses} were direct educational and instructional costs. This compares to 48% for public institutions and 52% for all traditional institutions (public and independent private schools} for the 2006- 2007 academic year (latest available}, according to the 60 Department of Education's 2009 Digest of Education Statistics.

We are able to invest significant resources in our students' education because we operate more efficiently by utilizing our classroom facilities nearly year round (whereas traditional schools often have unused facilities during summer and holiday breaks) and not spending our resources on dormitories, cafeterias, athletic complexes and other non-educational infrastructure that our students don't ask for and don't require. Ultimately, the value of the education we deliver to our students is the determinant of the long-term success of our institution, as positive outcomes yield success for our graduates. Our University delivers value to its students and is one of the few institutions of higher learning in the country to transparently publish its outcomes, which we do in our Academic Annual 61 Report.
learning Outcomes. For nearly 35 years, University of Phoenix has measured the learning outcomes of its students in order to verify what they've learned. University of Phoenix students typically enter with lower average assessment scores than the national average but substantially close that gap by their senior year, meaning they demonstrate similar levels of improvement through the course of their educational experience and even better improvement in the critical areas of English and mathematics compared with students from other schools. 62 Improvement in MAPP Scores demonstrates our students' accomplishments.

Apollo Group, Inc.

I Higher Education at a Crossroads

27

~~ GROUP. INC.

,\.~ APOLLO

August 2010

Exhibit 18: Percentage Improvement in MAPP Scores: Freshmen to Seniors
).')'.

Source: Educational Testing Service (ETS), Measure of Proficiency and Progress (MAPP).
Note: Master's Universities reference institutions that offer baccalaureate through graduate degrees.

Graduation Rates. As reported in University of Phoenix's 2009 Academic Annual Report, our associate students graduate at a slightly higher rate than the national average, and bachelor's students graduate below the national average owing, in part, to the greater numbers of risk factors (as defined by the Department of Education) that non-traditional students like ours 63 exhibit. Exhibit 19: Completion Rates by Various Demographic Characteristics

11m

h 70K ____

_,_6jl~

I

I

I I

68~

"""
sm

_ :_n
I

I
SJ,lr.

""

7J"
1---

60S
Sl %

SOI'I

f-f-26...

""

~.

r--•42"
36%

41)%

- :-

f--

-: -

f--

-

l OS

'""
l OS

""

o U ,_

t

'--

_,_

I I I I I

-

-

f--

-:I I

-:I I I

1I I

-

t-o ~I I I

-

t-o -

f--

.-t--

f--

-

hM'.o

f--

-;~<tee

f--

L.J

!

H» ,_

-.,,
'~

wWOit

..,.,_
riA lftc

M1••1

"'-t -

O!AoiYJo~

, . .....4-t/ IIIIN'r O;.....t-...t

Source: U.S. Department of Education, National Center for Education Statistics.

Normalizing for these demographic differences in non-traditional students helps account for much of the observed differences in completion rates between proprietary and traditional 64 schools. In addition, proprietary institution completion rates are substantially higher than community colleges, which have the most similar student mix based on demographics. Despite the demograph ic challenges of our non-traditional student base, we are proud that

Apollo Group, Inc.

I Higher Education at a Crossroads

28

~~GROUP. INC.

,\.~APOLLO

August 2010

University of Phoenix produced approximately 90,000 graduates in the past year alone. With more than 500,000 alumni, our graduates are employed by thousands of companies and organizations-large and small, including Fortune 500 companies and the White Housewithin a variety of industries and in various capacities, including entrepreneurs, senior level executives and CEOs.
Tuition and Student Debt. Tuition increases have historically been in-line with those of other types of institutions. We estimate that annual tuition and fee increases at University of Phoenix have generally ranged between 4-6% (depending on degree program) over the past ten years compared with 7.6% at public four-year institutions, 4.4% at public two-year 65 institutions, and 5.4% at independent private institutions according to the College Board.

Student debt levels at University of Phoenix are within national averages compared to both public and independent private four-year colleges and universities. For University of Phoenix, our bachelor's degree students (graduating between July 2007 and June 2008) had student loan debt on par with independent private four-year institutions. According to the College 66 Board, in 2007-08, 28% of bachelor's degree students in independent private four-year institutions graduated with no debt, 48% graduated with less than $30,500 in debt, and 24% graduated with more than $30,500 in debt. During the same timeframe looking at federal debt incurred while attending University of Phoenix, 21% of our bachelor's degree recipients graduated with no debt, 56% graduated with less than $30,500 in debt, and 23% graduated 67 with more than $30,500 in debt.
Default Rates. While default rates are a lagging indicator and are likely to go higher over the near term owing to the economic downturn of the last few years, as well as due to the significant growth in our associate student population in recent years, the draft 2008 2-year cohort default rate (CDR) for University of Phoenix students is 13.1% despite the demographic factors previously mentioned that place non-traditional students at a higher risk of default.

CDRs for our associate students tend to be significantly higher than those of bachelor-level and graduate students, which, as mentioned, is expected to drive our reported rates up for the next couple of years. However, we believe our efforts to shift our student mix to bachelor's and higher-level students, as well as our new University Orientation program, will favorably impact our CDRs over time. Interestingly, as noted earlier, the official CDR metric is a measure of default incidence, not a measure of dollar default. Students who drop out drive CDRs and drop-outs have lower debt levels as individuals who drop tend to do so early in their programs. As a result, two additional data points are worth noting. First, if we only look at students who have graduated with a University of Phoenix degree, we estimate our cumulative default rate is less than 1% 68 (using the official 2005, 2006 and 2007 cohort files). Second, the dollar value default percentage (the true economic impact of defaults) is about half of the incidence percentage. We estimate that the 2-year default rate on student loans for students at University of 69 Phoenix in the 2008 cohort was just 6. 7% on a dollar-basis calculation, despite one of the worst economic recessions in modern history. Importantly, we expect our University Orientation program to significantly reduce the number of students who drop out early in a given program, which we would expect over time to improve the relatively lower dollar loan default rates.

Apollo Group, Inc.

I Higher Education at a Crossroads

29

~~GROUP. INC.

,\.~ APOLLO

August 2010

Exhibit 20: University of Phoenix Default Rates (2-Year)

13.1%
9.3%

2006 • Official CDR

2007

2008 (Draft)

• Dollar-based Default Rate

Source: U.S. Department of Education, Apollo Group internal analysis.

Salary Improvement. University of Phoenix students realize average annual salary increases in annual compensation of 8.5% for bachelor's graduates and 9.7% for master's graduates during the course of their program compared to the 3.8% national average increase during 70 that same period.

Investing in the Future of Higher learning
Now that we've discussed our learning model as it stands today, we want to highlight some of the substantial investments we've been making into the future of learning at the college level. While being a for-profit entity in higher education generates some criticism, and in some cases rightfully so when profit motives drive bad behavior, one undeniable benefit is the fact that profits often drive innovation in a free market society. We are living proof of this at Apollo Group, as we helped pioneer education for the working learner over 35 years ago, and we have always been committed to the use of technology innovation and advances in information systems to improve the access to and outcomes of education for our students. Like so many industries that have leveraged technology advances to enhance product, service and productivity, we have invested significantly in the use of technology to increase our students' learning experience and to expand the accessibility of education to working learners in general. We are currently investing hundreds of millions of dollars in research, development, information systems, networking infrastructure and data centers. We are making advances in the field of adaptive learning in order to personalize education so that every individual - no matter what their learning style- can have a chance at a successful education. We strive to create a system that learns with each student and adapts the way in which it delivers curriculum to maximize the learning experience. We are investing in the most current community and networking technologies, so that we can connect our students, faculty and alumni into learning communities across the country and the globe in order to create an environment from diverse communities and gain access to the most relevant and highest quality information wherever it may physically reside. Importantly, our advancements in distance learning enable a larger pool of faculty and knowledge workers to bring their skills and techniques in every critical field of the economy to a global audience of students.

Apollo Group, Inc.

I Higher Education at a Crossroads

30

~~GROUP. INC.

,\.~ APOLLO

August 2010

We imagine a future in which learning can happen at any moment in whatever format or modality an individual needs to be successful, whether it is listening to downloads on their commute to work on a smart phone or in a traditional classroom. We believe in a world in which the most relevant information and the most engaging learning experiences inspire millions of citizens to pursue an education in an environment that instills confidence and accomplishment and empowers teachers and innovators to invest in learning. Over the long term, we hope that by integrating technology effectively with innovations in learning, we can make substantial breakthroughs in the future of education.

Recognizing the Importance of Regulatory Compliance
Apollo Group believes that effective regulatory oversight is critical to the postsecondary system for both traditional and proprietary institutions, and we strive to be leaders in regulatory compliance. At the most fundamental level, our institutions' policies, procedures, actions and outcomes are reviewed and scrutinized by a regulatory triad consisting of (1) federal agency and federal law, (2) multiple state regulatory authorities, and (3) regional and various programmatic accrediting bodies to help ensure quality educational outcomes, effective student protections, and responsible stewardship of Title IV funding. These are objectives that we share with those charged with overseeing the postsecondary system in this country. At the federal level, the U.S. Department of Education, as authorized by Congress through the Higher Education Act and subsequent reauthorizations, has conducted numerous program reviews and audits of University of Phoenix over its 35 year history and has, after extensive periodic reviews, fully recertified the University's eligibility to participate in student financial aid programs under Title IV of the Higher Education Act. Additionally, the University is required to submit annual student financial aid compliance audits conducted by an independent accounting firm and continuously abide by the terms of our Program Participation Agreement. In addition, we are subject to numerous state-level regulatory visits, reviews, license renewals, and various other criteria depending on the state. University of Phoenix has been approved or has authorization to operate in 43 states and currently does so in 40 of them. Lastly, University of Phoenix has achieved regional accreditation from the Higher Learning 71 Commission (HLC) of the North Central Association of Colleges and Schools -one of six accrediting bodies considered to be the gold standard of accreditation-in 1978 and has been subsequently reaffirmed five times based on thorough reviews and site visitations from academicians at peer institutions charged with scrutinizing our academic quality and student learning outcomes. In addition, several of our degree programs are accredited by programmatic accrediting bodies, including our teaching, nursing, counseling and business programs: • Nursing, CCNE (Commission on Collegiate Nursing Education)
72

Counseling, CACREP (Council for Accreditation of Counseling and Related Educational 73 Programs) Business, ACBSP (Association of Collegiate Business Schools and Programsf Education, TEAC (Teacher Education Accreditation Councilf
5
4

We take our responsibility to our regulators, and ultimately to students, seriously, and while we will never rest, we have initiated a rigorous process designed to improve oversight of our policies and procedures. Earlier this year, we hired a new Chief Compliance Officer, who has

Apollo Group, Inc.

I Higher Education at a Crossroads

31

~~ GROUP. INC.

,\.~ APOLLO

August 2010

more than a decade of experience in senior leadership roles specific to ethics and compliance, to ensure that the policies and procedures we have in place with respect to the interaction of our employees, faculty and staff with prospective and current students and our handling of student funds is fully compliant with the law and our regulators' directives. Furthermore, we have an internal team dedicated to identifying cases of potential fraud, and have self-reported numerous instances of suspected fraud and abuse to the U.S. Department of Education Office of Inspector General for them to further pursue investigations and take legal action when appropriate. Some critics of the proprietary sector have recently pointed to specific instances of inaccurate or misleading interactions with prospective students as the basis of claiming a culture of aggressive sales tactics and inappropriate behavior at certain institutions. While we cannot think of a company or government entity that has zero errors in the area of compliance, noncompliance is neither acceptable nor permitted at any of our universities. There are clear consequences for breaches of compliance. To that end, we have instituted comprehensive compliance training and control processes within our institutions. When we discover instances of impropriety, they are dealt with quickly and fully-up to, and including, termination. Our intent is to ensure that our employees understand and act on both the letter and the spirit of the law and the many regulations that are already in place through the regulatory triad. Simply, we ask our employees to always comply with policies and procedures and do the right thing for the student. We are committed to fostering a culture within the organization, advocated and supported by our senior leaders, that aligns our policies and procedures with the goal of creating a world-class student experience at each of our universities.

What is Management's Philosophy?
Apollo Group is proud of its record of positive student outcomes and our leadership in the field of higher education with respect to the transparency of those outcomes, as demonstrated through the publication of our 2008 and 2009 Academic Annual Reports. Importantly, while we are a publicly traded company with shareholders, for us ''for-profit" does not mean "profits before students." It does mean that we do not need to ask the taxpayer to directly subsidize our operations beyond the usage of federal loans and grants for which our students qualify (using the same criteria that students of all institutions use to qualify}. Our management philosophy is, first and foremost, to always do what is right for the student. Internally, our senior leaders have explicitly directed faculty, advisors and staff that they must always be of the mindset of doing the right thing for the student; treat each student as if he or she were a close friend or family member; and if something does not seem right, elevate that concern until the concern is resolved. Externally, management has expressed this philosophy to our shareholders so that they can understand how our leadership team operates University of Phoenix and our other institutions. We believe this philosophy is borne out not just by our words, but more importantly by our actions, including responsible enrollment practices, student protections, and performance management systems to reward the right behaviors. Ultimately, our shareholders can only realize sustainable returns on their investment if we consistently provide a strong value proposition to our students.

Apollo Group, Inc.

I Higher Education at a Crossroads

32

~~GROUP. INC.

,\.~ APOLLO

August 2010

Conclusjon
In today's world we need on-demand, rapidly deployed, effective education. Today's working learners need industry-adaptive faculty and curriculum-faculty who are active in their fields of instruction and teach curriculum that can immediately be applied in the workforce. Educational programs need to prepare students for today's economy, not the economy of the past. We believe that University of Phoenix through our technological investment, advanced learning methodologies, and our national reach can dramatically accelerate the innovation that is essential to transform education in America. The U.S. higher education system must evolve from one that caters to a small, selective elite to one that also produces a broadly educated society in order for the U.S. to remain competitive in today's global, knowledge-based economy. While an important part of the higher education system, traditional colleges and universities cannot meet the Obama administration's national education goals alone. University of Phoenix's mission is to provide access to high-quality education through innovation and by delivering consistent, valuable learning outcomes. We built and manage our differentiated learner model with small class sizes, convenient locations and online 24/7 availability for our working learners. We successfully serve the non-traditional students that now represent 73% of the total 76 student population, as defined by the Department of Education. Although non-traditional students assume debt to fund their education, their return upon graduation is very attractive. University of Phoenix continues to aggressively invest in our students' future with hundreds of millions of dollars spent on innovative technologies, service platforms and products, providing opportunities for our students to achieve their personal and professional goals. By providing an accessible, high quality education, University of Phoenix is producing successful outcomes-graduates who are better positioned to enjoy the professional, financial and personal benefits that a degree brings, as well as a more educated, competitive society as a whole. Through a framework of thoughtful and consistent regulation, well managed proprietary colleges and universities-those that are committed to responsible, ethical practices and regulatory compliance-play a vital role in the future of America's higher education system, helping it to rise to the challenge of meeting the needs of the millions of non-traditional learners and producing the graduates necessary to achieve the nation's shared educational and economic goals. Apollo Group is committed to leading the nation towards this future.

Apollo Group, Inc.

I Higher Education at a Crossroads

33

~~ GROUP. INC.

,\.~ APOLLO

August 2010

Append"x
Mil ken Institute, 2010 Global Conference, Panel on Science, Technology, Engineering+ Math {STEM) = Formula for Global Competitiveness, http://www.milkeninstitute.org/presentations/slides/GC10-2329.pdf. 2 U.S. Bureau of Labor Statistics, Occupational Outlook Handbook, 2010-11 Edition, http://www.bls.gov/oco/. 3 U.S. Bureau of Labor Statistics, Current Population Survey, http://www.bls.gov/web/empsit/cpseeaS.pdf. 4 World Economic Forum, The Global Competitiveness Report 2009-2010, http://www.weforum.org/en/initiatives/gcp/Giobai%20Competitiveness%20Report/index.htm. 5 President Barack Obama, American Graduation Initiative, July 14, 2009, http://www.whitehouse.gov/the press office/Excerpts-of-the-Presidents-remarks-in-Warren-Michigan-and-fact-sheet-onthe-American-Graduation-Initiative/. 6 Milken Institute, 2010 Global Conference, Panel on The Next Chapter in Charter Schooling: Taking Reform to Scale, http://www.milkeninstitute.org/presentations/slides/GC10-2096.pdf. 7 U.S. Department of Education, National Center for Education Statistics, 1ih Grade Reading and Mathematics 2005: National Assessment of Educational Progress, http://nces.ed.gov/nationsreportcard/pdf/main2005/2007468.pdf. 8 Organisation for Economic Co-operation and Development, Education at a Glance, 2004. 9 U.S. Department of Education, National Center for Education Statistics, Highlights from PISA 2006: Performance of U.S. 151

Year-Oid Students in Science and Mathematics Literacy in an International Context,
http://nces.ed.gov/pubs2008/2008016.pdf. 10 Apollo Group estimates based on the number of individuals in the U.S. labor force without any college experience, assumed student to teacher ratio of 100:1 and assumed average class size of 25-50 students. 11 Apollo Group estimate (see Exhibit 16 and accompanying notes). 12 Center on Budget and Policy Priorities, http ://www.cbpp.org/cms/index.cfm?fa=view&id=1214. 13 U.S. Department of Education, National Center for Education Statistics, National Postsecondary Student Aid Study (NPSAS}, 2000, http://nces.ed.gov/surveys/npsas/index.asp. 14 Apollo Group analysis (see Exhibit 14 and accompanying notes). 15 Apollo Group analysis (see Exhibit 16 and accompanying notes). 16 Apollo Group SEC filings and internal data and National Association for College Admission Counseling, 2009 State of

College Admission,
http://admin.nacacnet.org/PublicationsResources/Marketplace/research/Pages/StateofCollegeAdmission.aspx. Educational Testing Service (ETS}, Measure of Proficiency and Progress (MAPP}, results published in University of Phoenix Academic Annual Report, http://www.phoenix.edu/about us/publications/academic-annual-report.html. 18 U.S. Department of Education, Integrated Postsecondary Education Data System (IPEDS) and University of Phoenix data reported in University of Phoenix Academic Annual Report, http://www.phoenix.edu/about us/publications/academicannual-report.html. 19 Apol lo Group internal analysis; certain assumptions were made in the preparation of this analysis due to limitations in the source data. 20 Apollo Group internal analysis; using the official 2005, 2006 and 2007 cohort files. 21 University of Phoenix data based on institutional research on entering student income, registration survey completing student income and end-of-program survey of 2008 graduates; national data from Culpepper and Associates compensation and benefits surveys, published in University of Phoenix Academic Annual Report, http://www.phoenix.edu/about us/publications/academic-annual-report.html. 22 U.S. Bureau of Labor Statistics, Current Population Survey, http://www.bls.gov/emp/ep chart OOl.htm. 23 College Board, Education Pays: The Benefits of Higher Education for Individuals and Society 2007, http://www .college board .com/prod down loads/about/news info/cbsen ior/yr2007/ed-pays-2007 .pdf. 24 M il ken Institute, 2010 Global Conference, Panel on Science, Technology, Engineering+ Math {STEM) = Formula for Global Competitiveness, http://www.milkeninstitute.org/presentations/slides/GC10-2329.pdf. 25 U.S. Bureau of Labor Statistics, Occupational Outlook Handbook, 2010-11 Edition, http ://www.bls.gov/oco/. 26 U.S. Bureau of Labor Statistics, Current Population Survey, http://www.bls.gov/web/empsit/cpseea5 .pdf. 27 World Economic Forum, The Global Competitiveness Report 2009-2010, http://www.weforum.org/en/initiatives/gcp/Giobai%20Competitiveness%20Report/index.htm. 28 President Barack Obama, American Graduation Initiative, July 14, 2009,
17

Apollo Group, Inc.

I Higher Education at a Crossroads

34

~~ GROUP. INC.

,\.~ APOLLO

August 2010

http://www.whitehouse .gov/the press office/Excerpts-of-the-Pre sidents-re rna rks-i n-Wa rren-M i ch iga n-and-fact-sheet -onthe-American-Graduation-Initiative/. 29 Mil ken Institute, 2010 Global Conference, Panel on The Next Chapter in Charter Schooling: Taking Reform to Scale, http://www.milkeninstitute.org/presentations/slides/GC10-2096.pdf. 30 U.S. Department of Education, National Center for Education Statistics, 1ih Grade Reading and Mathematics 2005: National Assessment of Educational Progress, http://nces.ed.gov/nationsreportcard/pdf/main2005/2007468.pdf. 31 Organisation for Economic Co-operation and Development, Education at a Glance, 2004. 32 U.S. Department of Education, National Center for Education Statistics, Highlights from PISA 2006: Performance of U.S. 15-

Year-0/d Students in Science and Mathematics Literacy in an International Context,
http://nces.ed.gov/pubs2008/2008016.pdf. Apollo Group estimates based on the number of individuals in the U.S. labor force without any college experience, assumed student to teacher ration of 100:1 and assumed average class size of 25-50 students. 34 Apollo Group internal analysis (see Exhibit 16 and accompanying notes). 35 Center on Budget and Policy Priorities, http://www.cbpp.org/cms/index.cfm?fa=view&id=1214. 36 Chicago Tribune, University of lflinois Orders Furloughs, Other Cost-cutting Measures, January 6, 2010. 37 U.S. Department of Education, National Center for Education Statistics, Digest of Education Statistics 2009, http://nces.ed.gov/pubs2010/2010013.pdf. 38 U.S. Department of Education, National Center for Education Statistics, National Postsecondary Student Aid Study (NPSAS}, 2000, http://nces.ed.gov/surveys/npsas/index.asp. 39 U.S. Department of Education, National Center for Education Statistics, 2007-2008 National Postsecondary Student Aid Study (NPSAS: 08), http://nces.ed.gov/pubs2009/2009166.pdf. 40 U.S. Department of Education, National Center for Education Statistics, National Postsecondary Student Aid Study (NPSAS), Data Analysis System, Undergraduate Survey, 1987, 1990, 1993, 1996, 2000, 2004, 2008. 41 Apollo Group internal analysis; U.S. Department of Education Common Origination and Disbursement, 2008-2009 Federal Pel/ Grant Program End-of-Year Report, U.S. Department of Education, Office Postsecondary Education. 42 U.S. Department of Education, National Center for Education Statistics, 2007-2008 National Postsecondary Student Aid Study {NPSAS: 08}, http://nces.ed.gov/pubs2009/2009166.pdf. 43 U.S. Bureau of Labor Statistics, Current Population Survey, http://www.bls.gov/emp/ep chart OOl.htm; figures are based on average earnings all individuals in the labor force at each degree level, not starting salary data. 44 U.S. Government Accountability Office, GA0-09-600, August 17, 2009. 45 Elizabeth Herr and Larry Burt, Predicting Student Loan Default for the University of Texas at Austin, 2005, http://www.nasfaa.org/Annualpubs/Journai/Voi35N2/Herr Burt.PDF. 46 Thomas A. Flint, Journal of Higher Education, Predicting Student Loan Defaults, 1997. 47 NASFAA Journal of Student Financial Aid, Jennie Woo, Factors Affecting the Probability of Default: Student Loans in California, 2002. 48 Apollo Group internal analysis; certain assumptions were made in the preparation of this analysis due to limitations in the source data. 49 2011 White House Budget, Table 3, Direct Loans: Assumptions Underlying the 2010 Subsidy Estimates; net recovery rate estimate based on 2011 White House Budget and discussions with industry sources. 50 Apollo Group internal analysis (see Exhibit 14 and accompanying notes). 51 Delta Cost Project, Trends in College Spending 1998-2008, figures in 2008 dollars, http://www.deltacostproject.org/resources/pdf/Trends-in-College-Spending-98-08.pdf. 52 National Center for Higher Education Management Systems, http ://www.nchems.org/. and the Chronicle of Higher Education, February 24, 2010, How Far States Have to Go to Meet Obama's College-Completion Goal, http:l/chronicle.com/article/Chart-How-Far-States-Have-to/64361/. 53 Apollo Group analysis (see Exhibit 16 and accompanying notes). 54 Apollo Group SEC filings, internal data. 55 National Association for College Admission Counseling, 2009 State of College Admission, http://admin.nacacnet.org/PublicationsResources/Marketplace/research/Pages/StateofCollegeAdmission.aspx. 56 Apollo Group SEC filings, internal data. 57 National Association for College Admission Counseling, 2009 State of College Admission, http://admin.nacacnet.org/PublicationsResources/Marketplace/research/Pages/StateofCollegeAdmission.aspx; as a proxy
33

Apollo Group, Inc.

I Higher Education at a Crossroads

35

~~ GROUP. INC.

,\.~ APOLLO

August 2010

for all colleges, the data provided by NACAC Survey for Marketing and Advertising is assumed to be the data offered for admissions budget less salaries and benefits presented. 58 Apollo Group internal data; assumed all students were eligible for the maximum amount. 59 Apollo Group SEC filings, internal data. 60 U.S. Department of Education, National Center for Education Statistics, Digest of Education Statistics 2008, http://nces.ed.gov/pubs2009/2009020.pdf. 61 University of Phoenix Academic Annual Report, http://www.phoenix.edu/about us/publications/academic-annualreport.html. 62 Educational Testing Service (ETS), Measure of Proficiency and Progress (MAPP}, results published in University of Phoenix Academic Annual Report, http://www.phoenix.edu/about us/publications/academic-annual-report.html. 63 U.S. Department of Education, Integrated Postsecondary Education Data System (JPEDS) and University of Phoenix data reported in University of Phoenix Academic Annual Report, http://www.phoenix.edu/about us/publications/academicannual-report.html. 64 U.S. Department of Education, National Center for Education Statistics, Digest of Education Statistics 2009, http://nces.ed.gov/pubs2010/2010013.pdf. 65 The College Board, Annual Survey of Colleges, weighted by full-time undergraduate enrollment. 66 College Board, Trends in Student Aid 2009, http://www.trendscollegeboard.com/student aid/pdf/2009 Trends Student Aid.pdf. 67 Apollo Group internal analysis; certain assumptions were made in the preparation of this analysis due to limitations in the source data; figures include only federal debt incurred while attending University of Phoenix. 68 Apollo Group internal analysis; using the official 2005, 2006 and 2007 cohort files. 69 Apollo Group internal analysis; certain assumptions were made in the preparation of this analysis due to limitations in the source data. 70 University of Phoenix data based on institutional research on entering student income, registration survey completing student income and end-of-program survey of 2008 graduates; national data from Culpepper and Associates compensation and benefits surveys, published in University of Phoenix Academic Annual Report, http://www.phoenix.edu/about us/publications/academic-annual-report.html. 71 University of Phoenix is accredited by The Higher learning Commission (HlC) and is a member of the North Central Association. The Higher learning Commission can be reached at http://www.ncahlc.org/ or by phone at (312) 263-0456. 72 The Bachelor of Science in Nursing and the Master of Science in Nursing programs are accredited by the Commission on Collegiate Nursing Education (CCNE). Commission on Collegiate Nursing Education (CCNE), One Dupont Circle, NW, Suite 530, Washington, DC 20036-1120. 73 The Master of Science in Counseling program in Community Counseling (Phoenix and Tucson, Arizona campuses) and Master of Science in Counseling program in Mental Health Counseling (Utah campuses) are accredited by the Council for Accreditation of Counseling and Related Educational Programs (CACREP). For additional information, visit http://www.cacrep.org. 74 University of Phoenix School of Business has achieved voluntary from the Association of Collegiate Business Schools and Programs (ACBSP) demonstrating it has met standards of business education that promote teaching excellence. 75 The Master of Arts in Education program with options in Elementary Teacher Education and Secondary Teacher Education is preaccredited by the Teacher Education Accreditation Council (TEAC). 76 U.S. Department of Education, National Center for Education Statistics, National Postsecondary Student Aid Study {NPSAS}, 2000, http://nces.ed.gov/surveys/npsas/index.asp.

Apollo Group, Inc.

I Higher Education at a Crossroads

36

~~GROUP. INC.

,\.~ APOLLO

August 2010

About Apollo Group1

nc.

Apollo Group, Inc. is one of the world's largest private education providers and has been in the education business for more than 35 years. The Company offers innovative and distinctive educational programs and services both online and on-campus at the high school, undergraduate, master's and doctoral levels through its subsidiaries: University of Phoenix, Apollo Global, Institute for Professional Development, College for Financial Planning and Meritus University. The Company's programs and services are provided in 40 states and the District of Columbia; Puerto Rico; Canada; Latin America; and Europe, as well as online throughout the world. For more information about Apollo Group, Inc. and its subsidiaries, call (800) 990-APOL or visit the Company's website at www.apollogrp.edu.

About University cf Phoenix
University of Phoenix is constantly innovating to help students balance education and life in a rapidly changing world. Through flexible schedules, challenging courses, small classes and highly interactive learning, students achieve academic and career aspirations without putting their lives on hold. University of Phoenix serves a diverse student population, offering associate, bachelor's, master's, and doctoral degree programs from campuses and learning centers across the U.S. as well as online throughout the world. It is accredited by the Higher Learning Commission of the North Central Association of Colleges and Schools.

Forward ...ooking Statements Safe Harbor
Statements about Apollo Group and its business in this position paper which are not statements of historical fact, including statements regarding Apollo Group's business outlook, future enrollment and future strategy and plans, are forward-looking statements, and are subject to the Safe Harbor provisions created by the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current information and expectations and involve a number of risks and uncertainties. Actual results realized and actual plans implemented may differ materially from those set forth in such statements due to various factors, including changes in the overall U.S. or global economy, changes in enrollment or student mix, including as a result of the roll-out of the Company's University Orientation program to all eligible students, the impact of changes in the manner in which the Company evaluates and compensates its counselors that advise and enroll students, changes in law or regulation affecting the Company's eligibility to participate in or the manner in which it participates in U.S. federal student financial aid programs, including the proposed program integrity regulations published for comment by the U.S. Department of Education on June 18, 2010, and the proposed regulations relating to "gainful employment" published for comment by the U.S. Department of Education on July 23, 2010, changes in the Company's business necessary to remain in compliance with U.S. federal student financial aid program regulations and the accrediting criteria of the relevant accrediting bodies, and other regulatory developments. For a discussion of the various factors that may cause actual results to differ materially from those projected, please refer to the risk factors and other disclosures contained in Apollo Group's Form 10-K for fiscal year 2009 and subsequent Forms 10-Q, and other filings with the Securities and Exchange Commission, all of which are available on the Company's website at www.apollogrp.edu.

Apollo Group, Inc.

I Higher Education at a Crossroads

37

From:

To: CC:
Date: Subject:

Robert MacArthur <nnacarthur@altresearch com> Woodward, Jennifer
8/30/2010 1 :42: 10 PM

Rob MacArthur Alternative Research Setvices, Inc.
203-244-5174

nnacarthur@altresearch.com

This material has been prepared by Alternative Research Setvices Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Setvices Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The finn does not make a market or hold positions in the securities mentioned herein, nor does the finn maintain any investment banking relationships in such securities.

Total Rev up 18.4% yoy to $290.9M, vs $245.8M in 3q07: Tuition Rev up 17.3% yoy to $265.3M, vs $226.1Min 3q07. Other Educational Rev up 30.7% to $25.7M, vs $19.7M in 3q07.

Total Op Costs & Exp up 11.2% yoy to $240.4M, vs $216.2M in 3q07: Student Svc & Admin Exp up 21.4% yoy to $109.6M, vs $90.3M in 3q07. Cost ofEducational Svcs up 4% yoy to $l30.8M from $125.8 Min 3q07.

Total Op Inc up 70.9% yoy to $50.6M from $29.6M in 3q07. Net Income up 67.2% yoy to $38.3M from $22.9M in 3q07. EPS up 65.6% yoy to $0.53 from $0.32 in 3q07. " investments in marketing, recruiting, information technology and human resources will continue into the fourth quarter." New undergraduate student enrollment up 12.1% yoy to 12,410 from 11,075 in 3q07. Total student enrollment up 10.3% yoy to 44,814 from 40,637 in 3q07. Jan 08 session at Keller Graduate School of Management (KGSM), number of graduate coursetakers was 17,377, up 13 .7% yoy from 15,278 in Jan 07. March 08 session at KGSM, number of graduate coursetakers was 17,005, up 15.2% yoy from 14,756 in March 07. Total number of online undergraduate and graduate coursetakers in March 2008 up 25.0% yoy to 43,889 from 35,111 in March 07. Overall sector growth in the online market was 17.0% yoy for same period, according to Eduventures. "{l)The term "coursetaker" refers to the number of courses taken by a student. Thus one student taking two courses is counted as two coursetakers." "System-wide, 92.6 percent ofDeVry University's graduates for the year ending June 2007 were in the active job market and employed in their fields within 6 months of graduation at an average starting salary of $42,805." "(2) Graduates who actively pursued employment or who were already employed when they graduated and held positions in their chosen fields within six months of graduation. Include bachelor's and associates degree g•·aduates."

"We do not provide quarterly guidance; emphasize long-term growth guidance."

lnt'l growth strategy concentrates on Latin America, as well as India and China. Further growth strategy emphasizes online education. Re: Student Loan Crisis- "Recent new House legislation appears to be positive for students .. . lenders have exited and are still exiting, but, as outlined in 4/21 press release, this will not impact DV. Here's why" : 1) 2) 3) 4) 5) Increased Fed Loan Limits reduces need for private loans; Quality and placement ofDV graduates; State grant eligibility; DV students have historically lower default rates; DV has Educard system to directly finance students, and can ramp up this program."

Auction on securities failed has to do with lack of liquidity, and not credit-worthiness. When auction fails, rate is reset for 35 days. Near-term strategy is to hold until liquidity arrives.

%
ASSETS Cash and Cash Equivalents Restricted Cash Accts Rec'vble LIABILITIES Accts Payable Advance Tuition Payments Deferred Tuition Rev 3/31/08 249,580 3/31/0 7 135,82 1

YOY
Chg

23,077 58,042 121523 95490 36,895 34,283 21405 12311 16706 195869 4

83.8% -60.2 % 27.3% 7.6% 73.9% 17.2%

Q&A Q: (Jerry Herman) Early in the week, your press release stated no material impact on DV from student loan changes/crisis- what is your relationship with your six lenders on a FFELP and/or private loan basis? A: New student recruiting has not been impacted ... kudos to our professionals ... (bunch of other self-congratulatory bull shit). BoA, Chase, Citi, Wachovia, Wells Fargo, and SLM are our 6lenders ... getting good terms from them on both the FFELP and the Private Loan sides. Q: Just to be clear- all are active on BOTH the FFELP and the Private Loan side? A: (stalling ... searching for right words) Have had a ... uh.. " disruption" with

Wachovia ... but that' s a matter of weeks to fix ... has to do with their guaranty agency. N o issues that will last more than a few weeks for any lender on both the FFELP and private side. Q: High School recruiting update?

A: Efforts going well.
Q: Movement to your Direct Lending Program - how long to implement and how much are we talking? A: We have had the program ready ... pipes/processes in place ... would only take weeks to pull off. But at this point, it's all hypothetical. There' s no need to implement our direct lending program at present. Q: Incremental investments . . $9-$12M per quarter impact ... where did you come in on this estimate? A: Pretty much on target. Will continue at this rate going forward.

Q: You;ve talked about increasing compensation packages on employee side ... will we see impact on the P & L from this in coming quarter?
A: (Doesn' t really give an answer. .. defends decision saying that it is best for DV in the long term.) Q: Strategic Plan of areas you want to get into - can you gi ve us a roadmap of how you' re thinking about it, in terms of sequence/timing? A: DV core is still top priority. But, growth opp is there in health. Q: Are you doing dilutive deals, or accretive? ... A: AJmost everything we do is dilutive on day one ... Q: Professional and training business doing really well ... how much longer can you keep growth up like this? How much higher can margins go? A: Kudos to our team ... at the end of the day, margin dollars are what matter, not margin %ages ... margin dollar will continue to increase, but %ages will not. Q: Can you talk about other sources of student funding, i.e. credit cards and direct funding, corporate reimbursements ... perhaps breakout as a %age of sales those sources provide? Are you seeing any signs of weakness on those fronts? A : Not seeing any signs of weakness or any significant change with corp reimbursement, direct payments, military tuition reimbursements .. .all those have not changed as a %age of the mix ... there's been a lot ofbuzz, a lot of noise, but it really doesn' t look all that different from what it did 6 months. Q: Retention - How should we think about new enrollment growth at DeVry

University being so much stronger than total enrollment growth? Is there a slippage in retent1on? A: No. (emphatic.) There is no slippage ... we're seeing some early signs of improvement there, in fact. There' s a lag between new and total. .. Total is catching up with new enrollment from past quarters ... Q: Sa1es and Marketing- does model suggest that you could continue low double dig1t new undergrad enrollment growth? A: Yes, that's why we' re continuing to invest in that, so that we can continue reasonable growth. Growth rate will probably come down in the longer term. Q: Near-term low double digit doesn' t seem unreasonable? A: I don ' t want to put a number on that, but given the averages over the past few quarters, it's not unreasonable. Q: Given sales & marketing investments, is it reasonable to think that there is st111 enough room for efficiency in Student Svcs & Admin expense that there' s potential for leverage there in the next year, in terms of whole year, in spite of increased Sales and Marketing spend? A: It's possible for the whole year, as opposed to quarter to quarter. As long as we see the opp to invest in marketing & recruiting with the metrics not deteriorating - not getting to diminishing returns, and our data says that we're far from that point - we' re going to cont1nue to spend in that area .. . and since the spend isn' t accretive until next year, you' re going to see continued spend in marketing and recruiting. Q: Color on trend within faculty? Adjunct vs full-time? Course load? Cl.ass sizes? Of DVU facilities? A: Sure. Thanks. There is some leverage there. Looking at improving course load. Lot offocus on that. Showing early signs ofimprovement.. .lot of room on that one. Room for scheduling efficiencies. Q: If you look at avg students/class or per faculty member- are you happy where you are? Have you hit a wall there? A: Have not hit a wall. Not happy with where we are. Lot of room for upside there. Q: Ross- expansion in clinical space, but in terms of actual infrastructure in Caribbean, what sort of cap ex in the coming quarters? A: Wouldn 't be surprised to see a little bit more cap ex there in FY09, vs FY08. Investments in Ross Capacity are in the core science program . Also, 5°1 semester in Miami location and semesters 6 through 10 in clinical programs. Q: Do you expect exposure with SLM on private side to come down in coming quarters? Could you speak to your relationship with Citi and Chase, given their announcements last week?

A: Sure. Chase remains unchanged. Citi continues as a lender. There are some areas where we will not be touting Citi as a preferred lender. And let' s see ... um ..you asked about SLM exposure ... SLM continues, and our relationship moves forward, with no change. Q: You' ve mentioned SLM as your largest lender on your private side, so I'm just curious if you' re going to see more diversification among your private lenders? A: Sure. There will be more diversification among preferred lenders, but our SLM relationship continues to be strong. We really don' t see a big change there ... more color on overall statement that we've made that we don ' t see any material impact on our students. Q: You' ve been asked a lot about this acquisition strategy, and I guess it makes sense in terms of price, but wouldn ' t it drag you further into credit challenges for programs that are diploma and certificate programs? How much did you think about this before making the decision? A: We thought about it a lot, and I disagree with the premise of your question. Career college programs does not equal lower quality programs. Shorter programs does not equal more risk. You have to look at the whole confluence of factors (program quality, length, employment potential, etc.)

Q: When you talk about Allied Health program then, are you not talking about the typical 10-month programs?
A: Oh we are! If you take a 10 month respiratory assistant program, where you come out making $35K ... (pause) ... with multiple job offers, then that's a great value proposition. Q: So you're not talking about serving the same population that a typical medical assistant program serves, because it' s typically a no credit or low credit group? A: Urn ... sure! Some of the students do not have the credit scores that you or I have. That's why I get u p every morning and slog it out 30 miles on the tollway to come to work. .. to provide those opportunities. Some of those students are eligible for Perkins loans and Federal grants ... it's not as simple as - and I know you know this, but many people don' t - " if it's a short program then it's a lower quality program." Q: What about from your balance sheet. .. your ability to borrow ... you don ' t see any obstacles to this? A: Currently, we have a very strong cash balance. A very strong credit facility that let' s us tap into $275M. We have the resources to make the sort of deal, if the opp arises, as we have outlined. Q: Clarification - incremental spend in 2h08 previous guidance - up $13.5M in 3q08, and then $9M-$12M in 4q08. So when you said that spend would be up, are you talking about vs 3q08 or 4q08?

A: Well, we came within spitting distance. It wouldn ' t surprise me if 4q08 is up relative to 3q08.

Q: How many states are you working on getting approval in?
A: If I could just go back to previous question on spend - I just want to give some kudos to Rick and finance/accounting team, for stepping up our game. In terms of Chamberlain, just because it's such a highly regulated environment, we've taken particular care ... what I would emphasize is that it's our goal is to open 1 new location per year, and here we are having opened 2 in 3q08. Also, this co-location of Chamberlain campuses with DVU campuses is exceeding our expectations .. .it' s more than just the dollars and cents of improved utilization.

Q: You' ve lowered cap ex guidance twice significantly .. .is there a project that's taking longer or has been dropped?
A : Yeah, the Project Delta is taking longer, but it's worth taking the time to get it right.

DV Name Title Company Last Mentioned jtorres@browardalliance o President DeYry University (past)

r

Torres Julio C

(773) 929-8500 12/ 19/2008 r Davey Rick rdavey@yorkvilleu ca President DeVey University (past) (773) 929-8500 10/15/2008 Brown Steve stevebrown@cfef net President DeVey Universi ty (past) (773) 929-8500 ~Last 30 days r lfranklin@alexchamber com President DeYry University (past) Franklin Loretta
1

(773) 929-8500 12/3/2008 r Hackett. Reed President DeVey University (past) (773) 929-8500 l 0/11/2008 r Fateri. F ardad faterif@iecglobal com President Devey University (past) (773) 929-8500 MlLast 30 days r President DeVey University (past) Field Darryl W.

(773) 929-8500 11/ 1/2008 r Van Zwol Bill President DeVry University (past) (773) 929-8500 3/14/2008 r Grevesen. Chris W. President DeVey University (past) (773) 929-8500 3/28/2008 r Moore. Jeff Georgia President DeVry University (past) (773) 929-8500 11/112008 r Ireleaven. James jtreleaven@itaa org President, Chicago Metro DeVry University (past) (773) 929-8500 12/16/2008 r Hamburger Daniel J. Executive Vice President D eVry University (past) (773) 929-8500 12/9/2008 Ri cordati Timothy H tri cordati@aQs.org Vice President, Enrollment Management and Vice President, Student Affairs DeVr:y University (past) (773) 929-8500 6/27/2008 Babel, Thomas A babel@studentcl earinghous... Vice President DeVey University (past) (773) 929-8500 jQ!Last 30 days Drescher, Drew mailto:drew@stillplayingw Vice President and Business Manager DeVry University (past)

(773) 929-8500 ~Last 30 days r Parrott. Sharon T Vice President for External Relations and Regulatory Assurance DeVcy University (past) (773) 929-8500 12/ll/2008 r Mayers Patrick L. patrickmayers@b-einc.com Vice President of Academic Affairs DeVcy University (past) (773) 929-8500 11117/2008 r Loraine Donna M. Vice President for Academic Affairs and Dean DeYr:y University {past) (773) 929-8500 12/1 1/2008 r Perlmutter Jane Regional Vice President of Operations DeYry University (past) (773) 929-8500 11 /8/2008 r Odom-Wesley. Barbara barbara odom-wesley@ahima Chair of the Health Information Technology Program DeVr:y University (past) (773) 929-8500 ~Last 30 days Abooja Anjuli (905) 845-4681 ext-306 aahooja@appleby on ca Chair ofElectronics Engineering Technology Programs DeVry College of Technology DeYr:y University (past)
1

(773) 929-8500 10/14/2008 r Tasooji Matthew Senior P rofessor and Chairman of the EET Department DeYr:y University (past) (773) 929-8500 9/5/2008 3127555499 psi mpson@acgme.org

r

Simpson, Peggy

;J Director, Graduate Student Services DeYcy University {past)
(773) 929-8500 11 /16/2008 r Sullivan William S. (562) 997-5354 wsullian@devry edu Director DeVey University (past) (773) 929-8500 4/ 1/2008 ' Graham Shawn Director, Student Finance DeYr:y University (past) (773) 929-8500 10/12/2008 r Overbye David davido@aaua org Director of Curti culum DeV r:y University (past) (773) 929-8500 12/14/2008 Sullivan. Pat psullivan@devcy.edu Director of Career Services DeVey University (past) (773) 929-8500 ~Last 30 days Lisko, Adele (816) 941-0430 alisko@kc.devcy edu Director of Community Relations DeVry University (past} (773) 929-8500 ";Last 30 days Sevak Amit National Director of Strategy and New Business Enrollment DeVry University (past)

(773) 929-8500 9/ 15/2008 Suhrid Amita Director for Master In Information Systems DeVey University {past) (773) 929-8500 10/23/2008 r 847-214-7161 mchahino@elgin edu
~

Chahino. Michael

Director of Information Technology and Adjunct Faculty DeVry University (past) (773) 929-8500 'WLast 30 days r Selman John A john@selmanhouse.com Assistant Director of Admissions DeYry University (past) (773) 929-8500 3/1/2008 r Sims Tommy Director of Student Finance DeVry University (past) (773) 929-8500 9/17/2008 r Kane Kim kkane@usafunds org Director of Student Finance DeVzy University (past) (773) 929-8500 11/ 13/2008 925-787-4215 Kay Anderson@comcast net
;]

r

Anderson Kay

Director of Student Services DeVr:y University (past) (773) 929-8500 11/l 0/2008 678 327-5518 lanytaffel@corncast net
~

r

Taffe! Larry H.

National Corporate and Strategic Alliance Manager DeVry University {past) (773) 929-8500 517/2008 r Strassburger Richard rstrassburger@cbdmarketi n Manager, Interactive and Media Efforts DeYcy University {past) (773) 929-8500 12/16/2008 r Robinson. loes Human Resources Manager DeVry University (past) (773) 929-8500 10/25/2008 r Chumley. Chris Program Manager DeVry University (past) (773) 929-8500 11/3/2008 Simon Leanne Finance Team Manager DeVry University (past) (773) 929-8500 10/12/2008 Carroll. Wayne Patent Attorney DeVry Un iversity (past) (773) 929-8500 9/26/2008 McCoy Douglas dmccoy@trhsa org Consultant DeYry University (past) (773) 929-8500 11/19/2008 Stucbly Ray rstuchly@teamlmi .com Certified Instructor In Quality Management DeYry University {past)

(773) 929-8500 12/ 11/2008 r

u

Rambish. Medea

Developmental English Instructor DeVey University (past) (773) 929-8500 7/26/2008 r Arce. Diego Senior Student Finance Advisor D eVzy University (past) (773) 929-8500 2/15/2008 r Dalessandro James G. (330) 392-6140 , ext-14 james@regionalchamber com Field Academic Advisor DeVry University (past) (773) 929-8500 12/ 12/2008 r Newton. Jim Admjnistrator DeYry University {past) (773) 929-8500 12/26/2008 r Fejgert. Don dfeigert@verizon. net Administrator DeVry University (past) (773) 929-8500 ~Last 30 days r Wille. Steve swille@teamsontarget com Member, Advisory Boards DeVzy University (past) (773) 929-8500 12/1/2008 Cherney Marc I mchemey@strate2osinc.com Adjunct Facul ty Member DeVry University (past) (773) 929-8500 12/3/2008 r Quigley John G Adjunct Faculty Member DeVry University (past) (773) 929-8500 10/25/2008 r Johnson Indigo D. indigo@career-transition ... Faculty Member DeYry University {past) (773) 929-8500 10/25/2008 r Leonard Hem:y S. Adjunct Facul ty Member DeVry University (past) (773) 929-8500 1 1/12/2008 r Heyl. Jon W. jonh@spie org Member, Advisory Board DeVry University (past) (773) 929-8500 3/31 /2008 Ratcliffe. Iris Member, Faculty DeYry University (past) (773) 929-8500 12/9/2008 Reitzel. M ichael mi chael reitzel@d igitalre Member, Business Faculty D eVry University (past) (773) 929-8500 51 15/2008 Hong Stan!ey stanley.hong@worldsourcei ... Certified Public Accountant DeVry University (past) (773) 929-8500 6/5/2008 Webb Josh j webb@edutechsystems.com Seni or Technician for the Inform ation Technology Department DeVey University (past)

(773) 929-8500 5/31/2008 Donovan Mike Teaching Assistant DeVzy University {past) (773) 929-8500 11 I 14/2008 r Phillips. Jerry Maintenance Assistant DeVry University (past) (773) 929-8500 7/6/2008 r 916-612-1385 michaeladwsn@yahoo.com
~

Dawson. Michaela R

Faculty Assistant DeYry University {past) (773) 929-8500 8/29/2008 r McDonald Ron (705) 728-1968 x1447 rmmcdonald@georgianc on. c ... Senior Management Positions DeVry University (past) (773) 929-8500 12/16/2008 r Dabsys Tadas G (800) 367-1565 , ext-203 tadas@psionline.com Position, Career Counseling Department DeYry University {past) (773) 929-8500 ~Last 30 days .- Jean. Mary Position, Career Center DeVry University (past) (773) 929-8500 IWLast 30 days r Seah Gilbert Senior Professor DeVry College of Technology DeVry University (past) (773) 929-8500 11/ 14/2008 r Meyers John (773) 243-1603 j meyers@sunbeltoetwork.co. Senior Management Roles DeVry University (past) (773) 929-8500 7/l 5/2008 r Meyers John (847) 533-7115 jmeyers@sunbeltnetwork co Senior Management Roles DeVry University (past) (773) 929-8500 12/9/2008 r Everhart Nicki Professor DeVey University (past) (773) 929-8500 9/29/2008 r Graham. Kay kayg@hgtc.org Educator DeYry University (past) (773) 929-8500 ~Last 30 days mba! ouchestani@devry. edu Professor DeYry University {past) Baloucbestani Mehdi

(773) 929-8500 ~Last 30 days Rutherfoord, Andrea Technical Writer for Another Software Development Company, A Professor DeVry University (past) (773) 929-8500 12/17/2008 Homan Student DeYry University {past)
An~ie

(773) 929-8500 12/2/2008 r Weiss Barry A Professor DeVcy University (past) (773) 929-8500 10/14/2008 r DeCosa Brandy Professor DeVry University (past) (773) 929-8500 ~Last 30 days DeYry University {past)

r

Smith Alan

(773) 929-8500 8/30/2008 Merkow. MarkS. Mark Merkow@aexp com Faci litator DeYcy University (past) (773) 929-8500 5/30/2008 r Petrik. John Dean of Career Services DeVry University (past) (773) 929-8500 10/26/2008 r Perren Ray Dean of Academic Affairs DeVry University (past) (773) 929-8500 8/ 15/2008 Brauer. Susan susan@dreamerstapestry.co... Technology Dean DeVry University {past) (773) 929-8500 11/22/2008 r Isele, William P wisele@archerlaw com Adjunct Professor of Law and Ethics DeVey University (past) (773) 929-8500 7/1 7/2008 joe alexander@bull com
~

r

r

r

Alexander. Joe B.

Adjunct Professor DeVry University (past) (773) 929-8500 ~Last 30 days r Quinones John P. Dean of Computer Information Systems, Information Technology and Telecommunications Management DeYcy University (past) (773) 929-8500 9/15/2008 r Culpepper, Reginald G Adjunct Professor DeVry University (past) (773) 929-8500 ~Last 30 days r Kraft James Adjunct Professor DeVry University (past) (773) 929-8500 8/5/2008 Henderson Elaine elaine henderson@hcca com Communication, Marketing and Writing Classes Teacher DeVcy University (past) (773) 929-8500 'mLast 30 days Bartlett Carol English Teacher DeVcy University {past) (773) 929-8500 2115/2008 Marquez, Andrew Undergrad Student DeVry University (past) (773) 929-8500 7/22/2008 (403) 207-3182 bovellp@cadvision com DeVry University (past) Bovell, Peter

(773) 929-8500 9/20/2008 r Ramsey Tom Economics Teacher DeVry University (past) (773) 929-8500 8/6/2008 r rnjwhite@columbus rr com DeYcy University (past) White Margie J

(773) 929-8500 ~Last 30 days carolc@sandiegomagazine c ... DeVry University (past)

r

Cujec. Carol

(773) 929-8500 7/30/2008 r Denson. T.J. ti .denson@macedoniaminist Dean of Students DeVry University (past) (773) 929-8500 9/29/2008 r Hinrichs Mark P Dean of General Education DeVry University (past) (773) 929-8500 5/25/2008 DeYry Un iversity (past)

r

Schuler Vaughn

(773) 929-8500 7/6/ 2008 r Walker. Dave davidw@ storytron com Academic Dean of Game and Simulation Programming DeYry University (past) (773) 929-8500 12/9/2008 debe! st@devcy.edu DeYry University (past) (773) 929-8500 9/19/2008 DeYry University (past) Chelst Dov N

r

Mathes Jennifer

(773) 929-8500 5/17/2008 r Smith Jennifer Education Adviser DeVry University (past) (773) 929-8500 5/19/2008 r Hildebrand Andrew C. andrew@aarro com Dean of Business Programs DeVry University (past) (773) 929-8500 8/l/2008 Bass, Leonard lbass@mc3 .edu Dean of First Year Programs DeYry University (past) (773) 929-8500 9/2/2008

Name Title Company Last Mentioned Cuilla. Thomas Adjunct Faculty Role DeVry University (past)
(773) 929-8500 9/20/2008 Devoss Joe joe devoss@certtest.com Professor of Business and Operations DeYr:y University (past) (773) 929-8500 8/ 13/2008 (970) 763-7005 ddutmer@theyoutbfoundatio PeVry University (past) Dutmer Deb

(773) 929-8500 11/14/2008 DeVcy University (past)

r

Mcmillan Teey

(773) 929-8500 2/24/2008 r Strachman Peggy peggy@dnagateway com College Professor DeVey University (past) (773) 929-8500 11/24/2008 bhenderson@devcy edu

r

Henderson. Brittany

DeVry University-Washington DeVey University (past) (773) 929-8500 12/16/2008 I Benner Suzanne

iJ
Online and On site Classes In Composition, Ethics , and Career Development Teacher DeVcy Un iversity (past) (773) 929-8500 8/15/2008 abourc@aaua.org DeVey University (past)

r

Cherif. Abour

(773) 929-8500 12/14/2008 r Cumming. Gregory G Adjunct Professor of History DeVey University (past) (773) 929-8500 12/2/2008 DeVey University (past) (773) 929-8500 10/l2/2008 DeVey University (past)

r

Gabaga. Ruth Leizerowicz Joe

(773) 929-8500 10/ 12/2008 r Silk, Suzette ssilk@ohjocatholicfcu com Adjunct Facu lty DeVry University (past) (773) 929-8500 4/11/2008 greg.streich@galegroup co DeVzy Un iversity (past)
F"

Streich. Greg

(773) 929-8500 10/12/2008 I Bailey Barry Dean of Bakersfield Center Devey University (past) (773) 929-8500 6/ 13/2008 DeYzy University (past) (773) 929-8500 8/23/2008 DeVry University (past)

r

Draper Stacy Knight. Rebecca

Mohan. Ratish (773) 929-8500 10/12/2008 International Recruitment DeVey University (past) (773) 929-8500 10/ 12/2008 dpeper@crystalcity org DeVzy University (past) (773) 929-8500 9/4/2008 rrolda@shermanoaksnc org DeVry Un iversity (past) Peper. Denis

Rolda Rick

(773) 929-8500 1 1/15/2008 DeVry University (past)

r

Singh Jagj it K

(773) 929-8500 10/12/2008 r Telfer Deborah M Dean of Business, Computer Information Systems, Technical Management and Biomedical Informatics DeVcy University (past) (773) 929-8500 3/26/2008 Warland. Shannon L Accounting Teacher DeVcy University (past) (773) 929-8500 12/6/2008 QeYry University (past) (773) 929-8500 10/10/2008 cbri s@stillplayi ngwithtoyl DeVry Un iversity (past)
I I

Wilborn, Willy

r

Enterline. Chris

(773) 929-8500 illULast 30 days Buonacore, Mary Auto Mechanic DeVry University (past) (773) 929-8500 7/24/2008 1 Cerney, Jac A. Adjunct Professor of Business DeVry University (past) (773) 929-8500 11/6/2008 (909) 868-4075 kchao@devry edu DeVry University (past) (773) 929-8500 6/23/2008 DeVry University (past)

~

r

Chan, Ken

r

Collins Jennifer

(773) 929-8500 ~Last 30 days 8741 2401 1, ext. 251 221 steveborgmanlcpc@gmail.col
I I

r

Borgman Stephen

.GJ
Counselor DeYry University {past)
(773) 929-8500 12/29/2008

r

PaQuin, Dave

Director of Faculty Devry University Online (past) I l/29/2008 Celeste

r

Hansen

Adjunct Faculty Member Devry University Online (past) 12/ 10/2008

r

~

M.ant
Economics Researcher and Lecturer Universite d'Evcy Yal d'Essonne (past) B!Last
30 days Jeanblanc, Monique Universite d'Evcy Val d'Essonne (past) 10/12/2008

Let me comment now on two pending matters in the legislative and regulatory environment. First, as we mentioned briefly when we reported earnings last quarter, there's the likely conversion from FFELP to a direct lending program delivered as a result of our focus on academic quality. Full year revenue hit a record $1.461 billion, up approximately 34% versus prior year. Revenue was still up about 20% versus prior year, excluding the impact of the U.S. Education and Fanor acquisitions. Net income for fiscal 2009 also hit a record level of$165.6 million, up nearly 32% versus last year. Reported recent acquisitions that boosted top-line growth, along with continued focus on efficiency and margin improvement to increase the bottom line. Revenue of $396 million was up 43% versus last year and so grew 22.5% excluding the impact of U.S. Education and Fanor. Net income in the fourth quarter of $37 million was up 51% versus last year, with reported earnings per share of $0.51 , up 50% versus last year. And the pre-tax income margin was 15% in the quarter, up 300 basis points versus last year, excluding discrete items from both years. and our recruiter compensation system has been and continues to be fully compliant. Now earnings per share would have been $0.56, excluding this litigation reserve, or up about 65% versus last year in the quarter. Our net accounts receivable balance was about a $104 million versus $55 million last year. About 75% of this increase was the result of the addition of receivables for U.S . Education and Fanor. The balance of the increase can be attributed to strong enrollment and revenue growth in the quarter, as receivables per account across our schools are generally in line or lower

moves. Capital spending for fiscal2010 is expected to exceed $100 million. <A- Richard M. Gunst, ChiefFinancial Officer>: Yeah, I think you hit the nail on the head. I think as far as the year goes, our long-term goal is just that, and we think next year we'll be able to be in line with those goals. And for the first quarter, we got some hurdles. You know, could the margin be down versus prior year in any one quarter? I think that's --could be the case. But for the year, I think we're expecting to improve our margins. But we're not managing, as Daniel said, quarter-to-quarter. animal vets. You are going to see continued stories about the shortage among the other healthcare professionals that-- you might go to the doctor's office or the hospital , you meet with a doctor, and meet with a nurse, and then there's two or three or four or five other professionals, you know respiratory therapists or the, maybe you need physical therapy, there's the physical therapy . We're serving dentistry: dental assistants, dental hygienists. So, Medical and Healthcare is definitely a huge priority for investment. its kind. Now, we visit over 8,000 high schools. We see nearly a million high school students a year, and we are educating them on post-secondary

opportunities and careers and the part of that is our service to the community, as part of that is also helping to recruit them to DeVry University, and now we also had programs like that at Chamberlain College of Nursing and Apollo College and Western Career College.

So, that concludes my overview of the very strong results for fiscal 2009. As we look back to our- as we look to our new fiscal year, we still feel comfortable with our long-term financial objectives to deliver a double-digit revenue growth and roughly 20% compound annual earnings per share growth over the next few years. We'll be making investments in Advanced Academics, online

<Q- Sara Gubins>: Okay. And then I wanted to ask about the comment about expecting longer-term to be able to continue to grow revenue double-digits and earnings over 20%, or about 20%. Given the more challenging comparisons that you have from this year, do you think that's an achievable target next year? And I'm also just wondering about the seasonality of that, given your comments about some initiatives presenting hurdles for the first quarter. I'm wondering if you're expecting margins to actually be down year-over-year in the first quarter?

School Name

Number of students

1st Year Retention%

Graduation Rate%

%of students entering calculation graduation rate

UOP
DeVry Institute of Technology & Keller Graduate School of ManagementNew York DeVry UniversityArizona DeVry UniversityCalifornia DeVry UniversityColorado DeVry UniversityFlorida James Madison University University of Florida American University Florida State University University of Vermont Iowa State University Northeastern University SUNY at Albany SUNY at Buffalo Ball State University San Diego State University University of Rhode Island The University of Texas at Dallas

1,432

33%

31%

47%

1,538

49%

44%

53%

6,005

56%

43%

37%

1,079

n/a

n/a

n/a

2,940 17,393 50,912 11,378 39,973 11,870 25,462 23,411 17,434 27,823 20,030 33,441 15,062

48% 92% 94% 87% 88% 84% 84% 90% 84% 87% 75% 82% 81%

85% 80% 79% 71% 68% 67% 66% 65% 63% 61% 59% 58% 57%

91% 80% 69% 78% 74% 82% 69% 69% 60% 66% 74% 47% 78%

14,523

80%

55%

42%

ENTER NO JS-6 SEND
FILED -WESTERN DIVISION CLERK, U.S. DISTRICT COURT
ENTERED ClERK, u .S. DISTRICT COURT

1

Jtl 2 0 2(03

b

2 3
CfNTAAl. 01 SY ,,...;,

4

Of CALifORNIA DEPUTY

CENTRAL OISffiiCT OF CAUFO' ~ 0~ ~~~ t"

·~~~ ~ ~
~

u

l,f)

5
6
7

8 9 10
11

UNITED STATES DISTRICT COURT CENTRAL DISTRICT OF CALIFORNIA

12

SARO DAGHLIAN on behalf of himself and all others similarly situated, Plaintiff, vs. DEVRY UNIVERSITY, INC., DEVRY INC ., and DOES 1 through and including 100, Defendants.
----~----------------------

) CASE NO. CV 06-00994 MMM (PJWx)
) ) ) ) ) ) ) ) ) )

13

14

15
16
17

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS FIRST AMENDED COMPLAINT

18 19 20
21

) )

THIS CONSTITUTES NOTICt Ot tNfRY AS REQUIRED BY FRCP, RUL£ 77(d).

On December 23, 2005, Saro Daghlian commenced this putative class action against DeVry University , Inc., DeVry Inc., and Does 1 through 100 (collectively, "DeVry" or "defendants") in state court. Daglian alleges that defendants failed to inform students, including him, that academic units earned at DeVry probably would not transfer to other educational
,

22 23

24 institutions, and that students who sought further education elsewhere would have to earn the units 25 26 27 anew. Daghlian filed a first amended complaint on January 11 , 2006, which asserted four causes of action: (1) violations of the California Education Code; (2) violations of the California

28 Consumer Legal Remedies Act; (3) false advertising in violation of California Business &

1 Professions Code § § 17500 et seq.; and (4) unlawful, unfair, and deceptive business practices in 2 violation of California Business & Professions Code§§ 17200 et seq. Defendants remove~iihe
12:

i::J

3 action to federal court on February 17, 2006. They now move to dismiss all causes of action in
~-I

(I)

4 plaintiffs first amended complaint. 5
6 7 I. FACTUAL BACKGROUND

The first amended complaint contains the following factual allegations, which are accepted

8 as true for purposes of this motion:

9 10 11 12 13 14 15 16

Defendant DeVry University provides career-oriented undergraduate and graduate degree programs in technology, business, and management. 1 In addition to an online program, it offers courses at seventy-five locations, including nine campuses in California. 2 Defendant DeVry Inc. is one of the largest publicly held for-profit higher education companies in North America. 3 It is the holding company for DeVry University and a number of other educational institutions. 4 Plaintiff Saro Daghlian was a sludent at DeVry University from Apri12002 until October 2005, attending the Electronics Computer Technology program at the West Hills Campus. 5 Prior to enrolling, Daghlian met with a DeVry recruiter, who represented that DeVry was an accredited

17 college where students were able to obtain degrees. The recruiter told Daghlian that unlike 18 technical colleges that give students certificates that cannot be used towards advanced degrees,

19 academic credits from DeVry were transferrable to a wide variety of other academic institutions. 6 20 The recruiter did not give Daghlian any documents explaining that DeVry credits were not likely 21 22 23 24
3
1

First Amended Complaint, , 5.

2/d.

25 26 27 28

/d.,, 6.

5

/d.,, 4.

2

1

to be accepted by other colleges, and that he would have to start his education over if he c~ose to attend another college. 7 In reliance on DeVry's representations, Daghlian signed an ehron~bnt
;~

Cl

2

3 agreement in the presence of the recruiter. 8 He has since incurred approximately $40,000.QQ of
Z r,

4 educational debt. 9 5 6
7

ll. DISCUSSION

A.

Legal Standard Governing Motions To Dismiss Under Rule 12(b)(6)

8

A Rule 12(b)(6) motion tests the legal sufficiency of the claims asserted in the complaint.

9 FED.R.CIV.PROC. 12(b)(6). A court may not dismiss a complaint for failure to state a claim

10 "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim
11 12
13

which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957); see also Moore

v. City of Costa Mesa, 886 F.2d 260, 262 (9th Cir. 1989). For this reason, a court should not
dismiss a complaint if it states a claim under any legal theory, even if a plaintiff erroneously relies

14 on a different theory. Haddock v. Bd. of Dental Examiners, 777 F.2d 462, 464 (9th Cir. 1985). 15 In other words, a Rule 12(b)(6) dismissal is proper only where there is either a "lack of a 16 cognizable legal theory" or "the absence of sufficient facts alleged under a cognizable legal 17 18 theory." Balistreri v. Pacifica Police Dept., 901 F.2d 696, 699 (9th Cir. 1988). In deciding a motion to dismiss for failure to state a claim, the court's review is generally

19 limited to the contents of the complaint. See Campanelli v. Bockrath, 100 F.3d 1476, 1479 (9th 20 21 22 23 Cir. 1996); Allarcom Pay Television, Ltd. v. Genera/Instrument Corp., 69 F.3d 381, 385 (9th Cir. 1995). The court may also consider material that is properly submitted as part of the complaint or that is a proper subject of judicial notice under Rule 201 of the Federal Rules of Evidence. United States v. Ritchie, 342 F.3d 903, 907-08 (9th Cir. 2003); Gumataotao v.

24 Director of Dept. of Revenue and Taxation, 236 F.3d 1077, 1083 (9th Cir. 2001); Hal Roach 25 26 27 28
3

1 Studios, Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555 n. 19 (9th Cir. 1990). The court
Cl

2 must accept plaintiff's factual allegations as true, and construe them and draw all reason4Qie . ... 3 inferences from them in favor of the nonmoving party. Cahill v. Liberty Mutual Ins. Co .• ::,?o

-~·

~r-,

4 F.3d 336, 337-38 (9th Cir. 1996); Mier v. Owens, 57 F.3d 747,750 (9th Cir. 1995). It need not, 5 however, accept as true legal conclusions cast in the form of factual allegations. Western Mining 6 7 8
Council v. Watt, 643 F.2d 618, 624 (9th Cir. 1981).

B.

First Cause Of Action Alleging Education Code Violations

Dahglian's first cause of action alleges that defendants failed to comply with various

9 provisions of the Private Postsecondary and Vocational Education Reform Act of 1989 (the 10 11 "Reform Act"), which is part of the California Education Code. Daghlian contends that defendants violated Education Code § 94816(b) by failing to provide written notification to

12 students that credits earned at DeVry would probably not transfer to other colleges or 13 universities. 10 He also asserts that, as part of their recruiting effort, defendants actively misled

14 students to believe that the credits would transfer to other institutions, 11 in violation of Education 15 16 17 Code§ 94832Y Finally, Daghlian alleges that defendants breached Education Code§ 94814, which requires that institutions give students and other interested persons, prior to enrollment, a brochure or catalogue that sets forth all material facts that are reasonably likely to affect their

18 decision to enroll. 13 19 20 21
1.

Whether Plaintiff Has A Private Right Of Action To Sue For Violation Of Education Code §§ 94814, 94816, And 94832

Defendants argue that Daghlian lacks standing to enforce Education Code §§ 94814,

22 94816, and 94832, because these sections are not listed in§ 94985(b), the Reform Act provision 23 24
10

25
11

/d., ,, 11, 12, 26, 27.

26 27 28
12

First Amended Complaint, ~, 10, 13.
/d., ~, 24, 27.
/d., ,, 25, 27.
4

13

I~
I

'*!

1 that confers a private right of action to sue for violations of specific sections of the act. 14
0

2 3

Defendants contend that in amending §.94985, the California Legislature "expressly chos~o exclude a private right of action as a remedy for violations of Sections 94814, 94816, and 948~5,"

4 and therefore that Daghlian's first cause of action must be dismissed. 15 5 Daghlian disputes this, focusing on§ 94985(b)(6). That section states: "Notwithstanding any provision of the contract or agreement, a student may bring an action for a violation of this article or for an institution's failure to perform its legal obligations and, upon prevailing thereon, is entitled to the recovery of damages, equitable relief, or any other relief authorized by this article, and reasonable attorney's fees and costs." CAL. Eouc. CODE§ 94985(b)(6). Based on the legislative history of § 94985, the purpose of the Reform Act and subsequent amendments, Daghlian contends that this provision should have been subdivision (c), and that its placement under subdivision (b) was a legislative drafting error. He asks that the court overlook this "blatant" error, and find that he has a private right of action to sue under Education Code
§§ 94814, 94816, and 94832.

6
7 8 9 10 11 12
13

14 15 16 17 18

a.

Principles Of Statutory Construction

The parties have not cited, nor has the court found, any case that directly addresses the question presented here. To resolve the issue, therefore, the court must interpret the pertinent

19 provisions of the Reform Act, following California's rules of statutory construction. See In re 20 First T.D. & Inv., Inc., 253 F.3d 520, 527 (9th Cir. 2001) ("With the exception of the 21 22 23 24 25 26 27 28 Memorandum of Points and Authorities in Support of Defendants' Motion to Dismiss First Amended Complaint ("Defs.' Mot.") at 5-7.
15

bankruptcy and district courts below, no state or federal court has had occasion to interpret [Cal. Prof. & Bus. Code]§ 10233.2. We therefore apply California's rules of statutory construction," citing Fed. Sav. & Loan Ins. Corp. v. Butler, 904 F.2d 505, 510 (9th Cir. 1990) (applying California's rules of statutory construction to interpret California Civil Code § 877)); In re

14

Id. at 6-7.

5

1 Anderson, 824 F.2d 754, 756 (9th Cir. 1987) ("We can find no relevant California cases which 2 discuss the problems raised in this appeal. We are bound by California rules of constructi&~ in 3 our independent interpretation of the California starutes at issue, however"). See aisoDimido~ich
<.f)
:i~

0

4

v. Bell & Howell, 803 F.2d 1473, 1482 (9th Cir. 1986) ("Where the state's highest court has not

5 decided an issue, the task of the federal courts is to predict how the state high court would resolve

6 it").
7 Under California law, "the 'ultimate task' in statutory interpretation 'is to ascertain the

8 legislature's intent."' In re First T.D. & lnv., 253 F.3d at 527 (quoting People v. Massie, 19 9 Cal.4th 550, 569 (1998), cert. denied, 526 U.S. 1113 (1999)). See also S.D. Myers, Inc. v. City 10 and County ofSan Francisco, 336 F.3d 1174, 1179 (9th Cir. 2003) ("'Ofprimary importance the 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 court should ascertain the intent of the Legislature so as to effecruate the purpose of the law,'" quoting San Diego Union v. City Council, 146 Cal.App.3d 947, 953-54 (1983) (internal citation and quotation marks omitted)); Cal. Teachers Ass'n v. San Diego Community College Dist., 28 Cal. 3d 692, 697 (1981) ("In construing a statute 'we begin with the fundamental rule that a court should ascertain the intent of the Legislarure so as to effectuate the purpose of the law'" (citations and internal quotation marks omitted)). Generally, '"the words of the statute provide the most reliable indication of legislative intent.'" In re First T.D. & Inv., 253 F.3d at 527 (quoting Pacific Gas & Elec. Co. v. County of

Stanislaus, 16 Cal. 4th 1143, 1152 (1997)). In interpreting the words of a statute, a court "should
give the language ... 'its usual, ordinary import and accord[ ] significance, if possible, to every word, phrase and sentence in pursuance of the legislative purpose.'" !d. (quoting Dyna-Med, Inc.

v. Fair Employment & Hous. Comm'n, 43 Cal.3d 1379, 1386-87 (1987)). See also Mutual Life Ins. Co. of New York v. City of Los Angeles, 50 Cal. 3d 402, 407 (1990) ("'[I]n arriving at the
meaning of a [[starutory or] constitutional provision], consideration must be given to the words employed, giving to every word, clause and sentence their ordinary meaning,'" quoting State

Board ofEduc. v. Levit, 52 Cal.2d 441,462 (1959)); Cal. Teachers Ass'n, 28 Cal. 3d at 697 ("An
equally basic rule of statutory construction is, however, that courts are bound to give effect to statutes according to the usual, ordinary import of the language employed in framing them" 6

1 (citations and internal quotations omitted)). "[W]here the language of a statute is reasonably 2 susceptible of two constructions, one of which in application will render it reasonable, fai~~nd 3 harmonious with its manifest purpose, and another which would be productive of ab~rd
( •)

Cl

;r=

4 consequences, the former construction will be adopted." Pitney-Bowes, Inc. v. State of Cal., 108 5 Cal.App.3d 307, 313-14 (1980) (citations and internal quotations omitted)). 6 If the meaning of a stanltory provision is ambiguous, "a court may consider extrinsic

7 evidence of the legislature's intent, 'including the statutory scheme of which the provision is a 8 part, the history and background of the statute, the apparent purpose, and any considerations of

9 constitutionality."' In re First T.D. & lnv., 253 F.3d at 527 (quoting Hughes v. Bd. of
10 Architectural Exam 'rs, 17 Cal. 4th 763, 776 (1998)). If, on the other hand, "the language of the 11 12 13 statute is clear and ambiguous, the statutory analysis ends." Viceroy Gold Corp. v. Aubry, 75 F.3d 482, 490 (9th Cir. 1996) (citing Delaney v. Superior Court, 50 Cal.3d 785, 800 (1990) ("When statutory language is thus clear and unambiguous there is no need for construction, and

14 courts should not indulge in it" (internal citations omitted, emphasis original)). See also Mutual 15 Life Ins. Co., 50 Cal. 3d at 497 ("If doubts and ambiguities remain then, and only then, are we 16 17 warranted in seeking elsewhere for aid.. . . When, however, 'the language is clear and unambiguous there is no need for construction, nor is it necessary to resort to indicia of the intent

18 of the Legislature . . . " (citations omitted)). 19 20 21 22 23 24 25 26 27 28 This "'plain meaning' rule does not, [however,] prohibit a court from determining whether the literal meaning of a statute comports with its purpose or whether such a construction of one provision is consistent with other provisions of the statute." Lungren v. Deukmejian, 45 Cal. 3d 727, 735 (1988). The meaning of a statute should be construed in context, and the various parts of the statutory enactment should be harmonized to the extent possible. /d.; see Moyer v.

Workmen's Comp. Appeals Bd., 10 Cal. 3d 222, 230 (1973) ("When used in a statute [words] must
be construed in context, keeping in mind the nature and obvious purpose of the statute where they appear. Moreover, the various parts of a statutory enactment must be harmonized by considering the particular clause or section in the context of the statutory framework as a whole" (citations and internal quotation marks omitted)). Indeed, "[l]iteral construction should not prevail if it is
7

....

1 contrary to the legislative intent apparent in the statute." Lungren, 45 Cal. 3d at 735.
(:J

2
3
4

With these principles in mind, the court turns to the language of the statute.

b.

The Reform Act

·z
•7
~

lLl
..... ....

u {1)

In enacting the Reform Act, the California legislature sought "to promote the effective

5 integration of private postsecondary education into all aspects of California's educational system
6 and to foster and improve the educational programs and services of these institutions while

7 protecting the citizens of the state from fraudulent or substandard operations." CAL. Eouc. CODE
8 § 94705. It also intended "to provide for the protection, education, welfare of citizens of 9 California, its postsecondary education institutions, and its students by providing for all of the 10
11
12

following:
(a)

Ensuring minimum standards of instructional quality and institutional stability for all students in all types of institutions and thereby encouraging the recognition by public and private institutions of completed coursework and degrees and diplomas issued by private institutions, to the end that students will be provided equal opportunities for equal accomplishment and ability.

13 14 15 16 17 18 19 20
21

(b)

Establishing minimum standards concerning the quality of education, ethical and b~siness practices, health and safety, and fiscal responsibility to provide protection against substandard, transient, unethical, deceptive, or fraudulent institutions and practices.

22
23

(d)

Prohibiting misleading literature, advertising, solicitation, or representations by private educational institutions or their agents.

24 25
(f)

Protecting the consumer and students against fraud, misrepresentation, or other practices that may lead to an improper loss of funds paid for educational costs, whether financed through personal resources or state and federal student financial aid.
8

26
27

28

1
2 (h)

Recognizing and encouraging quality nongovernmental accreditation, while not ceding to that or any other nongovernmental process the responsibility for state oversight for purposes of approval, if the accreditation process fails either to protect minimum standards of quality or to acknowledge legitimate innovative methods in postsecondary education .... " ld.

3
4

5
6

7 The Reform Act defines ''private postsecondary education institutions" as "any person doing 8 business in California that offers to provide or provides, for a tuition, fee, or other charge, any 9 instruction, training, or education" under certain specified circumstances. /d., § 94739(a). 16 The 10 Act creates a Bureau for Private Postsecondary and Vocational Education (the "Bureau") in the 11 12 13 14 Department of Consumer Affairs, which is charged with the duty of "approving and regulating private postsecondary educational institutions." /d., § 94770. See also id., § 94774 (detailing the Bureau's functions and responsibilities). The Reform Act is codified in the Education Code, Title 3, Division 10, Part 59, Chapter

15 7. Article 6, which encompasses Education Code §§ 94800 through 94848, is titled "General 16 Standards for All Postsecondary Institutions Approved Under This Chapter." Section 94800 17 18 requires that all institutions comply with certain minimum standards - specifically, that they remain financially capable of fulfilling commitments to students; that they award students

19 appropriate degrees, diplomas, or certificates upon satisfactory completion of training; and that 20 they provide instruction as part of their educational program. /d., § 94800. 17 21 Section 94814 mandates that institutions "provide to students and other interested persons,

22 prior to enrollment, a catalog[ue] or brochure containing . . . all . . . material facts concerning 23 24 25 26 27 28 Section 94739(b) enumerates the types of education institutions that are exempt from regulation under the Reform Act. See CAL. EDUC. CODE § 94739(b). It does not appear, and DeVry does not argue, that it falls within any of the exceptions listed in § 94739(b).
17

the institution and the program or course of instruction that are reasonably likely to affect the

16

This section became effective January 1, 2004.
9

·J

1 decision of the student to enroll, as prescribed by rules and regulations adopted by the [BureauJ. " 2 /d., § 94814(a). Failure to disclose this information renders a written contract between~~e ..,. J3 institution and a student unenforceable. /d., § 94814(b).
C.:J

5
(})

4

Section 94816 requires that "[e]ach institution offering a degree program designed to

5 prepare students for a particular vocation, trade, or career field and each institution subject to 6 Article 7 (commencing with Section 94850) ... provide to each prospective student a statement 7 in at least 12-point type that contains the following [language]: 8 9 'NOTICE CONCERNING TRANSFERABILITY OF UNITS AND DEGREES EARNED AT OUR SCHOOL Units you earn in our _ _ _ _ (fill in name of program) program in most cases will probably not be transferable to any other college or university. For example, if you entered our school as a freshman, you will still be a freshman if you enter another college or university at some time in the future even though you earned units here at our school. In addition, if you earn a degree, diploma, or certificate in our _ _ _ _ (fill in name of program) program, in most cases it will probably not serve as a basis for obtaining a higher level degree at another college or university."' /d., § 94816.

10
11 12 13 14 15 16 17

18 This disclosure must be signed by both the student and the institution, and dated. /d. 19 20 21 Section 94832 prohibits institutions and their representatives from "mak[ing] or caus[ing] to be made any statement that is in any manner untrue or misleading, either by actual statement, omission, or intimation." ld., § 94832(a). It also requires that "[n]o institution or representative

22 of an institution ... engage in any false, deceptive, misleading, or unfair act in connection with 23 any matter, including the institution's advertising and promotion, the recruitment of students for 24 enrollment in the institution, the offer or sale of a program of instruction, course length, course 25 credits, the withholding of equipment, educational materials, or loan or grant funds from a 26 27 28 student, training and instruction, the collection of payments, or job placement." ld. , § 94832(b).

c.

Section 94985

Article 13 is titled "Administrative and Judicial Procedures." Sections 94965 and 94975
10

·-'

1 of the article govern administrative actions. !d., § 94950(a). "Sections 94952 and 94955
{j

2 authorize the Bureau and the Attorney General to seek various forms of judicial relief in orde:i:;!to :r. 3 enforce this chapter." /d., § 94950(d). ~]
J~

4
5

Section 94985, the provision at the center of the parties' dispute, "authorizes civil remedies for individual students in addition to those available under other provisions of law." /d.,

V'l

6 § 94985(f). Subdivision (a) declares that "[a]ny institution that willfully violates any provision
7 of Section 94800, 94810, 94814, or 94816, Sections 94820
to

94826, inclusive, Section 94829,

8 94831, or 94832 may not enforce any contract or agreement arising from the transaction in which 9 the violation occurred, and any willful violation is a ground for revoking an approval to operate

10 in this state or for denying a renewal application." /d., § 94985(a). 11 12 13 14 15 Subdivision 18 (b) gives a private right of action to "[a]ny person who claims that an institution is operating in violation of subdivision (a) of Section 94831, subdivision (a) of Section 94900, or Section 94915, or [that] an institution is operating a branch or satellite campus in violation of subdivision (a) of Section 94857." /d., § 94985(b) (stating that such person "may bring an action, in a court of competent jurisdiction, for the recovery of actual and or statutory

16 damages as well as an equity proceeding to restrain and enjoin those violations, or both"). 19 The 17 cited provisions require institutions to secure Bureau approval before operating or granting 18 degrees in the state. 19 A prospective plaintiff who intends to sue under § 94985(b) must satisfy various pre-suit

20 notice requirements. Paragraph (b)(l) requires that anyone intending to sue give notice to, and 21 make a demand on, the institution at least thirty-five days prior to filing an action alleging

22 violationof§§94831(a), 94900(a), 94915, or94857(a). Seeid., §94985(b)(1). It also requires 23 24 25 26 27 28 In keeping with the format of the Education Code, the court refers lettered provisions ((a), (b), (c), etc.) as "subdivisions," and to numbered provisions ((1), (2), (3), etc.) as "paragraphs." See id., § 94857(a) ("No institution shall establish a branch or satellite campus unless the council approves the branch or satellite campus before any students are enrolled for instruction, or any instruction is offered, at that campus").
11
19

18

·-:

1 that the prospective plaintiff give the Bureau notice of intent to sue. The institution may avoid 2 suit by filing an application f~r Bureau approval within thirty days of receiving notice. If a~~it 3 if filed, however, and the court finds that the institution has violated any of §§ 9483l;(a),
\~

8

z

(I)

4 94900(a), 94915, or 94857(a), it must grant certain remedies specified in subdivision (b)(2). See 5 id. ' § 94985(b)(2). 20 6 7 8 9 Paragraph (b)(3) declares that "[a]ny violation of subdivision (a) of Section 94831, subdivision (a) of 94900, Section 94915, and subdivision (a) of Section 94857 shall constitute an unfair business practice within the meaning of Section 17200 of the Business and Professions Code." /d., § 94985(b)(3). Paragraph (b)(4) provides that a certification from the Bureau that

10 the institution has not been approved gives rise to "a conclusive presumption that the institution 11 has violated this subdivision." !d., § 94985(b)(4). Paragraph (b)(5) states that "[a]Il fines and

12 other monetary amounts that an institution is ordered to pay pursuant to this subdivision may be 13 14 15 16 17 18
20

collected from the institution itself and from the individuals who own the institution, whether or not the institution is organized as a corporation." !d.,§ 94985(b)(5). Finally, paragraph (b)(6) provides: "Notwithstanding any provision of the contract or agreement, a student may bring

Section 94831, subdivision (a) of Section 94900, Section 94915, or subdivision (a) of Section 20 94857, all of the following shall occur: (A) The court shall order the institution to cease all operations and to comply with all procedures set forth in this code pertaining to the closure of 21 institutions. (B) The court shall order the institution to pay all students who enrolled while the school was in violation of subdivision (a) of Section 94831 , subdivision (a) of Section 94900, 22 Section 94915, or subdivision (a) of Section 94857 a refund of all tuition and fees paid to the 23 institution and a statutory penalty of one thousand dollars ($1 ,000). (C) The court shall order the institution to pay the prevailing party's attorneys' fees and costs. (D) The court shall order the 24 institution to pay to the bureau all fines incurred pursuant to subparagraph (E) of paragraph (1). 25 (E) Any instrument of indebtedness, enrollment agreement, or contract for educational services is unenforceable pursuant to Section 94838. The court shall order the institution to mail a notice 26 to all students who were enrolled while the school was in violation of subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section 94915, or subdivision (a) of Section 94857, 27 stating that instruments of indebtedness, enrollment agreements, and contracts for educational 28 services are not enforceable... ").
12

19

/d., § 94985(b)(2) ("If the court finds that the institution has violated subdivision (a) of

1
2

an action for a violation of this article or for an institution's failure to perform its legal obligations and, upon prevailing thereon, is entitled to the recovery of damages, equitable relief, or any other relief authorized by this article, and reasonable attorney's fees and costs." /d. , § 94985(b)(6). Section 94985 has no subdivision (c). The section contains eight additional subdivisions,

3

4 5

6 (d) through (k). 7
8

d.

Analysis

Defendants argues that subdivision (b) of§ 94985 creates a private right of action only for

9 violations of§§ 94831(a), 94900(a), 94915, 94857(a), and that Daghlian's action is barred as a 10 consequence. They contend the fact that the legislature specifically cited §§ 94814, 94816, and 11 94832 in subdivision (a) "vitiates any claims that the Legislature inadvertently failed to provide

12 a remedy for these sections" in subdivision (b). 21 Defendants assert the inclusion of§ 94831 in 13 both subdivisions (a) and (b) is evidence that "if the Legislature had intended to provide a private

14 and public right of action for violations of Sections 94814, 94816 and 94832 of the Reform Act, 15 16 17 18 it" could have done so, and "would have treated these sections in the same way that it treated Section 94831. " 22 Daghlian counters that "[a] plain reading of the legislation demonstrates, without a doubt, that the relocation of a student's private right of action as section 94985(b)(6) rather than section

19 94985(c) was inadvertent drafting error. "23 He contends that paragraph (b)(6)'s use of the word 20 21 22 23 24
21

"article" shows that it is an "omnibus" clause that reflects a legislative intent to afford students a private right of action to enforce any provision of the Reform Act. 24 Daghlian argues that the legislative history of Assembly Bill 201, which amended § 94985 in 2001, supports this

25 26 27 28
23 24

Defs.' Mot. at 7.

PJ. 's Opp. at 10.

/d. at 12.
13

1 interpretation. He asserts that the purpose of A.B. 201 was to reform certain aspects of
()

2

California's Student Tuition Recovery Fund, and that nothing in the legislative history sugg~sts
2 !5

3 that the bill "was [designed] to eradicate, minimize or even change substantive student rights':C' 26
l ...)

~

t..-...

i,l)

4

Daghlian contends that limiting students' private right of action to§§ 94831(a), 94900(a), 94915,

5 and 94857(a) would undermine the purpose of A.B. 201 and the objectives of the Reform Act. 27 6 He also maintains that defendants' construction creates internal inconsistencies in the legislative 7 scheme and that if the provision governing students' private right of action is denominated
8

paragraph (b)(6) rather than subdivision (c), subdivisions (d), (g), (h), (k), and the rest of

9 subdivision (b) would be meaningless. 28 10
11

i.

Language Of § 94985(b)(6)

A plain reading of§ 94985(b)(6) indicates that the California legislature intended to grant

12 students a broad private right of action. Without specifying particular sections of the Reform Act, 13 14 15 the provision authorizes students to bring suit to enforce "a violation of this article or [to redress] . . . an institution's failure to perform its legal obligations." CAL. Eouc. CODE§ 94985(b)(6). This right cannot be waived; students may sue "[n]otwithstanding any provision of a contract or

16 agreement." !d. In addition, the provision affords students a wide range of remedies, including 17 legal damages, equitable relief, attorneys' fees, "or any other relief authorized by this article." 18 ld. 19 20 21 22 23 24
25

Defendants urge a narrower construction of paragraph (b)(6). Emphasizing the phrase " [n]otwithstanding any provision of a contract or agreement," they argue that the provision means only that "clauses in contracts that seek to void all private claims under the Education Code .. .

25 26 27 28

/d. at 8. /d. at 10.

26

27

/d. at 10-13.

28

/d. at 13-14.
14

1 are against public policy. "29 Defendants take the opening clause out of context. The balance of 2 the paragraph clearly provides that students may bring an action for "a violation of this articl~~r
~?:

a

3 an institution's failure to perform its legal obligations. " /d. See Dyna-Med, Inc., 43 CaHfat
u

4

1386-87 (in construing a statute, a court should "accord[ ] significance, if possible, to every

'.J)

5 word, phrase and sentence in pursuance of the legislative purpose"). Paragraph (b)(6)'s use of 6 7 8 the word "article" stands in stark contrast to prior paragraphs' references to specific "subdivisions." See, e.g., CAL. Eouc. CODE §§ 94985(b)(1)(A) (plaintiff must "[n]otify the institution alleged to have violated subdivision (a) of Section 94831, subdivision (a) of Section

9 94900, Section 94915, or subdivision (a) of Section 94857, of the particular alleged violations"), 10 94985(b)(4) ("A certification, issued by the bureau ... shall establish a conclusive presumption
11

that the institution has violated this subdivision" (emphasis added)), 94985(b)(5) ("All fines and

12 other monetary amounts that an institution is ordered to pay pursuant to this subdivision may be 13 14 15 collected from the institution itself and from the individuals who own the institution, whether or not the institution is organized as a corporation" (emphasis added)). The use of the open-ended phrase "or an institution's failure to perform its legal

16 obligations" also distinguishes paragraph (b)(6) from prior paragraphs, all of which make clear 17 18 19 20 21 22 23 24 25 26 27 28 Defendants DeV ry, Inc. and DeVry University, Inc. 's Reply Brief in Support of Motion to Dismiss Plaintiff's First Amended Complaint ("Defs.' Reply") at 15 (emphasis added). Sections 94831, 94900, and 94915 require Bureau approval to operate, confer degrees, and offer educational services or programs. Section 94857 requires approval to operate a branch or satellite campus. See CAL. Eouc. CODE§§ 9483l{a) ("No institution, or representative of that institution shall . . . [o]perate in this state a postsecondary educational institution not exempted from this chapter, unless the institution is currently approved to operate pursuant to this chapter. The council may institute an action, pursuant to Section 94955, to prevent any individual or entity from operating an institution in this state that has not been approved to operate pursuant to this chapter and to obtain any relief authorized by that section"), 94900(a) ("No private postsecondary educational institution may issue, confer, or award an academic or honorary degree unless the institution is approved by the council to operate in California and award degrees"), 94915 ("No private postsecondary educational institution ... may offer educational services or programs
15
30

that they address only an institution's operation without Bureau approval in violation of
§§ 94831(a), 94900, 94915, or 94857(a). 30 See id., § 94985(b). The repetition of the phrase,

29

1 2 3 4 5

"subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section 94915, or subdivision (a) of Section 94857" in paragraphs (b)(l) through (b)(5), and its absence from paragraph (b)(~ .
1 strongly suggests that the California legislature did not intend to limit the applicability;,..,
l.n
i~\

z

of

paragraph (b )(6) to private claims under these particular sections.

See, e.g., id.,

§§ 94985(b)(l)(A) (plaintiff must "[n]otify the institution alleged to have violated "subdivision

6 (a) of Section 94831, subdivision (a) of Section 94900, Section 94915, Section 94915, or
7 8 9 10
11

subdivision (a) of Section 94857 of the particular alleged violations"), 94985(b)(l)(B) (same), 94985(b)(l)(C) (same), 94985(b)(l)(E) (same), 94985(b)(l)(F) (same), 94985(b)(l)(G) (same), 94985(b)(2) (same), 94985(b)(2)(B) (same), 94985(b)(2)(E) (same), 94985(b)(3) (same), 94985(b)(4) (same).

ii.

Context Of § 94985

12

Reading § 94985 in context also supports Daghlian's position that the private right of action provision should have been denominated subdivision (c), rather than paragraph (b)(6). See

13
14 15 16 17 18 19 20 21 22 23

Lungren, 45 Cal. 3d at 735 ("The meaning of a statute may not be determined from a single word
or sentence; the words must be construed in context, and provisions relating to the same subject matter must be harmonized to the extent possible," citing Dyna-Med, Inc., 43 Cal. 3d at 1386-87. Like paragraph (b)(6), subdivisions (e) through (k) are relatively broad in scope, referring to causes of actions under "this section" or "this article." Subdivision (e), for example, confirms that "[t]he remedies provided in this article supplement, but do not supplant, the remedies provided under any other provision of law." CAL. Eouc. CODE § 94985(e) (emphasis added). Subdivision (f) imposes a three-year statute of limitations on actions "brought under this section. "

Id., § 94985(f) (emphasis added). See also id., §§ 94985(g) (referring to "any right or remedy"
(emphasis added)), 94985(h) (governing the assignment of any "cause of action for a violation of

24
25 26 27 28 unless the institution or locations at which these services or programs are offered have been approved by the council as meeting the requirements of this section"), 94857(a) ("No institution shall establish a branch or satellite campus unless the council approves the branch or satellite campus before any students are enrolled for instruction, or any instruction is offered, at that campus").

16

1 this article" (emphasis added)). 2 3 Furthermore, like paragraph (b)(6), many of these subdivisions address suits by "studen~~"
;~

l.J

in contrast to paragraphs (b)(l) through (b)(5), which concern suits by "any person." Subdivi~9n
i,l)

4 (g), for example, declares void and unenforceable ''[a]ny provision in any agreement that purports
5

to require a student to invoke any grievance dispute procedure established by the institution .... "

6 /d., § 94985(g) (emphasis added). Similarly, subdivision (h) provides that "[a] student may 7 8 assign his or her cause of action for a violation of this article to the bureau, or to any state or federal agency that guaranteed or reinsured a loan for the student or that provided any grant or

9 other financial aid." ld., § 94985(h) (emphasis added).

10
11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Subdivision (k) of § 94985 sets forth certain notification requirements for students who bring an action against an institution. It provides: "If a student commences an action or asserts any claim in an existing action for recovery on behalf of a class of persons, or on behalf of the general public, under Section 17200 of the Business and Professions Code, the student shall notify the bureau of the existence of the lawsuit, the court in which the action is pending, the case number of the action, and the date of the filing of the action or of the assertion of the claim. The student shall notify the bureau as required by this subdivision within 30 days of the filing of the action or of the first assertion of the claim, whichever is later. The student shall also notify the court that he or she has notified the bureau pursuant to this subdivision. Notwithstanding any other

provision of law, no judgment may be entered pursuant to this section until the student has notified the bureau of the suit and notified the court that the bureau has been notified. This subdivision only applies to a new action filed or to a new claim asserted on or after January 1, 2002." /d., § 94985(k). Plaintiff argues that defendants' proposed construction of the statute, which would limit students' private right of action to violations of§§ 94831(a), 94900, 94915(a), and 94857(a), would render

17

1 subdivision (k) meaningless. 31 The court agrees. Subdivision (b) sets forth a detailed pre-suit

2 notification procedure that must be followed by a party who wishes to sue for violation~bf
~~

b

·-

3

§§ 94831(a), 94900, 94915(a), and 94857(a). Subparagraph (b)(l) requires that, "[a]t leas£J5
1,1'')

4 days prior to the commencement of an action pursuant to this subdivision," "'[a]ny person," 5 6 7 including a student, who intends to sue must notify the institution of "the particular alleged violations," and "[d]emand that the institution apply for the bureau's approval to operate as required by subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section 94915,
!d., §§ 94985(b)(l)(A),

8 or subdivision (a) of Section 94857, whichever is applicable." 9

94985(b)(l)(B). This notice must "be in writing, and ... be sent by regular mail and certified

10 or registered mail, return receipt requested, to the location of the institution that is allegedly

11
12
13

operating in violation of subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section 94915, or subdivision (a) of Section 94857, whichever is applicable."

ld., §

94985(b)(1)(C). The institution then has thirty working days "from the receipt of the notice, to file an application for approval to operate with the bureau." !d., § 94985(b)(l)(D). If, "within 30 working days after receipt of the notice, [it] applies for the bureau's approval to operate as required by subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section 94915, or subdivision (a) of Section 94857," the plaintiff is barred from bringing suit. /d.,

14 15 16 17 18 19 20 21

§ 94985(b)(l)(E). If, however, "within 35 days after receipt of the notice, the bureau has not received an application from the institution, the bureau shall mail the plaintiff a certification that the institution has not applied or been approved to operate pursuant to subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section 94915, or subdivision (a) of Section 94857." Such certification "establish[es] a conclusive presumption that the

22 !d., § 94985(b)(l)(F). 23 24 25 26 27 28
31

institution has violated this subdivision." /d., § 94985(b)(4). The prospective plaintiff must also "notify the bureau by mail and by certified or registered mail, return receipt requested, that he or she intends to bring an action pursuant to this section against the institution." !d., § 94985(b)( 1)(G). Upon receipt of this notice, the Bureau must

Pl. 's Opp. at 14.
18

1 investigate the institution's compliance or noncompliance with the approval provisions. See id.
b

2 ("Upon receipt of this notice, the bureau shall immediately investigate the institution's compliance
!~

3 with subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section

94915~5or
~I)

·-

4 subdivision (a) of Section 94857, whichever is applicable ... "). If the investigation reveals "that 5 the institution has violated the applicable section, the bureau shall immediately order the 6 institution to cease and desist operations." /d. An institution that "continues to operate in 7 violation of the bureau's cease and desist order" can be fined $1,000 per day. /d. 8 Subdivision (b) allows an institution to avoid a suit for violation of§§ 94831(a), 94900(a),

9 94915, or§ 94857(a), by applying for Bureau approval within thirty days of notification. It also 10 imposes a responsibility on the Bureau to determine whether the institution has complied with the 11 approval provision in question. These provisions make sense, as§§ 94831(a), 94900(a), 94915,

12 and § 94857(a) all concern an institution's obligation to obtain approval from the Bureau, not 13 duties owed to students or other persons. Furthermore, because an institution's failure to obtain

14 approval from the Bureau before conducting operations affects all of its students, subdivision (b) 15 16 17 18 requires that a court that finds a violation "order the institution to cease all operations." /d.,
§ 94985(b)(2)(A). In addition, the court must "order the institution to pay all students who

enrolled while the school was in violation of subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section 94915, or subdivision (a) of Section 94857 a refund of all tuition and fees
/d.,

19 paid to the institution and a statutory penalty of one thousand dollars ($1 ,000)." 20 21 22 23 24 25 26 27 § 94985(b)(2)(B).

In contrast to the notice provisions set forth in subdivision (b), subdivision (k) requires a student who "commences an action or asserts any claim in an existing action for recovery on behalf of a class of persons, or on behalf of the general public, under Section 17200 of the Business and Professions Code" to inform the Bureau of the action. /d., § 94985(k). If, as defendants contend, a student's private right of action is restricted to claims that an institution violated §§ 94831(a), 94900(a), 94915, and § 94857(a), there would have been no need for the legislature to have enacted subdivision (k). See id., § 94985(b)(l) (governing actions in which

28 a "person ... claims that an institution is operating in violation of subdivision (a) of Section
19

1 94831, subdivision (a) of Section 94900, or Section 94915, or an institution is operating a branch
c:~

2 or satellite campus in violation of subdivision (a) of Section 94857"); see also id., § 94985(ti)t3)

·-

3 ("Any violation of subdivision (a) of Section 94831, subdivision (a) of Section 94900, Section
~ ..)

VI

4 94915, and subdivision (a) of Section 94857 shall constitute an unfair business practice within the 5 meaning of Section 17200 of the Business and Professions Code"). 6 Moreover, the notification requirements in subdivision (k) conflict with those in

7 subdivision (b). Paragraph (b)(1) requires that a prospective plaintiff notify the Bureau that he 8 or she "intends to" commence an action against an institution. !d., § 98945(b)(1)(G). Although 9 the paragraph does not specify a time limit, its use of the phrase "intends to" indicates that such 10 11 notice must be given prior to filing suit. Subdivision (k), by contrast, states that "[i]f a student commences an action or asserts any claim in an existing action" under § 17200, he or she must

12 inform Bureau of the existence of the lawsuit "within 30 days of the filing of the action or of the 13 14 first assertion of the claim, whichever is later." !d., § 94895(k). The student must also notify the Bureau of "the court in which the action is pending, the case number of the action, and the

15 date of the filing of the action or of the assertion of the claim." !d. Finally, subdivision (k) 16 17 mandates that a student advise the court that he or she has notified the Bureau; if a student fails to do so, no judgment can be entered in the case. !d. None of these additional requirements

18 appears in subdivision (b). Even more significantly, subdivision (k) differs from subdivision (b) 19 in that it does not require that the student give any notice or make any demand on the institution 20 prior to filing suit or asserting the claim. 21 22 23 24 25 Daghlian's construction avoids potential inconsistency between these sections. If, as he asserts, students have a private right of action to challenge any "violation of this article or an institution's failure to perform its legal obligations," then certain student suits fall outside the scope of paragraph (b)(l). Subdivision (k) provides a mechanism by which the Bureau can learn of large student class actions brought against institutions under § 17200. It does not require the

26 Bureau to issue a certification or to conduct its own investigation, however, since such suits do 27 28 not implicate the approval process, but instead concern injury suffered by a particular group of students. Read in this way, subdivision (k) serves a purpose distinct from subdivision (b). See
20

1 Moyer, 10 Cal. 3d at 230 ("When used in a statute [words] must be construed in context, keeping
t,j

2 3 4

in mind the nature and obvious purpose of the statute where they appear. Moreover, the var!~us parts of a statutory enactment must be harmonized by considering the particular clause or sec~~m
1 .1)

in the context of the statutory framework as a whole" (citations and internal quotation marks

5 omitted)). See also Leslie Salt Co. v. San Franicsco Bay Conservation & Dev. Comm'n, 153 6 Cal.App.3d 605, 614 (1984) ("The meaning of the words of a statute or, to use the alternative

7 approach favored by many courts, the intent of the Legislature, can only be determined with 8 9 reference to the context in which the words are used; that is, with reference to such purpose as may be discerned from examining the entire enactment of which the words are part. A statutory

10 phrase may be said to be clear and unambiguous if the meaning assigned to it is not in conflict 11 12 13 14 15 16 17 18 19 with other language in the act" (citations and footnote omitted)). In sum, the language of the students' private right of action provision, as well as the overall context of§ 94985, suggest that it was erroneously numbered as the final paragraph of subdivision (b), and that the legislature's failure to denominate it subdivision (c) was an inadvertent drafting mistake.
iii.
Purpose And Legislative History

The history and purpose of the Reform Act, and amendments made subsequent to its enactment provide further support for Daghlian's position. The statute states that one of its principal objectives is to "protect[ ] the citizens of the state from fraudulent or substandard

20 operations." CAL. Eouc. CODE§ 94705. To this end, the legislature "[e]stablish[ed] minimum 21 standards concerning the quality of education, ethical and business practices, health and safety,

22 and fiscal responsibility to provide protection against substandard, transient, unethical, deceptive, 23 24 25 26 27 28 or fraudulent institutions and practices" (id., § 94705(c)), and to "protect[] the consumer and students against fraud, misrepresentation, or other practices that may lead to an improper loss of funds paid for educational costs . . .. " (id., § 94705(f)). In 1997, the California Legislature passed Assembly Bill 71, which made numerous substantive changes to the Reform Act. See 1997 Cal. Legis. Serv. ch. 78 (A.B. 71) (West). A.B. 71 added Chapter 7 to the act, which includes§§ 94814, 94816, and 94832. See 1997 Cal.
21

1 Legis. Serv. ch. 78, § 4. It also enacted§ 94985, which provides: 2 3 4 "(a) Any institution that wilifully violates any provision of Section 94800, 94810, 94814, or 94816, Sections 94820 to 94826, inclusive, Section 94829, 94831, or 94832 may not enforce any contract or agreement arising from the transaction in which the violation occurred, and any willful violation is a ground for revoking an approval to operate in this state or for denying a renewal application. (b) Notwithstanding any provision of the contract or agreement, a student may bring an action for a violation of this article or for an institution's failure to perform its legal obligations and, upon prevailing thereon, is entitled to the recovery of damages, equitable relief, or any other relief authorized by this article, and reasonable attorney' s fees and costs.... " Id. See also CAL. EDUC. CODE §§ 94985(a)-(b) (2001). Subdivision (b) of the statute, as originally passed, gave students a broad right to sue under the Reform Act. See, e.g., Payne v. Nat'l Collection Systems, Inc., 91 Cal.App.4th 1037, 1040 (2001) (class action involving twenty-three plaintiffs for violation of Education Code§§ 94831, 94832, and 94838, Business and Professions Code§§ 17200 and 17500, and the Consumers Legal Remedies Act). In 2001, the California Legislature passed A.B. 201. See 2001 Cal. Legis. Serv. ch. 621 (A.B. 201) (West). A review of the legislative reports regarding A.B. 201 shows that its primary purpose was to reform the California's Student Tuition Recovery Fund ("STRF"). The report of the April 17, 2001 hearing before the Assembly Committee on Higher Education notes: "Under the Act, STRF was created to attempt to make students financially whole in the event a school prematurely closes without completing a student's term of education. STRF is paid into by certain qualified schools based on a formula that accounts for the number of students and the cost of tuition at the institution. The Act also gives the Bureau the ability to levy a special assessment, at virtually anytime in the fiscal year, upon these schools in the event STRF is insufficient to

5

6
7

8
9

10
11

12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

22

1 2

pay any necessary claims. Recent court cases (including Aguirre v. Hamilton- San Francisco Superior Court Case Number 308354) have ordered repayment from STRF to students who were owed monies as the result of the closure of several schools. Because the total repayments exceeded the funds available in STRF, the Bureau ordered further assessments that were to be paid immediately. The affected schools opposed this assessment and contend that the courLc; erred in their findings and subsequent order. The schools also contend that having all of the schools pay for the actions of the schools that closed is unfair. After much debate, the increased assessments were withdrawn. Subsequently, the Bureau, along with the regulated schools and advocacy groups, have searched for an alternative to make STRF solvent in order to pay the recent claims. This bill seeks to ensure the solvency of STRF by requiring schools to disclose the status of their STRF payments and in case of a deficiency, formulate a plan to become current. Furthermore, it allows the Bureau to track litigation against regulated schools and eliminates some confusion around STRF responsibilities for third-party payers." Cal. Bill Analysis, A.B. 201, Assembly Committee on Higher Education (Apr. 17, 2001). Although AB 201 was primarily concerned with reforms to the STRF, it did make other

3

4
5

6
7

8
9

10 11 12 13 14 15 16 17 18 19

20 substantive changes to the Reform Act. As pertinent here, the bill amended § 94985 to add 21 22 23 24 25 26 27 28 subdivisions (b) and (k). See 2001 Cal. Legis. Serv. ch. 621, § 10 (A.B. 201). Although the legislation did not alter the language of the students' private right of action provision, it renumbered the provision paragraph (b)(6). The enrolled bill contains no subdivision (c). The legislative reports do not reflect any reason for the omission of subdivision (c) from the final version of § 94985. Nor do they reflect, expressly or implicitly, that, in amending
§ 94985, the legislature intended severely to restrict students' private right of action. The April

17, 2001 report, for instance, summarizes the purpose of the bill as follows: "[T]his bill:
23

1
2

1)

Requires that any audit or financial report required to be prepared under the
Cl

act contain a statement signed by the individual who has prepared the report certifying that the institution has paid or not paid to the Bureau all amounts owed to the Student Tuition Recovery Fund (STRF). Requires that an institution that has not paid all amounts owed to the Bureau . . . report within 30 days on its plan to become current in these payments. 2) Requires a student who brings an action or asserts any claim in an existing action for recovery on behalf of a class of persons to notify the Bureau of the existence of the lawsuit, the court in which the action is pending, the case number of the action, and the date of the filing of the action or of the assertion of the claim, within 30 days of the filing of the action. Further requires the student to notify the court that he or she has notified the Bureau pursuant to this provision, and prohibits a judgment from being entered pursuant to this provision until the student has complied.
3)

z
z

llJ

3
4
5

·•:(
(_J
I,!)

6
7

8
9

10 11 12 13 14 15 16 17 18
4)

Requires the Bureau to send to such student who applies for payment from STRF a written notice specifying the rights of the student under these provisions. Requires the Bureau to submit an annual report to the chairpersons of the Assembly Committee on Higher Education, the Senate Committee on Education, the Assembly Committee on Budget, and the Senate Committee on Budget and Fiscal Review on the collection and expenditure of moneys collected as special assessments under this bill, as prescribed." Cal. Bill Analysis, A.B. 201, Assembly Committee on Higher Education (Apr. 17, 2001).

19
20 21 22
23

24
25 26 27 28

Other legislative reports are similarly devoid of any indication that the Legislature intended to effect such a radical change. See, e.g., Cal. Bill. Analysis, A.B. 201 Assembly Committee on Appropriations (May 9, 2001); Cal. Bill. Analysis, A.B. 201 Senate Committee on Education (June 27, 2001); Cal. Bill Analysis, A.B. 201 Senate Committee on Business and Profession

24

1 (Aug. 20, 2001); Cal. Bill. Analysis, A.B. 201 Assembly Floor (Sept. 13, 2001).
Cl

2 3 4

The legislative history of A.B. 201, therefore, does not support defendants' assertion :@at it is "clear ... the Legislature expressly chose to exclude a private right of action as a rerr@:ly for violations of Sections 94814, 94816, and 94832. " 32 Not only is defendants' proposed
I/)

~ ==

5 construction of the students' private right of action provision at odds with the legislative history, 6 it is also inconsistent with the overarching purpose of the Reform Act, which was to protect 7 "students against fraud, misrepresentation, or other practices that may lead to an improper loss 8 of funds paid for educational costs .... "
9
CAL.

Eouc. CODE § 94705 (f). Consequently, the

purpose and history of the Reform Act militate against defendants' literal construction of
§ 94985{b){6). See Lungren, 45 Cal. 3d at 735 ("Literal construction should not prevail if it is

10 11

contrary to the legislative intent apparent in the statute"); Cossack v. City of Los Angeles, 11

12 Cal.3d 726, 732-33 (1974) ("Statutes should be construed so as to be given a reasonable result 13 consistent with the legislative purpose . . . . The court should take into account matters such as

14 context, the object in view, the evils to be remedied, the history of the times and of legislation 15 upon the same subject, public policy, and contemporaneous construction. . . . The apparent

16 purpose of a statute will not be sacrificed to a literal construction" (citations and internal quotation 17 marks omitted)). See also Leslie Salt Co., 153 Cal.App.3d at 614 ("The courts resist blind

18 obedience to the putative 'plain meaning of a statutory phrase where literal interpretation would 19 defeat the Legislature's central objective"' (citation and footnote omitted)). 20 21 iv. Conclusion

Citing White v. E-Loan, Inc., 409 F.Supp.2d 1183, 1187 (N.D. Cal. 2006), defendants

22 argue that even if paragraph (b)(6) was the result of a drafting error, generally the legislature, not 23 24 25 26 27 28
32

the court, should correct the error. 33 In White, a prospective borrower brought a putative class action against a lender, alleging violation of the Fair Credit Report Act ("FCRA"), 15 U.S.C.
§ 1681m(d). /d. at 1183. The lender moved for judgment on the pleadings, arguing that

Defs.' Mot. at 6-7. Defs.' Reply at 15.

33

25

1 2 3 4

§ 1681m(h)(8)(A) authorized a private cause of action only for violation of § 1681m, not for
0

violation of§ 1681m(d). See id. at 1184 (citing 15 U.S.C. § 1681m(h)(8)(A) (''Section 16Bln and 168lo of this title shall not apply to any failure by any person to comply with this sectioizn u (emphasis added))). The district court agreed with defendant that the word "section" cle~?ly

z

•!!:..

5 referred to§ 1681m, not§ 1681m(h), a "subsection." See id. at 1185 ("As the Supreme Court
6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 recently discussed, Congress follows a convention when it uses organizational terms in statutes. A 'section' is broken down into· subparts as follows: 'subsections,' which begin with '(a)'; 'paragraphs,' which begin with '(1)' ... "). Plaintiff contended that the appearance of the word "sectionn at the end of§ 1681m(h)(8)(A) was merely "a scrivener's error attributable to the fact that § 1681m(h) was enacted as Section 311 of the Fair and Accurate Credit Transaction Act. . . . " !d. After considering plaintiff's structural and policy arguments, the district court

"acknowledge[d) that there [was] no way to perfectly reconcile the contents of§ 168lm(h)(8) with the remainder of§ 168lm,n and noted that "[p]laintiffs may indeed be correct that the text of

§ 1681m(h)(8) is the result of a scrivener's error." !d. at 1187. It declined to correct the error,
however, stating that "it is not for this Court to rewrite the words that Congress has chosen." /d. (citing Lamie v. United States Trustee, 540 U.S. 526, 542 (2004) ("If Congress enacted into law something different from what it intended, then it should amend the statute to conform it to its intent. 'It is beyond our province to rescue Congress from its drafting errors, and to provide for what we might think . . . is the preferred result.' This allows both of our branches to adhere to our respected, and respective, constitutional roles. In the meantime, we must determine intent from the statute before us")).

White is neither controlling nor persuasive, since this case involves a state, rather than a
federal, statute. As noted, when a federal court sitting in diversity interprets a state statute, it must apply state rules of statutory construction. In re First T.D. & Inv., 253 F.3d at 527; Fed.

Sav. & Loan Ins. Corp., 904 F.2d at 510; In re Anderson, 824 F.2d at 756. See also Dimidowich, 803 F.2d at 1482 ("Where the state's highest court has not decided an issue, the task
of the federal courts is to predict how the state high court would resolve it"). Under California law, as under federal law, statutory construction begins with the words of the statute itself.

26

1 Pacific Gas & Elec. Co., 16 Cal. 4th at 1152. The ultimate task of statutory construction,
Cl

2 however, is to "ascertain the intent of the Legislature so as to effectuate the purpose of the laW.t}" J_

"'"' 3 S.D. Myers, Inc. , 336·F.3d at 1179 (internal citation and quotation marks omitted)). In carrying
I t"\

-~

~-'

4 out this task, California courts have corrected drafting errors. See Szold v. Med. Bd. of Cal., 127 5 Cal.App.4th 591 (2005) (after considering the text and legislative history of a statute, the court 6 found that insertion of the word "of" for "or" was an inadvertent drafting error and stated: "We 7 8 interpret statutes so as to avoid giving effect to drafting errors," citing People v. Superior Court

(Blanquel), 85 Cal.App.4th 768, 771 (2000)); In re Chavez, 114 Cal.App.4th 989, 998 (2004)

9 ("Our suspicion that the 1983 amendment was indeed a drafting error is strengthened by the fact 10 that SB 813 was not focused upon penal laws but was a voluminous bill devoted in large part to 11 educational reforms that required the simultaneous amendment of hundreds of code sections.

12 Such circumstances can create a 'dangerous potential for drafting errors.' Given the legislative 13 history and the surrounding circumstances we are convinced the 1983 amendment was a drafting

14 error and was not enacted for any deterrent purpose," citing People v. Alexander, 178 Cal.App.3d 15 1250, 1261-62 (1986) ("Chapter 1635's sudden inconsistent and incongruous treatment of PCP

16 offenses . . . strongly suggests confusion and errors in drafting the various amendments and 17 reenacted statutes that made up the chapter. This suggestion is further strengthened when one

18 considers the Act's complex scheme of interrelated complementary statutes, the complicated task 19 of updating the cross-references to reflect the new schedules, and the fact that chapter 1635 20 21 involved the simultaneous amendment of dozens of other statutes in the Business and Professions, Education, Government, Penal, Vehicle, and Welfare and Instirution Codes. Certainly such

22 circumstances created a dangerous potential for drafting errors" (footnotes omitted)); see 23 24 25 26 27 28

Alexander, 178 Cal.App.3d at 1263 ("The lack of intent to legalize sale of PCP becomes even
more evident in light of the absurd consequences such legalization would have. . . . [W]e conclude that where, as here, it is obvious that the Legislature inadvertently deleted the sanctions against selling PCP because of a drafting error, such a 'repeal' cannot and does not reflect an intent to pardon illegal sales that were committed prior to the error"). The California Supreme Court has cautioned, however, that courts should not rewrite a 27

1 statute unless necessary to effectuate the Legislature's clear intent. See People v. Garcia, 21 2 Cal.4th 1, 5·6 (1999) ("The parties' briefs, lower court opinions and our own research h~e ..... 3 disclosed a number of possible resolutions of this postulated internal conflict, all based on(:Jle
1~

b

l.r)

4 premise [that] the distinction between paragraphs (B) and (D) of section 667, subdivision (d)(3) 5 is a result of 'drafting error.' As we demonstrate later, however, each such resolution would

6 require the court to disregard one of the two assertedly conflicting paragraphs or to rewrite some 7 of their provisions. Although we may properly decide upon such a construction or reformation 8 when compelled by necessity and supported by firm evidence of the drafters' true intent, we 9 should not do so when the statute is reasonably susceptible to an interpretation that harmonizes 10 all of its parts without disregarding or altering any of them," citing People v. Skinner, 39 Cal. 3d 11 12 765, 775 (1985)). Here, the text of the student~' private right of action provision, the larger context of the

13 statutory scheme, and the purpose and history of the Reform Act and amendments to it all suggest 14 15 that the legislature's renumbering of the provision as paragraph (b)(6), rather than subdivision (c), was a drafting error. Even were this not so, however, the court would conclude that, regardless

16 of its placement, the language of the students' private right of action provision clearly grants 17 students a cause of action "for violation of this article," and does not limit the right to any single 18 section or subdivision. CAL. EDUC. CODE § 94985(b)(6) (emphasis added). See Szold, 127 19 Cal.App.4th at 596 ("In construing any statute, '[w]ell·established rules of statutory construction 20 require us to ascertain the intent of the enacting legislative body so that we may adopt the 21 construction that best effectuates the purpose of law. . . . We first examine the words themselves

22 because the statutory language is generally the most reliable indicator of legislative intent,"' 23 quoting Whaley v. Sony Computer Entertainment America, Inc., 121 Cal.App.4th 479, 484-85

24 (2004) (internal citations omitted; emphasis added)). Stated differently, even if the provision is 25 26 27 28 properly numbered ·paragraph (b)(6), its use of the word "article" stands in contrast to use of the word "subdivision" in other paragraphs of subdivision (b). See CAL. EDUC. CODE§ 94985(b)(1), (b)(5). Ordinary principles of statutory construction require that this difference be given effect. See Briggs v. Eden Council for Hope and Opportunity, 19 Cal.4th 1106 (1999) (examining 28

1 California Code of Civil Procedure§ 425.16(e), and concluding that because "[c]lauses (3) and
t:J

2 (4) of section 425 .16, subdivision (e), concerning statements made in public fora and 'omer 3 conduct' implicating speech or petition rights, include[d] an express 'issue of public interest'
r•.J
!•">

.;.::

·-

4 5 6 7

limitation, n while "clauses (1) and (2), concerning statements made before or in connection with issues under review by official proceedings, contain[ed] no such limitation, n the court had to give effect to the "variation in phraseology," and "presume[] the Legislature intended different 'issue' requirements to apply to anti-SLAPP motions brought under clauses (3) and (4) of subdivision (e)

8 than to motions brought under clauses (I) and (2)"). Accordingly, the court concludes that 9 Daghlian's first cause of action is authorized by the Education Code, and rejects defendants' first

10 ground for dismissal of this claim.

11
12 13 14 15

2.

Whether The Consumer Protection Provisions Of The Reform Act
Apply To DeVry

Defendants next argue that Daghlian's first cause of action must be dismissed because the requirements of Education Code §§ 94814, 94816, and 94832 do not apply to institutions like DeVry that have been accredited by a regional accrediting agency other than the Western

16 Association of Schools and Colleges ("non-WASC regionally accredited institutions"). 34 Daghlian 17 18 counters that Senate Bill 967, which added statutory language addressing regionally accredited institutions, merely streamlined the Bureau's process of approving such accreditations. He

19 contends that the Act does not exempt non-WASC regionally accredited institutions from 20 21 22 23 24 25 26 27 28
34

complying with the consumer protection provisions set forth in§§ 94814, 94816, and 94832. 35

a.

Requests For Judicial Notice

On a Rule 12(b)(6) motion, the court's review is generally limited to the contents of the complaint. See Campanelli, 100 F.3d at 1479; Allarcom Pay Television , 69 F.3d at 385. Rule 12(b)(6) provides that when "matters outside the pleading are presented to and not excluded by the court, the motion shaH be treated as one for summary judgment and disposed of as provided

Defs.' Mot. at 3-4. Pl. 's Opp. at 16-18.
29

35

1 in Rule 56, and all parties shall be given reasonable opportunity to present all material made
l~

2 pertinent to such a motion by Rule 56." FED.R.CIV.PROC. 12(b)(6). "There are, however, t!Yo
~~~

3 exceptions to the requirement that consideration of extrinsic evidence converts a 12(b)(6) moti(>n
~.)

fJ)

4 5 6

to a summary judgment motion." Lee v. City ofLos Angeles, 250 F.3d 668, 688 (9th Cir. 2001) (citation omitted). Under the first exception, "a court may consider 'material which is properly submitted as part of the complaint' on a motion to dismiss without converting the motion to

7 dismiss into a motion for summary judgment."

Id. (citation omitted}.

"Second, under

8 Fed.R.Evid. 201, a court may take judicial notice of 'matters of public record."' ld. at 688-89 9 10 11 (citing Mack v. South Bay Beer Distrib., 798 F.2d 1279, 1282 (9th Cir. 1986)). In deciding a Rule 12(b)(6) motion, a court may judicially notice "not only ... the existence of a particular document, but the substance of the document as well." Miles, Inc. v. Scripps Clinic and Research

12 Foundation, 951 F.2d 361, 1991 WL 276450, *1 (9th Cir. Dec. 23, 1991) (Unpub. Disp.) (citing 13 14 15

Sinaloa Lake Owners Ass'n v. City of Simi Valley, 882 F.2d 1398, 1403 (9th Cir. 1989)).
In support of their motion to dismiss, defendants ask that the court take judicial notice of several documents outside the pleadings. First, defendants request that the court judicially notice

16 the fact that DeVry is an non-WASC regionally accredited institution. In support of this request, 17 defendants present the Higher Learning Commission's website36 and the Bureau's Directory of 18 Approved Institutions - Non-WASC Regionally Accredited (CEC 949095). 37 Second, defendants 19 20 21 22 23 Defendants DeVry, Inc. and DeVry University, Inc.'s Request for Judicial Notice in Support of Their Motion to Dismiss Plaintiff's First Amended Complaint ("Defs.' RJN"), Exh. A (Higher Learning Commission website, DeVry University, printed Apr. 5, 2006 ("HLC website")).
37

36

Defendants DeVry, Inc. and DeVry University, Inc.'s Request for Judicial Notice in Support of Their Reply in Support of Motion to Dismiss Plaintiff's First Amended Complaint 24 ("Defs. • RJN 2"), Exh. 2 (California Department of Consumer Affairs, Bureau for Private 25 Postsecondary and Vocational Education Directory of Approved Institutions - Non-WASC Regionally Accredited (CEC 94905), dated May 11, 2006, available at 26 http://www.bppve.ca.gov/directories/cec90905.pdt) ("Bureau Non-WASC Directory")). In general, "[i]t is improper for the moving party to 'shift gears' and introduce new facts 27 or different legal arguments in the reply brief than [those that were] presented in the moving 28 papers." William W. Schwarzer, A. Wallace Tashima, and James M. Wagstaffe, FEDERALClVIL 30

1 request that the court judicially notice the Bureau's position on non-WASC regionally accredited
a

2 3 4 5

institutions, as reflected in the Bureau's Initial Report of the Operations and Administrative
f'-

Monitor dated September 26, 2005 (the "Operation Monitor's 2005 Initial Reporf'•: 38 f
t0
(/')

z

Specifically, defendants ask that the court take judicial notice of a passage that states, in part: "It is the Department's position that none of the consumer protection provisions contained in Article 6 and elsewhere in the Reform Act are applicable to these

6

7
8 9 10 11 12
13

14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

PROCEDURE BEFORE TRIAL, § 12:107 (The Rutter Group 2005) . For this reason, the court has discretion to decline to consider new facts or arguments raised in a reply. See Stump v. Gates, 21 1 F. 3d 527, 533 (lOth Cir. 2000) ("This court does not ordinarily review issues raised for the first time in a reply brief.... The reasons are obvious. It robs the appellee of the opportunity to demonstrate that the record does not support an appellant's factual assertions and to present an analysis of the pertinent legal precedent that may compel a contrary result"); Burnham v. City of Rohnert Park, No. C 92-1439, 1992 WL672965, *5 (N.D. Cal. May 18, 1992) ("[R]eply briefs are limited in scope to matters either raised by the opposition or unforeseen at the time of the original motion"); Scott v. R.J. Reynolds Tobacco Co., No. Civ.A. 99-3091,2001 WL 797992, *5 (B.D. La. July 12, 2001) (same). The district court may, in its discretion, "consider the [new] issue even if it was raised in a reply brief." Glenn K. Jackson, Inc. v. Roe, 273 F.3d 1192, 1202 (9th Cir. 2001) (internal citation and quotation omitted). If the court elects to consider new material in a reply brief, however, it must afford the opposing party an opportunity to respond. Provenz v. Miller, 102 F.3d 1478, 1483 (9th Cir. 1996) ("We agree with the Seventh Circuit, which held that '[w]here new evidence is presented in a reply to a motion for summary judgment, the district court should not consider the new evidence without giving the [non-]movant an opportunity to respond'"); Black v. TIC lnv. Corp., 900 F.2d 112, 116 (7th Cir. 1990) ("Where new evidence is presented in a reply to a motion for summary judgment, the district court should not consider the new evidence without giving the movant an opportunity to respond" ); see El Polio Loco, Inc. v. Hashim, 316 F.3d 1032, 1040-41 (9th Cir. 2003) (indicating that the court may consider new issues raised on reply if it gives the opposition an opportunity to respond). Here, defendants submitted a second request for judicial notice in conjunction with their reply to plaintiff's opposition. They contend the documents were not available at the time the moving papers were submitted. (Defs.' RJN 2 at 1.) Because plaintiff responded to the second request (see Plaintiff's Memorandum of Points and Authorities in Opposition to Defendants' Request for Judicial Notice Submitted in Support of Their Reply in Support of Their Motion to Dismiss Plaintiff's First Amended Complaint ("Pl.'s Opp. to Defs. • RJN 2")), the court will consider the request on its merits. Defs . • RJN, Exh. B (Bureau for Private Postsecondary and Vocational Education, Initial Report of the Operations and Administrative Monitor, dated Sept. 26, 2005, at 136-37 ("Operation Monitor's 2005 Initial Report")). 31
38

1

[non-WASC regionally accredited] institutions, including requirements related to
(1) providing prospective students with a School Performance Fact Sheet and

2
3
4

transferability of credits disclosure; (2) incorporation of Bureau contact information in all student enrollment agreements, and (3) providing the Bureau with an annual report and copies of all accrediting agency reports and audit reports prepared by the U.S. Department of Education and student loan guarantee agencies. " 39

5
6

7 Third, defendants seek judicial notice of pages 3 and 7 of the Bureau's Annual Report to the

8 Legislature and California Postsecondary Education Commission for Fiscal Year 2004-2005, dated 9 April 20, 2006 ("Bureau's 2004-2005 Annual Report" or "Annual Report"). 40 These pages 10 outline the Bureau's general responsibilities, 41 and describe its position respecting the applicability 11 of the consumer protection provisions to non-WASC regionally accredited institutions. 42 Finally,

12 defendants request that the court judicialJy notice the text of S.B. 967. 43 13 14 15 16 17 Defs.' RJN, Exh. Bat 174 (Operation Monitor's 2005 Initial Report at 137). See Defs.' Mot. at 4-5.
40 39

Daghlian does not oppose the request for judicial notice of the Higher Learning

Defs.' RJN 2, Exh. 1 (Bureau for Private Postsecondary and Vocational Education Directory 's Annual Report to the Legislature and California Postsecondary Education 18 Commission, Fiscal Year 2004-2005, dated April 20, 2006, available at 19 http://www. dca.ca. govI reports/04_05_bppve_annrpt. pdf ("Bureau's 2004-2005 Annual Report")). 20 21 See id., Exh. 1 at 9 (Bureau's 2004-2005 Annual Report at 3 ("The Bureau for Private Postsecondary and Vocational Education (Bureau) approves and regulates private postsecondary and vocational institutions in California")).
42

41

See id., Exh. 1 at 13 (Bureau's 2004-2005 Annual Report at 7 ("SB 967 now exempts 23 these non-WASC regionally accredited institutions from most of the Reform Act, but still requires them to be approved by the Bureau based on a minimal number of requirements largely based on 24 the institution's financial stability and accreditation status. Consequently, SB 967 requires the 25 Bureau to approve these schools, but exempts them from providing protections for students such as enrollment and refund policies, disclosures regarding exam passage rates, transferability of 26 credit, complaint investigation and mediation, and other disclosures that institutions are required 27 to provide")). 28
43

22

/d., Exh. 3 (SB 967). 32

1 Commission's webpage, the Bureau's Non-WASC Directory, or S.B. 967. 44 Because DeVry's
~·:;:;

2 accreditation status and the text of S.B. 967 are matters of public record, which are not subj~bt :2: 3 to reasonable dispute, the court will judicially notice these items. See FED.R.Evm. 201(b). ~je
C ,l)

4 also Territory of Alaska v. Am. Can Co., 358 U.S. 224, 226 (1959) (court may take judicial 5 notice of the legislative history of a bill); Palmer v. Stassinos, 348 F.Supp.2d 1070, 1077 (C. D. 6 Cal. 2004) (taking judicial notice of legislative history materials, as well as sampling of 7 complaints and default judgments filed in California courts, because they "constitute judicial facts 8 sufficiently capable of accurate and ready determination"); Korematsu v. United States, 584 9 F.Supp. 1406, 1414 (C.D. Cal. 1984) (a court may take judicial notice of legislative facts, such 10 as legislative history, which are "established truths, facts or pronouncements that do not change 11 12 13 from case to case but [are applied] universally, while adjudicative facts are those developed in a particular case" (citation omitted)). 45 Daghlian opposes defendants' request for judicial notice of the Operation Monitor's 2005

14 Initial Report and the Bureau's 2004-2005 Annual Report, however. 46 He argues that the Initial 15 Report is not a proper subject for judicial notice because it is not a formal opinion and therefore

16 constitutes hearsay,47 and that the court cannot judicially notice the cited portions of the Annual 17 18 19 20 21 22 23 24
4

Report because they contain information that is in dispute in this litigation. 48 The Bureau is an administrative body that was created pursuant to the Reform Act, and statutorily charged with "approving and regulating private postsecondary educational institutions."

See Plaintiff's Memorandum of Points and Authorities in Opposition to Defendants' Request for Judicial Notice ("Pl.'s Opp. to Defs' RJN") (opposing judicial notice of Operation Monitor's 2005 Initial Report only); Pl.'s Opp. to Defs.' RJN 2 (opposing judicial notice of Bureau's 2004-2005 Annual Report only). sFor the same reason, the court grants plaintiff's request for judicial notice. See Pl.'s Opp. to Defs' RJN; Pl.'s Opp. to Defs.' RJN 2. PI. 's Opp. to Defs.' RJN at 2. Pl. 's Opp. to Defs. ' RJN 2 at 1.
33

44

25 26 27 28

46

47

48

.,

1

CAL.

Eouc. CODE § 94770.

See also id., § 94774 (detailing the Bureau's functions and
!.:)

2

responsibilities). Under § 94995, the Bureau is required to submit a written report to 1{!\e

3 legislature and the California Postsecondary Education Commission on or before January 3 (yf
tr)

;::

4 each calendar year "summarizing its activities during the previous fiscal year." /d., § 94995(a). 5 These annual reports must include, but are not limited to, the following: 6 7
8
(2)

"(1)

Timely information relating to the enforcement activities of the bureau pursuant to this chapter. Statistics providing a composite picture of the private postsecondary educational community, including data on how many schools, as classified by subject matter, and how many students there are within the scope of the activities of the bureau." /d. , § 94995(b).

9 10 11 12 13 14

The Reform Act requires that the Director of Consumer Affairs appoint a Bureau for Private Postsecondary and Vocational Education Operations and Administrative Monitor (the "Operations Monitor"). !d.,§ 94779.2(a)(l). The Operations Monitor must "assess the Bureau's

15 administrative operations, including its school approval, applicant review, revenue collection, and
16 complaint and enforcement processes and procedures with the primary goals of improving the

17 18

bureau's overall efficiency, improving its effectiveness, and improving its compliance with state laws, particularly with respect to the bureau's approval, complaint, and enforcement processes."

19 /d.,§ 94779.2(c)(1 ).49 The Reform Act requires that the Operations Monitor submit "an initial 20 21 22 23 24 25 Paragraph (c)(2) provides further details about the Operations Monitor's responsibilities. See id., § 94779.2(c)(2) ("This monitoring duty shall be on a continuing basis for a period of no more than two years from the date of the operations monitor's appointment and shall include, but not necessarily be limited to, all of the following: (A) Assessing the bureau's revenue collections and needs, and its staffing. (B) Evaluating the relevant laws and regulations to identify revisions that would improve state regulation and maintain or improve student and public protection. (C) Improving the quality and consistency of the bureau's processes and performance, including complaint processing and investigation, and reducing timeframes for each. (D) Reducing any complaint back.Jog.
34
49

26
27

28

1 written report of his or her findings and conclusions to the director, the bureau, and the 2 Legislature no later than October 1, 2005, and every six months thereafter," and also ~'Ee ...,. .,._ 3 available to make oral reports to each if requested to do so." /d., § 94779 .2(d). The Operations •.,.; 4
5
b

Monitor must "make his or her reports available to the public and the media" as well. /d. As noted, under Rule 20l(b)(2) of the Federal Rules of Evidence, the court may take

6 judicial notice of a fact that is "not subject to reasonable dispute in that it is ... capable of 7 accurate and ready determination by resort to sources whose accuracy cannot reasonably be 8 questioned." FED.R.EviD. 20l(b). The records and reports of administrative bodies are proper 9 10 subjects of judicial notice, as long as their authenticity or accuracy is not disputed. See Mack, 798 F.2d at 1282 ("[A] court may take judicial notice of 'records and reports of administrative bodies'" (citation omitted)), overruled on other grounds, Astoria Federal Savings & Loan Ass'n

11
12 13 14 15 16 17 18

v. Solimino, 501 U.S. 104 (1991); Interstate Natural Gas Co. v. Southern Cal. Gas Co., 209
F.2d 380, 385 (9th Cir. 1953) (same); Lundquist v. Continental Casualty Co., 394 F.Supp.2d 1230, 1243 (C.D. Cal. 2005) ("'A court may take judicial notice of records and reports of administrative bodies,' such as notices and opinion letters issued by" an administrative agency (citation omitted)). Because the Operation Monitor's 2005 Initial Report and the Bureau's 2004-2005 Annual Report are administrative reports mandated by statute, and because Daghlian does not the

19 authenticity of the reports, the court takes judicial notice of their content. The court does not take 20 judicial notice of the Operation Monitor's and Bureau's opinions for their truth, however, since 21 22 23 24 25 26 27 28
(G)

whether the consumer protection provisions of the Reform Act apply to non-WASC regionally

(E) (F)

Ensuring consistency in the application of sanctions or discipline imposed on regulated institutions and persons. Improving the quality and timeliness of application and approval processes for regulated institutions and persons, the collection of fees, and the collection of information from, and the ability to disseminate information regarding, those entities or persons regulated by the bureau. Improving the bureau's ability to perform outreach to prospective students of private postsecondary and vocational educational institutions"). 35

1 accredited institutions is a fact in dispute in this action. See Korematsu, 584 F.Supp. at 1415 2 (finding it improper to take judicial notice of an agency's findings if "they are offered on ~Q\e 3 ultimate issue,,. since taking judicial notice the findings "would render them conclusive accorq.i_9g
'.0

a

4

to Rule 20I(g)"). Nor does the court view the reports as constituting or reflecting the official

5 position of the legislature. See CAL. Enuc. CODE§ 94779.2(d) ("The operations monitor shall
6

make every effort to provide the department and the bureau with an opportunity to reply to any facts, finding, issues, or conclusions in his or her reports with which the department or the bureau may disagree").

7 8 9 10 11 12 13 14 15

b.

Analysis
i.

Reform Act Provisions Concerning Non-WASC Regionally
Accredited Institutions

"A non-WASC regionally accredited institution" is defined in the California Education Code as "a degree-granting institution that has been accredited by one of the non-WASC regional accrediting agencies listed in Section 94740.3." CAL. Enuc. CODE§ 94740.5. DeVry has been accredited by The Higher Learning Commission of the North Central Association of Colleges and

16 Schools, which is one of the approved non- WASC regional accrediting agencies identified in

17 18 19

§ 94740.3. See id., § 94740.3(c). 50 Therefore, DeVry is a "non-WASC regionally accredited

institution" within the meaning of the Education Code. Article 8 of the Reform Act sets forth standards and evaluation procedures that degree-

20 granting institutions must satisfy in order to obtain approval to operate in the state. See id., 21 22 23 24 25 26 27 28 See Defs.' RJN, Exh. 1 (HLC Website). See also Defs. RJN 2, Exh. 2 (Bureau NonWASC Directory") (listing DeVry)).
36
50

§94900 ("No private postsecondary educational institution may issue, confer, or award an academic or honorary degree unless the institution is approved by the [Bureau] to operate in California and award degrees"). Section 94900 describes the standards and procedures applicable to WASC-accredited institutions. To obtain approval under § 94901(c)(l), or conditional approval under§ 9409l(c)(2), the Bureau must determine that the WASC-accredited institution

1 has met all of the following requirements: 2
3
"(1)

b

The institution has the facilities, financial resources, administrative capabilities, faculty, and other necessary educational expertise and resources to ensure its capability of fulfilling the program or programs for enrolled students.

lU

2.

( r)

~5

~~

4

5
6

(2)

The faculty are fully qualified to undertake the level of instruction that they are assigned and shall possess degrees or credentials appropriate to the degree program and level they teach and have demonstrated professional achievement in the major field or fields offered, in sufficient numbers to provide the educational services.

7 8
9

10
11
(3)

The education services and curriculum clearly relate to the objectives of the proposed program or programs and offer students the opportunity for a quality education.

12 13
14 (4)

The facilities are appropriate for the defined educational objectives and are sufficient to ensure quality educational services to the students enrolled in the program or programs.

15
16

17 18
19

(5)

The program of study for which the degree is granted provides the curriculum necessary to achieve its professed or claimed academic objective for higher education, and the institution requires a level of academic achievement appropriate to that degree.

20 21 22 23 24 25 26 27 28 (7)
(6)

The institution provides adequate student advisement services, academic planning and curriculum development activities, research supervision for students enrolled in Ph.D. programs, and clinical supervision for students enrolled in various health profession programs. If the institution offers credit for prior experimental learning it may do so only after an evaluation by qualified faculty and only in disciplines within the institution's curricular offerings that are appropriate to the degree to be pursued. The council shall develop specific standards regarding the criteria
37

1
2

for awarding credit for prior experimental learning at the graduate level,
b

including the maximum number of hours for which credit may be awarded."
/d., § 94900(a).

llJ

3

<t} ..

4 Before approving a WASC-accredited institution for operation, the Bureau must conduct a 5 comprehensive onsite review and assessment in all the areas identified in § 94900. See id.,

6 § 94901(a)(l).
7 Non-W ASC regionally accredited institutions must also obtain approval from the Bureau

8 to operate in California. See id., § 94905 ("Any non- W ASC regionally accredited institution, as 9 defined in Section 94740.5, that is incorporated in another state and maintains its accredited status 10 11 throughout the period of a student's course of study, and that is approved by the bureau to

operate, may issue degrees, diplomas, or certificates" (emphasis added)). The approval process

12 for such institutions is much less rigorous, however. To receive approval, a non- W ASC
13

regionally accredited· institution must comply with five requirements:
"(1)

14 15
16

The institution meets the financial responsibility requirements set forth in paragraph (2) of subdivision (a) of Section 94804.

(2)

The institution's cohort default rate on guaranteed student loans does not exceed 15 percent for the three most recent years, as published by the United States Department of Education.

17 18 19 20 21 22 23 24 25 26 27 28 (4) (5) (3)

The institution submits to the bureau copies of its most recent Integrated Postsecondary Education Data System Report of the United States Department of Education and its accumulated default rate. The institution pays fees in accordance with Section 94932. The institution has submitted an application to operate for itself or a branch or satellite campus pursuant to Section 94802 or an application for renewal pursuant to Section 94980." /d., § 94905(b).

Defendants contend that § 94905 clearly exempts non- WASC regionally accredited

38

1 institutions from the consumer protection provisions contained in Article 6. 51 The court disagrees. 2 The focus of § 94905 is the approval process for non-WASC regionally accredited institutio~.
•;r
~-

l:l

3 The statute outlines the various requirements such an institution must satisfy to obtain the BureaU.' s \.) 4 approval to operate within the state. 52 It does not purport to be the only provision of the Reform Act applicable to non-WASC regionally accredited institutions, nor does not it expressly exempt these institutions from the requirements of Article 6. To the contrary, when the section is read as a whole, the only reasonable interpretation is that while the Legislature sought to streamline the approval process for non-WASC regionally accredited institutions, it did not intend to exempt them from the minimum standards set forth in Article 6, including§§ 94814, 94816, and 94832. Paragraph 2 of subdivision (a), for example, states that "a non-WASC regionally accredited institution approved to operate pursuant to this section, and any and all of its programs offerings, are subject to the requirements of Article 13 (commencing with Section 94950)." !d. ,
§ 94905(a)(2). As discussed, § 94985(a) of Article 13 makes unenforceable any contract or
'/')

5
6 7 8 9 10 11 12
13

14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

agreement arising from a transaction in which an institution willfully violated "any provision of Section 94800, 94810, 94814, or 94816, Sections 94820 to 94826, inclusive, Section 94829, 94831 , or 94832. " !d., § 94985(a). If the Legislature had intended to exempt non-WASC regionally accredited institutions from complying with §§ 94814, 94816, and 94832, surely it would not have adopted § 94905(a)(2), which explicitly subjects such institutions "and any and all of [their] programs offerings" to the entirety of Article 13. The inclusion of subdivision (e) in § 94905 also militates against defendants' proposed construction. That subdivision states: "A non-WASC regionally accredited institution approved to operate pursuant to this section is exempt from the requirements of Sections 94900 and 94901 , Article 9 (commencing with Section 94915), and Article 9.5 (commencing with Section 94931),

51

Defs.' Reply at 8.

s2See id. ("The plain language of Education Code section 94905 makes clear that Senate

Bi11967 established an approval process for non-WASC regionally accredited institutions that was different from the approval process applied to other institutions by Education Code section 97480"). 39

1 except for the applicable financial responsibility requirements referenced by paragraph (2) of a 2 subdivision (a) of Section 94804." !d., § 94905(e). Had the Legislature wanted to exempt nolV
;~

3 W ASC regionally accredited institutions from the requirements set forth in other articles, it wouia
~ ~ . ;.'

V')

4 have done so in subdivision (e). The subdivision makes no mention of Article 6, however.
5

Defendants dispute this, citing§ 94780, found in Article 5. 53 Section 94780 provides: "No institution, subject to this chapter, shall offer any educational service unless the institution is first approved by the council and meets all of the requirements in the following articles: (a) This article, Article 6 (commencing with Section 94800) except as provided for institutions approved under Article 9.5 (commencing with Section 94931), Article 10 (commencing with Section 94932), Article 11 (commencing with Section 94940), and Article 12 (commencing with Section 94944). (b) (c) Article 8 (commencing with Section 94900), if the institution offers degrees. Article 9 (commencing with Section 94915), if the institution does not offer degrees. (d) Article 9.5 (commencing with Section 94931), if the institution is registered pursuant to that article. (e) Article 7 (commencing with Section 94850), if the educational programs are not exempt under Section 94790." /d., § 94780 (emphasis added). 54 Section 94780 does not support defendants' position. First, it is clear that non-W ASC regionally accredited institutions are "subject to this chapter" as that term is used in the statute. See id.,
§ 94739(a) (defining "private postsecondary education institutions" as "any person doing business

6 7 8 9 10

11
12 13 14 15 16 17 18 19 20 21 22 23 24 25

in California that offers to provide or provides, for a tuition, fee, or other charge, any instruction, training. or education" under certain specified circumstances); id., § 94739(b) (listing institutions

26
27 28
53 54

Defs.' Reply at 5.

This section was added by A.B. 71, § 4.

40

1 that "are not considered to be private postsecondary educational institutions under this chapter").
2 :)

2 As defendants concede, the section bars any institution that is subject to regulation under ~!?e
~?.-:

3 Reform Act from offering educational services unless it is "'first approved by the Council' and
t•..)

(11

4 meets the requirements of various Titles of the Reform Act (including Title 6 commencing with
5 94800, which encompasses the Sections 94814, 94816, and 94832 of the Education Code at issue

6

in this case). " 55 Nothing in § 94780, moreover, suggests that non-WASC regionally accredited

7 institutions are exempt from this requirement or that they may offer educational services in 8 California without complying with the requirements of Article 6. See id., § 94780(b). 9 In short, under the plain language of the Reform Act, institutions like DeVry that are

10 accredited by a non- WASC regional accrediting agency need not undergo the comprehensive 11 12 13 14 15 16 review process the Bureau undertakes for W ASC-accredited institutions, but must comply with the "General Standards For All Postsecondary Institutions Approved Under this Chapter" set forth in Article 6.
ii.
Purpose And Legislative History

The purpose and history of Senate Bill 967, which added § 94905 to the Reform Act in 2003, provide further support for this conclusion. See 2003 Cal. Legis. Serv. ch. 340 (S.B. 967)

17 (West). According to the report of the May 5, 2003 hearing before the Senate Committee on 18 Business and Professions, the impetus for the bill was a November 2002 review of the Bureau's 19 operations conducted by the Joint Legislative Sunset Review Committee ("JLSRC") and 20 21 Department of Consumer Affairs. See Cal. Bill Analysis, S.B. 967 Senate Committee on Business and Professions (May 5, 2003). During that review, "[a] number of deficiencies and

22 problems with the current regulation and administration of the Reform Act were presented to the 23 24 25 26 27 28
55

JLSRC, and found in two audits that had been performed on the Bureau." /d. Specifically, the review revealed that the Bureau had a significant backlog in its approval of institutions, educational courses and instructors. See id. S.B. 967 was sponsored by the Accredited Out-of-State Colleges and Universities in

Defs.' Reply at 5. 41

1 California ("AOCUC"). !d. The AOCUC argued that "the bill would streamline the regulatory 2 process of the Bureau for regionally accredited degree granting institutions by relieving the Bur~u
~2:

a

3 from having to review those institutions or programs, while maintaining the Bureau's compf§te
( I')

4

regulatory authority over these same institutions for all consumer protection related provisions in

5 the Reform Act." /d. (emphasis added); see id. ("The bill is intended, as a two-year pilot project, 6 to remove degree granting private postsecondary colleges and universities from the institutional, 7 program, and instructor approval requirements of the Reform Act administered by the Bureau 8 but maintain the applicability of all the other regulatory and oversight provisions of the Reform

9 Act - notably its provisions regarding fees, information reporting, participation in the Student
10 Tuition Recovery Fund, student protections, and enforcement" (emphasis added)). 11 12 13 14 15 16 17 Reports of subsequent hearings on the bill similarly show that, while the Legislature wanted to increase the Bureau's efficiency by allowing non-WASC regionally accredited institutions to undergo a relaxed approval process, it did not intend to exempt them from the student protection provisions of the Reform Act. See, e.g., Cal. Bill Analysis, S.B. 967 Assembly Committee on Business and Professions (July 1, 2003) ("Some claims have been made that this bill creates a competitive disadvantage for non-regionally accredited schools still subject to BBPVE regulation. . . . The purpose of this bill is not to level the playing field but instead to

18 .increase efficiencies and eliminate redundancies. Even with this bill, WASC schools will still 19 theoretically have an advantage because this bill only calls for a partial deregulation"); Cal. Bill

20 Analysis, S.B. 967 Assembly Committee on Higher Education (July 8, 2003) ("SB 967 is 21 22 23 24 25 26 27 sponsored by the Accredited-Out-of-State Colleges and Universities in California (AOCUC). According to the sponsor, this bill would streamline the regulatory process at the BPPVE for regionally accredited degree granting institutions by relieving the BPPVE from having to review accredited degree granting institutions or programs, while maintaining the BPPVE's complete regulatory authority over these same institutions for all consumer related activities"); Cal. Bill Analysis, S.B. 967 Senate Floor, Third Reading (Aug. 18, 2003) ("This bill is sponsored by the Accredited Out-of-State Colleges and Universities in California (AOCUC). This bill is intended,

28 as a two-year pilot project, to remove degree granting private postsecondary colleges and 42

1 universities from the institutional, program, and instructor approval requirements of the Reform
b

2 Act administered by the Bureau. This bill maintains the applicability of all the other regulat2Jy 3 and oversight provisions of the Reform Act, notably its provisions regarding fees, informapon
,..)

:?:

4

reporting, and participation in the Student Tuition Recovery Fund, student protections, and
I

l.f')

5 enforcement"). There is no suggestion in any of these reports that in enacting S.B. 967, the 6 Legislature sought to provide a wholesale exemption for non-WASC regionally accredited
'

7 institutions from the student protection provisions of Article 6.

8
9 10 11 12 13

iii.

Conclusion

Both the text and legislative history of the Reform Act support Daghlian 's contention that, notwithstanding DeVry's status as a non-WASC regionally accredited institution, it must provide students with
writte~

notification regarding the transferability of credits, supply prospective

students with a brochure or catalogue disclosing all material facts reasonably likely to affect their decision to emoll, and refrain from engaging in false and misleading advertising. See CAL.

14 Eouc. CODE §§ 94814, 94816, 94832. Nonetheless, defendants urge the court to adopt the 15 contrary position of the Operations Monitor and the Bureau. 16 It is well-settled under California law that "'[i]n determining the proper interpretation of

17 a statute and the validity of an administrative regulation, the administrative agency's construction 18 is entitled to great weight, and if there appears to be a reasonable basis for it, a court will not

19 substitute its judgment for that of the administrative body.'" Family Planning Assocs. Med. 20 21

Group v. Belshe, 62'Cal.App.4th 999, 1004 (1998) (quoting Campbell Industries v. State Bd. of Equalization, 167 Cal.App.3d 863, 868 (1985) (internal citations and footnote omitted)) .

22 California courts have cautioned, however, that " '[t]he ultimate interpretation of a statute is ... 23 an exercise of judic~al power and it is the responsibility of the courts to declare its true meaning
I

24 even if it requires rejection of an earlier erroneous administrative interpretation."' Id. at 1004 25 26 27 28 (quoting Wheeler

Bd. of Administration, 25 Cal.3d 600, 605 (1979), and Physicians &

Surgeons Laboratories, Inc. v. Dep 't. of Health Services, 6 Cal.App.4th 968, 986 (1992)) .
Here, "the c~ear language and purpose of the statute" counsel rejection of the interpretation offered by the Operations Monitor and Bureau. The court notes in this regard that, while periodic
43

1 reports by the Operations Monitor and the Bureau are mandated by statute, the reports do not
C:r

2 constitute regulations or official agency findings, and do not have the force of law. See ClL. 3 Gov'T. CODE§ 11340.5(a). Accordingly, they are not entitled to the kind of deference norm~jly
(I)

z

4 accorded administrative interpretations. Compare Family Planning Associates, 62 Cal.App.4th 5 at 1004 (an "administrative agency's construction is entitled to great weight" when a court is 6 determining the validity of an administrative regulation); Campbell, 167 Cal.App.3d at 868 7 (stating that "an administrative ruling comes before the court with a presumption of correctness

8 and regularity, which places the burden of demonstrating invalidity upon the assailant. . . . The 9 ultimate resolution, however, of whether the Board has correctly interpreted its own regulations 10 11 rests with the courts" (citations and internal quotations omitted and emphasis added)); see also

lnt'l Business Machines v. State Bd. ofEqualization, 26 Cal.3d 923, 930-31 (1980) ("The Board
That

12 has embodied its interpretation of section 6006.3, in an administrative regulation. 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
56

regulation, a contemporary administrative construction of a statute by the agency charged with its enforcement and interpretation, 'is entitled to great weight unless it is clearly erroneous or unauthorized'" (citations and footnotes omitted; emphasis added)) . In sum, based on the text and legislative history of the Reform Act, the court concludes that DeVry is subject to the student protection provisions of Education Code §§ 94814, 94816, 94832. Defendants' motion to dismiss Daghlian's first cause of action is therefore denied.

c.

Second Cause Of Action For Violation Of The Consumer Legal Remedies Act

Daghlian's second cause of action asserts a claim for violation of § 1770(a)(5) of the Consumer Legal Remedies Act (the "CLRA "). Daghlian contends that he and other members of the putative class are consumers within the meaning of the CLRA, because they purchased goods and services intended for sale by defendants. 56 Daghlian alleges that "[b]y advertising to prospective students that the school's credits are easily transfer[r]able to other schools, and [by] failing to adequately disclose information required by the Education Code, defendants misrepresented their services as having characteristics, benefits, or qualities which they do not

First Amended Complaint, , 31. 44

1 have, all of which are prohibited acts under § 1770(a)(5) of the [CLRA]. " 57 Daghlian contends

2 that as a proximate result of the misrepresentations, he and other class members suffered mone~
3 4 damage in the form of tuition payments and attendance costs.
58

i:J

Daghlian seeks an order enjoi~~g
r,-.._

;;t

further violations of the CLRA, as well as other appropriate relief, under Civil Code §§ 1780(a)

5 and 1782(d).59 6 7
8

Defendants assert that the CLRA claim must be dismissed as untimely. 60 They argue that a § 1770(a)(5) claim' must "be commenced not more than three years from the date of the commission of such method, act, or practice." CAL. CIV. CODE § 1783. Because Daghlian' s CLRA claim challenges advertising that allegedly induced him to enroJI with DeVry in April

9

10 2001, and because Daghlian did not file this action until December 2005, defendants assert that 11 the CLRA claim is time-barred. 61 In his opposition, Daghlian concedes that "his Consumer Legal

12 Remedies Act claim may be time-barred and . . . withdraws th[e] cause of action."62 Because 13 Daghlian has
withdr~wn

the CLRA claim, the court dismisses it with prejudice.

14
15 16 17 18 19 20 21

D.

Third And Fourth Causes Of Action For Violations Of California Business

And Professions Code §§ 17500, Et Seq. And §§ 17200, Et Seq.

Daghlian' s third and fourth causes of action allege that defendants engaged in false advertising in violation of California Business and Professions Code §§ 17500, et seq., and in unlawful, unfair, and deceptive business practices in violation of California Business and Professions Code§§ 17200, et seq. California Business and Professions Code§§ 17500 et seq. prohibit the dissemination of

22
23 24

51
58

/d.' , 32.

/d. 1

,,

33, 34.

59

25 26 27 28

/d.• , 35.

60

Defs. 1 Mot. at 8.

62

Pl. 's Opp. at 1 n. 2.

45

1 false or misleading statements in connection with advertising. 2 § 17500. 63

CAL. Bus. & PROF. CQDE c. "Section 17500 has been broadly construed to proscribe 'not only advertising w~!fh
~~
( f)

3 is false, but also advertising which[,] although true, is either actually misleading or which h~§ a 4 capacity, likelihood or tendency to deceive or confuse the public.'" Colgan v. Leathennan Tool

5 Group, Inc., 135 Cal.App.4th 663, 679 (2006) (quoting Kasky v. Nike, Inc., 27 Cal. 4th 939, 951
6 (2002) (internal quotation marks omitted)). A court may award injunctive relief and restitution 7 for false advertising that violates§ 17500. See id., § 17535. 8 9 Under California Business and Professions Code §§ 17200 et seq., any person or entity that has engaged, is engaging, or threatens to engage "in unfair competition may be enjoined in any

10 court of competent jurisdiction." /d., §§ 17201, 17203. "Unfair competition" includes "any 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 The fuJI text of section 17500 reads: "It is unlawful for any person, firm, corporation or association, or any employee thereof with intent directly or indirectly to dispose of real or personal property or to perform services, professional or otherwise, or anything of any nature whatsoever or to induce the public to enter into any obligation relating thereto, to make or disseminate or cause to be made or disseminated before the public in this state, or to make or disseminate or cause to be made or disseminated from this state before the public in any state, in any newspaper or other publication, or any advertising device, or by public outcry or proclamation, or in any other manner or means whatever, including over the Internet, any statement, concerning that real or personal property or those services, professional or otherwise, or concerning any circumstance or matter of fact connected with the proposed performance or disposition thereof, which is untrue or misleading, and which is known, or which by the exercise of reasonable care should be known, to be untrue or misleading, or for any person, firm, or corporation to so make or disseminate or cause to be so made or disseminated any such statement as part of a plan or scheme with the intent not to sell that personal property or those services, professional or otherwise, so advertised at the price stated therein, or as so advertised. Any violation of the provisions of this section is a misdemeanor punishable by imprisonment in the county jail not exceeding six months, or by a fine not exceeding two thousand five hundred dollars ($2,500), or by both that imprisonment and fine." CAL. Bus. & PROF. CODE§ 17500. 46
63

unlawful, unfair or fraudulent business act or practice and unfair deceptive, untrue or misleading advertising." /d., § 17200. The Supreme Court has construed the term broadly. See Cel-Tech

Communications, Inc. v. Los Angeles Cellular Telephone Co., 20 Cal. 4th 163, 180 (1999)
("[Section 17200] defines 'unfair competition to include any unlawful, unfair or fraudulent business act or practice .... Its coverage is sweeping, embracing anything that can properly be

1 called a business practice and that at the same time is forbidden by law. . . . By proscribing any
0

2 unlawful business practice, section 17200 borrows violations of other laws and treats then!las

:;:

3 unlawful practices that the unfair competition law makes independently actionable .... However, 1 ....)
v~

4 5 6 7
8

the law does more than just borrow. The statutory language referring to any unlawful, unfair or fraudulent practice . . . makes clear that a practice may be deemed unfair even if not specifically proscribed by some other law. Because Business and Professions Code section 17200 is written in the disjunctive, it establishes three varieties of unfair competition - acts or practices which are unlawful, or unfair, or fraudulent" (internal quotations omitted)); see also Paulus v. Bob Lynch

9 Ford, Inc., 139 Cal.App.4th 659, 676-77 (2006) ("The purpose of the UCL 'is to protect both 10 consumers and competitors by promoting fair competition in commercial markets for goods and 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 services. [Citation.]' Thus, the scope of the UCL (Bus. & Prof.Code, § 17200 et seq.) is 'broad.' It 'covers a wide range of conduct"' (citations and footnote omitted)). A violation of the false advertising law,§§ 17500 et seq., constitutes a violation of the unfair competition law,
§§ 17200 et seq. Pfizer Inc. v. Superior Court,_ Cal.Rptr.3d _ , 2006 WL 1892581, *1

(Cal.App. July 11, 2006) (citing Kasky, 27 Cal.4th at 949-50)). On November 2, 2004, California voters passed Proposition 64; it took effect the following day, in accordance with Article II, Section 10 of the California Constitution. Lyons v. Chinese

Hosp. Ass'n., 136 Cal.App.4th 1331, 1336 n. 2 (2006); see also R&BAuto Ctr., Inc. v. Farmers Group, Inc., 140 Cal.App.4th 327, 44 Cal.Rptr.3d 426, 453 (2006). Proposition 64 amended
the California Business and Professions Code to bar persons from suing as "private attorneys general" or on behalf of others absent a showing that they themselves had suffered injury as a result of the allegedly unfair business practice. See CAL. Bus. & PROF. CODE§ 17535 ("Any person may pursue representative claims or relief on behalf of others only if the claimant meets the standing requirements of this section . .. "); id., § 17204 ("Actions for any relief pursuant to this chapter shall be prosecuted exclusively in a court of competent jurisdiction by the Attorney General or any district attorney . . . or upon the complaint of any board, officer, person, corporation or association or by any person who has suffered injury in fact and has lost money or

28 property as a result of such unfair competition" (emphasis added)). See also Paulus, 139 47

1 Cal.App.4th at 677 n. 13 ("California's electorate narrowed the scope of the UCL in 2004 by 2 passing Proposition 64 .... Proposition 64's provisions included- by amendment to BusiJ~ss
...... .
~

0

....

3 and Professions Code section 17204 - the elimination of the right of a person 'acting for ;!!te
~ 'i

4

interests of itself, its members or the general public' to bring a UCL suit, changing the language

5 of the statute to read that a person could bring suit only if the person 'has suffered injury in fact 6 and has lost money or property as a result of such unfair competition.' (Ballot Pamp. , Gen. Elec. 7 (Nov. 2, 2004) text of Prop . 64, § 3, p. 109)"); Harris v. Investor's Business Daily, Inc., 138

8 Cal.App .4th 28, 33 (2006) (California Business and Professions Code § 17203 "now requires that 9 relief may be sought only by persons who have themselves suffered injury"); Feitelberg v. Credit 10 Suisse First Boston, ILC, 134 Cal.App.4th 997, 1010 (2005) (Proposition 64 amendments "limit 11 private representative actions to persons who . . . meet the standing requirements set forth in

12 section 17204, which include injury in fact") . 13 Additionally, § 17200 plaintiffs must now satisfy the requirements for class actions under

14 California law. See CAL. Bus. & PROF. CODE§ 17535 ("Any person may pursue representative 15 claims or relief on behalf of others only if the claimant .. . complies with Section 382 of the 16 Code of Civil Procedure," which governs class actions); id. , § 17203 (same). See also Harris, 17 18 138 Cal.App.4th at 33 (a representative claim for unfair competition "requires class certification under the Code of Civil Procedure section 382"); Schwartz v. Visa Int'l Serv. Ass'n, 132

19 Cai.App.4th 1452, 1458 (2005) ("[T]he UCL now authorizes a person to pursue a representative 20 action only if he or she meets the class certification requirements of section 382 of the Code of 21 22 23 Civil Procedure") . Defendants argue that Daghlian's § 17500 and§ 17200 claims must be dismissed because he has not established that he has standing to prosecute the claims as required by Proposition 64. 64

24 Defendants emphasize that "nowhere in the FAC does [Daghlian] allege that he actually attempted 25 26 27 28
64

to transfer to another school that refused to accept his DeVry units, thus forcing him to repeat

Defs.' Mot. at 10.
48

1 courses or incur additional tuition expenses. "65 In the absence of such an allegation, defendants
CJ

2

assert, Daghlian has failed to show that he suffered the type of "injury in fact"
66

necessar~~o
~j
V'l
~

3 maintain the third and fourth causes of action.
4 5 6

Daghlian counters that he has adequately pled injury in fact. 67 He argues that he suffered injury when he "spent tens of thousands of dollars in tuition expecting that his degree would be a foundation for further education" and "did not receive what he had bargained for. "68 He

7 contends that regardless of his future actions, he has standing to maintain the§§ 17500 and 17200
8 claims. 69
9

The first amended complaint alleges that Daghlian attended DeVry from April 2002 to

10 October 2005. 70 Daghlian asserts that prior to enrolling at DeVry, he met with a DeVry recruiter,
11
12

who told him that DeVry "offered academic credits that would be transferable to a wide variety of other academic institutions. " 71 He alleges that he did not receive documents disclosing that his DeVry credits would likely not transfer to other colJeges.72 Although Daghlian does not allege that he attempted to transfer the credits to another

13
14

15 educational institution, or that he was forced to begin his education anew at another institution, 16 he does assert that he enrolled at DeVry and incurred $40,000 in debt "[i]n reliance on" 73

17 defendants' misrepresentations and omissions about the transferability of credits. This sufticiently
18

19 20 21 22

65
66

Id. at 10-11.
/d. at 11.

67

PI. 's Opp. at 22.

68/d.

23
24
7

25 26 27

°First Amended Complaint, , 4.

71/d.

28 49

1 alleges that Daghlian personally suffered injury as a result of defendants' allegedly false and/or
0

2 misleading advertising and unfair business practices. See Smith v. Wells Fargo Bank, N.A., !~5
· -~
Y-~

3 Cal.App.4th 1463, 1480 n. 13 (2005) (stating that after Proposition 64, "any person who §s 4 suffered injury in fact and has lost money or property as a result of such unfair competition" can
v~

5 bring a UCL cause of action). The fact that Daghlian may have received some value from his
6 $40,000 in tuition payments does not mean that he suffered no injury. See, e.g., Pfizer Inc. , 2006 7 WL 1892581 at *9 (assuming, in a post-Proposition 64 case, that the class plaintiff had standing 8 to sue under § 17500 and § 17200 because he alleged that he purchased Listerine in reliance on 9 Pfizer's purportedly false and misleading label; "[T]o have suffered an injury in fact as a result 10 of the alleged misrepresentation, a plaintiff would have had to read Ptizer's label 'as effective as 11 floss against plaque and gingivitis' or some similar statement and relied thereon in buying

12 Listerine. A consumer who was unaware of, or who did not rely upon, Pfizer's claims comparing 13 Listerine to floss did not suffer any 'injury in fact' as a result of the alleged fraudulent business

14 practice or false advertising"); see also Laster v. T-Mobile USA, Inc., 407 F.Supp.2d 1181, 1194 15 (S..D. Cal. 2005) ("[A]fter Proposition 64, a person seeking to represent claims on behalf of 16 others must show that (1) she has suffered actual injury in fact, and (2) such injury occurred as 17 a result of the defendant's alleged unfair competition or false advertising. . . . With respect to 18 the first prong - injury in fact - Plaintiffs claim they entered into a bundled transaction with

19 Defendants whereby they purchased both a phone and cellular service, and in doing so, were 20 provided with a phone that was falsely advertised as 'free' or substantially discounted, when in 21 fact, they were required to pay the sales tax on the full retail value. Plaintiffs, in essence, contend

22 putative class members were injured by Defendants' 'bait-and-switch' practices; that is, 23 consumers were lured in with advertisements for free or deeply discounted phones, yet once in 24 the store, they were charged sales tax based on the full retail value of the phone .... Such 25 allegations sufficiently allege an injury in fact"). As in Pfizer, where the Listerine user had

26 standing to sue despite the fact that he obtained some, albeit not the advertised, benefit from using 27 28 the product, Daghlian has standing to sue despite the fact that he may have received some, albeit not the advertised, benefit from taking cJasses at DeVry. Therefore, Proposition 64 does not bar
50

1 Daghlian's third and fourth causes of action.

2
3

m.

CONCLUSION

·z
·~ u
v;

0 i1J ._.,.

4

For the reasons stated, defendants' motion is granted in part and denied in part. The court

5 dismisses plaintiff's second cause of action for violation of the CLRA with prejudice. It denies 6 defendants' motion in all other respects.
7

8
9

DATED: July 18, 2006

10

11
12 13 14 15 16 17 18 19 20 21

22
23
24
25

26
27

28
51

From:

To: CC:
Date: Subject:

Robert MacArthur <nnacarthur@altresearch com> Woodward, Jennifer
9/ 13/2010 3:39:24 PM

Rob MacArthur Alternative Research Setvices, Inc.
203-244-5174

nnacarthur@altresearch.com

This material has been prepared by Alternative Research Setvices Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Setvices Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The finn does not make a market or hold positions in the securities mentioned herein, nor does the finn maintain any investment banking relationships in such securities.

ALTERNATIVE RESEARCH SERVICES, INC.
Robe1 MacArthur nnacarthur@altresearch.com 203-244-5 174 w 203-2 15-3843 c August 20, 20 l 0 i

Apollo Group (APOL) -- $40.59
Sell Short:

Market Cap. Shares Out. Short Interest Days short Avg. Daily Vol. St. eps est. 2010cy St. eps est. 20 l 1cy Px/book

$5 .9 bil 147 mil 9.63 mil 2.24 4.3 mil $5.39 $5.77
4.4x

44% Repayment Rate - Connection to TCI Playbook ~s:~;TDA 3.66x Student Suit Reveals Loans Paid back by Co. are Source: Bloomberg Inflating Repayment Rate Number Source: All loans for dropped students are paid off by the company; students are put into collections through the company's internal collection company, "CCC" COCO Reports Rise in CDR's
Repayment Rate Fallout •

1.35x

Last Friday, the Department of Education published repayment rates on Title IV loans. The numbers for the for-profit space were sufficiently low to shock the markets. Most of the for-profit education companies dropped on the news that r·epayment rates were below the 35% threshold. APOL, on the other· hand, reported a 44% Repayment Rate. That number is, without exception, in our mind, extremely misleading. While we cannot calculate what we think that number should be given currently available data, at the very least, we think there should be a conelation between repayment r·ate and graduation/ completion rates. The higher the completion t·ate, the greater the chances of repayment. We think through APOL's default aversion program, the company has manipulated its cohort default rate to an abnormally low level by paying off loans for· dropped students and then putting them into collections for money they are not entitled to keep and booking revenue in the process. A 44% repayment rate doesn't wash with APOL's (very) low-teens graduation rates (see below, - IO(M >). While there is some conflict over the validity of APOL's graduation/ completion r·ates, due to the number· of non-first time students and older students in the mix, investors can't ignore the so% gap between repayment rates of 44% and the graduation/ completion rate numbers. 1 The repayment rate data reports 133,802 borrowers in the numerator and 347,157 borrowers in the denominator, which is 38% of its students/ ex-students in repayment
Devry has a graduation rate -30% and a repayment rate of approximately 35% and a CDR of 9% in 2007 . COCO has a low 20's repayment rates and hi gh teens 2-year cohort default rate and a 3-year coho1 default rates well north i of30%.
1

Robert MacArth ur m1acarth ur@a ltresearch.com

203-244-5174 w 203-215-3843 c August 20, 2010

(44% is doUar·s). IPEDS completion/graduation rates and CDRs are based on the number of students/borrowers. In FY07, APOL had 9,941 (the numer·ator) botTowers in default out of 106,702 borrowers in repayment (the denominator), yielding a 9.3% CDR. 2 Why is there such a disparity between the 38% repayment figure on one hand, and the 9.3<Yo CDR for APOL in FY07? The repayment r·ate repor·ted by the DOE includes students in deferment and forbearance, which isn't in the CDR calculation. 5 Could there actually be 241,000 more students in repayment (347k-106k) than investors are led to believe? Further, at 241,000 x $1,000 per loans being paid, AIR would be $241M. Reported AIR is $261M. Coincidence? We think not. The new r·epayment rate metric inc1udes the total amount ofloans r·epaid divided by the original outstanding balance of ALL Federal loans entering repayment in the prior 4 fiscal year·s. APOL has already indicated to investor·s that preliminar·y 2008 cohort default rates to be released in mid-September· 2010 will be ovet· 10% vs. high s ingle digits in the prior years. We think the 2008 CDRs in 3 weeks will surprise investors and come in 15%-20%. The CDR manipulation and the A/ R is effectively a teeter-totter. If APOL has been paying off loans on behalf of students to keep their cohort default rate down, at some point, it is no longer an economically viable altemative, especially in a weak economy, where putting students into collections y ields lower· returns. The recent rise in bad debt expense, 5.4% of revenue vs. 3.4% in the previous quarter, signals noncollection. Therefore, the company is becoming handcuffed in its ability to maintain an artificially low default rate. Last quarter net A/R grew twice as fast as revenue. As of May 31" 2010, Gross A/R was $409M less $184M allowance for doubtful accounts vs. $269M in May 2009 less $99M allowance. We could actually see accounts receivable decline and have that be a negative to the company, not a positive as is typically the case. It would indicate a lower risk tolerance and lower rate of paying down student loans. We spoke to a fot·mer UOP em·ollment cou nselor about this practice. According to source, when a student <h·ops out they are put into "CCC." This is the company's internal collections agency. Source indicated that when students <h·op, "CCC" sends the money back to the lender· and puts the student s into coUection-including for· the Pell amounts that were disbursed. Source believes this to be illegal. How much of this the school is entitled to, we can't say. Source indicated that all students, Pell Runners or otherwise, that drop end up in CCC. Intemally, the em·ollment and academic counselors are prevented from talking to CCC. Given om· belief that APOL's drop-out r·ate is north of 50%, we believe that repayment rates are close to or equal to the graduation/ completion rates of 10%, not the 44% r·epayment being reported. Also included in ED's repayment rate measurement and not in the CDR measurement are consolidation loans issued in place of the original feder·alloans. " On its Monday morning pre-market conference call t·e: ED's t·epayment rate data, STRA's management vociferously contested the inclusion of consolidation loans in the t·epayment t·ate measure. STRA's management contends that since the or·iginal/undedying fedel'a] loans
http://wdcrobcolp0 l .ed.gov/CFAPPS/COHORT /cohortdata detail.cfm?Record 1D=4963&record= l &datarates.rec ordcount=J 3 See GIE Rule published 7/26/10, at page 21 of I 65 (text doc) or at column 3 of page 43619 in Federal Register publication: " Other bOJTOwers who are meeting Lheir legal obligations but are not actively repaying their loans, such as those in defe rment or forbearance, are not considered lobe in repayment." 4 See G/E Rile published 7/26/10, at page 34 of 165 (text doc) or at column 2 o fpage 43622 in Federal Register publication: "LPF (loans paid in full) would be loans to the program's students that have been paid in full. However, the LPF would not include any loans paid through a consolidation loan until the consolidation loan is paid in full. "
2

2
Robert MacArthur m1acarthur@altresearch.com 203-244-5174 w 203-215-3843 c August 20,2010

are first discharged before a new, consolidat ion loan for the t·emammg outstanding amount owed on the original loans is issued to the borrower, consolidation loans should not be considered in the repayment rate calculation. Under the CDR calculation, a default on a consolidation loan is not counted against the school fot· which the borrower· took out the original fedet·al loans. We think it entirely reasonable to believe that default and debt management services utilized by companies in the space foist consolidation on borrowers, in order to keep CDRs misleadingly low. Why APOL's Repayment Rates are Overstated- Select Quotes6 (Russ v. UOP) • "Although each student withdrew from UOP within weeks of em·olling, they attended long enough to incm· some amount of tuition related debt that UOP was entitled to debit fi·om the students' feder·alloans. Although UOP was in possession of each student's federal loan money, rather than debiting the amount owed for tuition, UOP, without the knowledge or consent of the students, and without standing to do so, cancelled the loans, returned the federal loan monies to the lenders and immediately thet·eafter sought to collect the outstanding amount directly fi·om the students." "The manner· by which UOP returned federal loan monies for educational services rendet·ed is neither mandated nor permitted by applicable federal rules. Indeed, the HEA requires the opposite-a borrower is entitled to the applicable percentage of loan funds earned prior to a student's withdrawal 34 CFR 668.22(e)(2)." "By r·eturning a student's loan money to the lender, UOP effectively pays offthat student's loan, eliminating the student's contractual obligation with thei1· lender. Rather than eradicating the debt on their books, however, UOP then seeks to collect dll·ectly fi:om the student the amount owed for tuition that it should have satisfied with federal loan money." "In addition to the fact that UOP had no right to interfere with a contract between a student and a third par-ty lender, UOP also does not have the right to seek a payment directly fi·om a student who has chosen, with UOP's ass.istance, to pay fm· his/her education by using federal loans. Doing so deprives students of the benefits of the terms on which they bon·owed money (i.e. low interest and a six month grace per·iod in which to star-t paying) and saddles them with an immediate debt and payment terms which wer·e never acceded to by the student by contract or otherwise. Unsuspecting students are routinely bombarded with calls, letter and e-mails fi·om UOP to collect tuition along with thl·eats that refusal to pay willr·esult in referral to collection agencies and negative repm-ts on their· credit." The TCI Playbook- Excerpts fi'Om IG t-epot-t (italics added)
• On May 19th, 2008 the OIG published an audit ofTechnical Career Institutes, Inc. TCI paid the lenders $440,487 to pay off the FFEL loans received by SOl students (~ 10% of all students) who withdrew during their first semester at TCI. TCI received a total of $20,541,317 in Title IV funding, which included $10,572,764 in Pell Grants and $8,881,954 in FFEL. The IG review disclosed that (1) TCI improperly paid $440,487 to FFEL lenders to pay

• •

offits students' loans and prevent their default;
FINDING NO. 1 - TCI Improperly Paid Lenders to Reduce Its Cohort Default Rates.
5

Angela Russ v. University of Phoenix, case number 9:2009-CV-00904, Central District Califomia.

3
Robert MacArthur m1acarth ur@a ltresearch.com 203-244-5 174 w 203-215-3843 c August 20, 2010

TCI paid the lenders $440,487 to pay off the FFEL loans received by SO 1 students who withdrew during their first semester at TCI.6 For 5 of the 1S students in our random sample of withdrawn students. 7 TCI then attempted to collect the loan amounts from its students by entering into repayment plans scheduled to begin 150 days after the end of the students' last semester at TCI. None of the five students in om· sample made payments within 150 days. TCI mru:ked the students' accounts as delinquent and sent the debts to an outside collection agency. According to TCI officials, TCI implemented its defaultpreventionpolicybecause it had problems with it$ cohort default rates in prior years, and it wanted to reduce its cohort default rates to maintain its Title IV eligibility. For fiscal years (FYs) 1992 through 1995, TCI's cohort default rates exceeded 25 per·cent. Based on these rates, TCI would have lost its eligibility to participate in the FFEL and Direct Loan programs if it had not prevailed in its appeals. TCI instituted its default prevention policy in November 1994. 8 As a result of TCI's payments on its students' loans, TCI's students were denied access to the FFEL loan funds to which they were entitled. This could have harmed the students by damaging thei r· credit (when their outstanding balances wer·e r·eferTed to outside collection agencies) and by denying the students access to the terms of FFEL Program loans, including grace periods, low-cost repayment plans, deferments, forbearances, cancellations, and other benefits. TCI may have retained its eligibility for Title IV programs improperly. TCI compounded the denial when it employed collect ion agencies to collect charges from students that had pt·eviously been sat isfied with FFEL funds. TCI's terms of repayment were not as generous as those for repayment of a FFEL loan. As the most substantive example, under TCI's terms of repayment, a borrower was considered to be in default if he or she did not begin making payments within 150 days after· he or she ended attendance. It takes about 600 days for a borrower to default on a FFEL loan after the student ends attendance. 9 All of the students in our sample defaulted on their obligations under TCI's loan terms; it is much less likely that they would have defaulted under the tenns for FFEL pt·ogram loans. TCI incorrectly calculated the return of Title Jv. We reviewed files for SO withdrawn students and found that TCI incorrectly determined the withdrawal date used in the retm·n of Title IV calculations. We found that, for 15 of SO randomly sampled students (50 per·cent), due to incorrect withdrawal dates. Hendow Qui Tam Docmnent Requests Defaults Info. ' 0

We identified a total of 1,502 students who withdrew from TCI during the period under review. Our original sample for the return of Title 1V funds included 30 withdrawn students: 13 students who had FFEL loans and/or other Title IV funding, and 17 students who did not have FFEL loans but had other Title IV funding. 8 For FY 1995, TCl 's original cohort default rate was 33.4 percent, but after an appeal it was revised to 24.7 percent. 9 For most borrowers, default occurs after 6 months in a grace period, then 60 days during which the lender schedules the first payment, then 270 days of delinquency on the loan by the bon·ower, and after that, an average of about 90 days for the default claim to be fi led and paid (34 C.F.R. §§ 682.200(b), 682.209(a)(2) and (3), and 682.406(a)). 1 Case 2:03-cv-0457-GEB-DAD Filed 4/28/2009 Document 271
7

6

°

4
Robert MacArthur m1acarthur@altresearch.com 203-244-5174 w 203-215-3843 c August 20,2010

• •

Interestingly, a relevant quote in the thousands of pages of Hendow filings, "Relators seek a designee who can testify on behalf of UOP about the "Defaults: The default rates of UOP students, default rate tracking, measurement of defaults, any steps UOP takes (including but not limited to purchasing student loans and Default Aversion Programs) to limit defaults [emphasis added] or steps short of default such as delinquency." (Clearly, the Relators has some cursory knowledge of an internal scheme to lower the company's default rate). Page 6 UOP refused to comply, saying it would only supply a witness that could speak to the company cohort default rate, and "not the extensive data UOP maintains as to actual default rates." [emphasis added] ''UOP has access to default data that extends well beyond the two year "cohort default" period used for its government reporting, and discovery concerning· UOP's knowledge of actual default rates is critical to Relators' ability to calculate one measure of restitutionary damages." "Moreover, the high actual [italics part of document] default t·ates by UOP students provides further evidence that UOP is running an illegal enrollment mill, whose incentive-based corporate culture ... " COCO EPS Report- CDR's On the Rise

Although we believe that om· default management efforts have slowed the rate of increase for the 2009 cohort, current trend information indicates that cumulative defaults have trended substantially higher for the 2009 cohort of students compru·ed with t he 2008 cohort at the same time last year. lnfor·mation curTently available also indicates that the number of our OPEIDs which could exceed DOE's 25% cohort default rate threshold for the 2009 cohort will be substantially higher than for the 2008 cohort. In the 2008 cohort, nine of our OPEIDs exceeded the 25% threshold. We expect the higher two-year rates for the 2009 cohort to translate into elevated three-year rates for the same cohort. We thus expect a majority of om· OPEIDs to exceed the 30% threshold under the three-year measurement for the 2009 cohort. Schools cannot be sanctioned under the three-year measurement methodology until 2014 (the year the 2011 cohort data will be final) on either the 30% ot· 40% thresholds, and we will aggressively pursue default mitigation efforts between now and then.

5
Robert MacArthur m1acarthur@a ltresearch.com 203-244-5 174 w 203-21 5-3843 c August 20, 2010

APOL's Consume•· Information Guide Re: Graduation Rates "

GRADUATION RATES

Graduation Rates
E"·d:a,i
1'31l~!!'l!!l~U)!::

(

Dl:.l.S
t4k:
.f:CJNh

tb.;.~

Gr.! elate:- m 1;/)t; t:m: 3 i:,tlb
S1S ! 1~1

.:.i;Nl ~I tliTri: lJr,d~~r to ~E.n~f!t:dl~ ·~ d !lndefgr:>.tiu)le

i>JS)

w,;m
LW

'19'n ll3:f.'tO "!St.

1\rnroc:;!"\[l':f>;;,.; cr Al.:!;b.lhtr.~

g 3

s.:m.
11 t~f !WT.i

•h= ::.< P:!o!.r isiJl\:k>
S:xl r..m- flt1p;rre
~p~:-.x . 7i;:..IV,l,~;,Al•ca
&.~ ~u~~!'.,..m

aD
l..G<''>
I .S!:l ~ '.1?9
J.l€>5
•r,~B9
~~- ·

zm
Zi'1

1·1.82i.
lll!l'i;

V: r,,..,,n:m- His;;;m~~:

?Al I!M 1~'">
429

l.rs.
lf)~~ •.

~lGr..l'•' Ret fi~ltr.

I ta!;9
T~nl

U.tl':h

I

~ia ·~~ St.I!M.rd twn
~r'!>•

5V.f-diJfl:/ <>:C<oM~ it PcJll:r.1~1

'"[~
£69

lllS't

"'~.;=s;,hc:ecr'"

dr.r:.hc,

f;.:i?C

(99~

;:-~ Gr.1~1" ct~P.<.,.<.,.d ~~3f!ll'd Ln:on~

Disclaimer This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.
http://wv.rw.phoenix.edu/content/dam/altcloud/doc/about uopx/Universitv-of-Phoenix-Consumer-InformationGuide-2009-20 I O.pdf
11

6
Robert MacArthur m1acarthur@altresearch.com 203-244-5174 w 203-215-3843 c August 20, 2010

From: To:

Robert MacArthur <nnacarthur@altresearch com> Woodward, Jennifer Wittman, Donna 'Serra Joanna'

CC:
Date: Subject:

9/22/201 0 11 :28:20 AM

Industry Overview
Equily I United States 1 Business, Education & Professional Services 22 September 2010

BankofAmerica~
Merrill Lynch
• Hearing to focus on student outcomes, debt & revenue
As has been widely anticipated, the Senate HELP (Health, Education, Labor and Pensions) committee will hold its next hearing on for-profit postsecondary education institutions on Thursday, 9/30 at 10am ET, according to an article in Inside Higher Ed. The article notes that the hearing will focus on student outcomes, debt, and for-profits' revenue sources. The head of the committee, Senator Tom Harkin (D-IA), has been leading the charge against for-profits. He had requested significant amounts of data from all of the publicly traded for-profits and 15 private schools, which were due on 8/26 and 9/16. We expect this data to be used in the hearing. To date these hearings have had a highly negative tone towards for-profits. At the last hearing, Senator Harkin said that hearings could continue into November/December.
Sara Gubins Research Analyst MLPF&S sara.gubins@baml.com DavidChu Research Analyst MLPF&S david.j.chu@baml.com David Ridley-Lane Research Analyst MLPF&S david.ridleytane@baml.com
+1 646 855 1961

+1 646 855 2589

+1 646 855 2907

Table 1: BofAML ratings vs. consensus Ticker APOL CECO No. of %breakdown BofAML Rating opinions Buy Neutral Sell Buy 22 59% 41% 0% Neutral 17 47% 41% 12% coco Underperform 15 6% 67% 27% Buy CPLA 18 59% 41% 0% DV Buy 22 59% 41% 0% EDMC Underperform 16 33% 61% 6% ESI Underperform 19 42% 53% 5% Neutral 10 44% 56% 0% LINC LOPE Buy 11 82% 18% 0% LRN Buy 9 67% 33% O"k STRA Buy 17 43% 50% 7% UTI Neutral 11 36% 55% 9%
Source: Bloombe<g

Legislative risk would decline under a Republican led House
Senators Harkin and Durbin (O-IL) have been very vocal about their concerns around for-profits and have called for legislation, though no specific proposals have yet been made. We think the likelihood of legislation passing this year is low, and mid-term elections will be an important factor in the outcome. In our view, a Republican-controlled House would lower the risk of particularly negative legislation going through. Some have become hopeful that positive legislation for the sector around gainful employment might be possible if Republicans take the House - this strikes us as less likely if the Democrats retain control of the Senate.

Not counting on a delay in gainful employment (GE)
With 80k+ comments coming in on GE including opposition to GE from at least 48 House Democrats according to The Hill, stocks have rallied on the hopes that GE could be delayed past the 11/1 deadline. A delay is possible, but we believe the Department of Education's (DOE) goal is still to publish final regulation by 11/1, including GE. The DOE must review all of the comments and include responses to major themes raised in the final regulation. Our published estimates - now the low on the Street in most cases -assume GE goes through largely as proposed & schools begin to adapt rapidly. Please see our recent note for highlights of our expectations and assumptions: Education: lowering estimates and ratings. APOL is top pick.

DC-related risk remains key overhang; Apollo is top pick
We continue to recommend a select group of postsecondary education stocks that have strong businesses and value propositions for students & investors. Apollo, our top pick, should fare well on gainful employment. We li ke its increased focus on quality and note that consensus already incorporates flat earnings in FY 11. The next company-specific catalyst for APOL will come on 10/13 when it reports 4Q (August) earnings. We also continue to recommend Grand Canyon, DeVry, Capella, and Strayer.

Merrill lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 7 to 9. Analyst Certification on Page 5. Price Objective Basis/Risk on page 3. link to Definitions on page 5. 1091~s1
CR

IV

"-' 3C N ~
(f)

IIIII
~

<I>

~ ;. ::.: o

Table 2: Education Valuation Metrics PO Basis CYPE 12E
NA 111 NA 17.3 7.9 4.2 11.4 14.0 12.0 8.5 5.8 14.8 10.5 10.3

'0

C1'

3

~ ~ (') ... ::r ::J.
~

;::~

CYPE

CV EV/EBITDA

CY EV/Revenue
5-~r

£

Ticker QRQ

Rating

22-Sep Price

Price Potential EV Obj. Upside to PO ($mn)
NR $62 NR $83 $21 $5 $51 $8.50 $23 $54 $14 $195 $19 NA 23% NA 17% 0% -21% 14% -25% 9% -18% 9% 23% -1% $489 $6,194 $771 $1 ,107 $1 ,332 $619 $2,915 $2,666 $950 $2,277 $334 $2,047 $408

10E 11E 12E 10E 11E 12E 10E
20.3 16.5 14.1 9.5 9.7 9.0 8.2 6.5 5.7 19.1 16.3 14.7 7.2 7.6 7.9 3.9 4.8 5.3 10.6 10.4 10.0 6.8 12.2 18.6 16.6 13.0 11 .0 5.9 6.8 10.4 5.2 5.3 5.3 16.0 13.5 12.0 14.0 12.1 10.7 11.0 10.4 10.4 9.0 4.2 3.6 9.5 3.1 1.9 5.6 4.1 8.0 3.5 2.3 8.5 5.5 5.3 7.2 4.3 2.8 7.8 3.2 2.3 5.3 5.8 6.1 4.1 2.4 7.4 4.8 4.9 6.3 4.0 2.5 6.9 3.4 2.5 5.0 7.6 5.1 6.0 2.3 6.6 4.4 4.8 2.5 12 1.1 2.6 0.6 0.3 14 1.0 2.3 1.4 0.5 3.2 0.9 1.5

11E
2.1 1.2 0.9 2.2 0.6 0.3 1.3 1.0 1.8 1.5 0.5 2.6 0.8 1.3

12E
1.8 11 0.7 1.9 0.6 0.3 1.3 1.0 1.5 1.8 0.5 2.3 0.8 1.2

Avg. Short Int. For. PIE as %of SO
34 17 12 29 19 21 24 13 23 18 17 28 25 21 11% 8% 17% 14% 12% 29% 4% 5% 8% 6% 22% 29% 6%

Net Cash/Sh. Current
$4.53 $4.76 $3.39 $11 .30 $3.86 -St18 $4.47 -$7.43 $0.32 $3.77 -$0.32 $10.28 $2.39

""
0 0
~

~

POSTSECONDARY American Public Ed. APE I NR NR $30.40 Apollo Group APOL B-1-9 Buy $50.37 Bridgepoint BPI NR NR $16.28 Capella $70.79 CPLA C-1-9 Buy $21 .08 Career Education CECO C-2-9 Neutral Corinthian Colleges COCO C-3-9 Underperform $6.31 DeVry DV B-1-7 Buy $44.79 Education Mgmt. EDMC C-3-9 Underperform $11 .28 Grand Canyon LOPE C-1-9 Buy $21.08 ITT ESI C-3-9 Underperform $65.67 $12.87 Lincoln LINC C-2-9 Neutral $158.45 Strayer STRA B-1-7 Buy $19.26 Universal Tech. lnsl. UTI C-2-9 Neutral Average
pre-K-12 K12, Inc.

LRN C-1-9

Buy

$28.58 $1,139.78

$30

5%

$820

38.1

36.3 24.4 16.6 10.7 13.7 12 7 12.0

7.5

5.2

1.9

1.5

1.1

41

11%

$2.71

m
c:
Q)
(')

"' <I> "' "' "'

c:

OJ

a.

S&P500

c;·

Source: CECO excl. tmnsitional schools. COCO rcnects continuing operations. LINC excludes three closed schools. APOL has an August FY end. COCO and DV have a June FY end. UTI has Sept. FY end. Source: BolA Merrill Lynch Global Research Estimates, Rrsteall, Company Reports. APE I & BPI estimates based on consensus. 0-R-0: Volatmty: A- Low, B- Medium, and C- High. Investment ratings reflect the analyst's assessment of a stock's: (~absolute total return potential and {ii) attractiveness for investment relative to other stocks within b C overage Clustet: 1 - Buy (total return of at least 10% and are the most a~ractive stocks in the coverage cluster - less than or equal to 70% of cluster); 2 . Neutral (expected to remain flat or increase in value and are less a~raotive than Buy rated stocks - less than or equal to 30% or coverage cluster), 3. Underperforrn (least attractive stocks in a coverage cluster . greater than or equal to 20% of clusterj. lncome ratings: indicatorn or potential cash dividends, are: 7 · same/higher {dividend considered to be seoureJ: 8 • sameJ!ower (dividend not considered to be secure); and 9 · pays no cash dividend.

"' llO
"0

0

"' "' 0 "'
Q)

<D

(/)

< ;:;·

<I>

"'

<I>

.,il'i.;; l·;:;,~.Ji';<i u-'.\~~y.-h, i~;! ;-:-.;.,iit~· ;.-'.'lit ~>x.'li' lti:,J,•q[ ~· ••'.\ JU1~H1 ·} !n')}{HJr::· :;·~~~--hin ·J

:;·r.,i,ul·

v l:.:•lt;;c;J.mn.:.~•~~·

Bank of America ~ Merrill Lynch
22 Sep tember 20 10

Business, Education & Profess ional Services

Price objective basis & risk
Apollo Group (APOL)
Our $62 target is based on 11x CY12E EPS, a significant discount to Apollo's average forward multiple of 16x. We apply a discounted multiple given broader regulatory risk and two key company specific overhangs - an informal SEC inquiry into revenue recognition and its transition to a higher degree/higher quality mix which will limit growth in FY11 as it rolls out its orientation program. Risks are: 1) SEC informal inquiry around revenue recognition practices. 2) Uncertainty in future growth as APOL shifts towards higher level programs. 3) Greater competition and limited growth in APOL's core working adult market. 4) Headline and regulatory risk. 5) Legal risks. 6) Concerns about the federal and private student lending markets, though this issue has largely subsided.

Capella Education (CPLA)
Our $83 price objective is based on 17x CY12E EPS, below its 28x historical forward multiple. While this represents a premium to its peer group, we believe a premium multiple is warranted given the company's pure online model, less countercyclical nature, margin expansion potential and attractive position from a regulatory perspective. Risks are: 1) Gainful employment risk 2) Funding risk: changes in corporate tuition reimbursement programs are a risk. 3) Increasing competition in the online education market as market growth slows. 4) Popularity of programs. 5) Increasing mix of bachelors degree students could dilute revenue per student and lower graduation rates. 6) Capella operates in a highly regulated sector and is currently awaiting the outcome of a Federal Student Aid review of its financial aid.

Career Education (CECO)
Our $21 PO is based on 8x our 2012 EPS estimate and is a discount to peers given the continued regulatory overhang around the Dept. of Education gainful employment proposal. Risks to our price objective are: 1) execution risk, 2) higher than anticipated costs and decreased cash flow associated with internal financing of students, and 3) headline, regulatory, and legislative risks.

Corinthian Colleges Inc (COCO )
Our $5 PO is based on 4x CY12E, a significant discount to COCO's 3-year historical forward multiple of 17x. Despite historically low valuations, we believe it will be difficult for the stock to work until more clarity is gained on company specific issues (see below) and on the broader regulatory overhang. Risks are: 1.) one of its regionally accredited schools potentially losing accreditation, 2.) cohort default rates continuing to rise or starting to fall, 3.) execution risk around operational changes, 4.) higher/lower than anticipated costs and decreased/increased cash flow associated with internal financing of students, and 5.) broader regulatory and legislative risks.

DeVry Inc (DV)
Our $51 PO is based on 11x CY12E EPS of $4.47, below its 20x average 3-year forward multiple, given the broader regulatory overhang facing the sector. We remain positive on its balance of focus on quality, long-term growth potential, diversification and attractive valuation in our view. However, we believe upside could be limited near-term given the broader regulatory overhang facing the sector.

3
CR

Bank of America ~ Merrill Lynch
22 Sep tember 20 10

Business, Education & Profess ional Services

Risks are 1.) potential negative impact of any regulatory or legislative changes, 2.) faster than expected decline in enrollment trends, 3.) pressure on DV's countercyclical segments as the economy improves, 4.) declining job placement rates, 5.) integration risk of recent acquisitions, 6.) increasing competition.

Education Manage ment Corporation (EDMC)
Our $8.50 target is based on EDMC achieving 7x CY12E EV/EBITDA. We remain impressed by its operations and growth prospects from online and new campus openings. However, we think it will be hard for the stock to deliver upside until there is more clarity around the impact of GE given its exposure and as a result of the broader heighted legislative risk for the sector. Risks are: 1) higher/lower-than-anticipated costs and decreased/increased cash flow associated with internal financing of students, 2) disruptions in federal loan availability, 3) relatively high tuition levels, 4) slowing market growth and increasing competition in the on-line education market, 5) continued popularity of programs, 6) headline and regulatory risk, including the recently-disclosed qui tam action.

Grand Canyon Education (LOPE)
Our $23 PO is based on 12x CY12E EPS, a discount to forecast growth given the broader regulatory and legislative overhang as well as the DOE program review. We continue to believe LOPE is a high-growth high-quality story and that it is well positioned vs peers on key regulatory risks given low tuition & low default rates. Risks are: 1) execution risk, 2) slowing market growth and increasing competition, 3) popularity of programs, 4) heavy reliance on federal financial aid, 5) regulatory risk, including an Office of Inspector General investigation, a DOE program review and a false claims lawsuit, and 6) the broader legislative overhang.

ITT Educational Services (ESI )
Our $54 PO is based on ITT achieving 9x CY12E, a deep discount to its 14x 3year historical forward multiple. The multiple accounts for slowing demand trends and gainful employment risks, which will likely limit a return to more robust historical valuation multiples near term . Risks are 1) gainful employment risks: could result in tuition cuts or elimination of programs, 2) higher/lower than anticipated costs and decreased cash flow associated with internal financing of students, 3) any disruptions in federal loan availability, 4) increasing competition and relatively high tuition levels vs peers, 5) limited online presence in a market in which online is the fastest growing segment and 6) ITT operates in a heavily regulated sector.

K12 (LRN)
Our $30 PO represents 25x CY1 1 EPS of $1.18, a discount to our 30% five-year EPS CAGR. While our target multiple for K12 is not low in the absolute, we believe the earnings growth rate justifies a high multiple of current earnings. Risks are: 1) execution risk, 2) operating in a niche market, with increasing competition, 3) operating in a heavily regulated and political sector which requires approval to operate in any state and often growth caps, 4) funding risk as K12 has minimal control over government-regulated funding per pupil, and 5) concentrated revenues in several key states.

4
CR

Bank of America ~ Merrill Lynch
22 Sep tember 20 10

Business, Education & Profess ional Services

Lincoln Educational Services Corp (LINC)
Our $14 price objective is based on 6x 2012E EPS. Our price objective represents a significant discount to Lincoln's 15x historical forward 3 year multiple. We believe a discount is warranted given potential for slowing enrollment growth in shorter-term vocational programs as the economy improves, the broader regulatory overhang, and execution risk around its new initiatives. Risks to the price objective are weaker-than-forecast auto enrollments, a slowdown in demand for health science programs, slowing enrollment growth in an improving economy, broader regulatory and DC concerns, and execution risk.

Strayer Education Inc. (STRA)
We believe Strayer should continue to warrant a premium multiple to the peer group given its growth prospects, superior profitability and strong track record. We also believe its is well positioned on gainful employment from a debt service to income perspective, despite low repayment rates. Our $195 price objective is based on a multiple of 15x our 2012 EPS estimate of $13.22. Risks are: 1) changes to the industry business model from gainful employment, 2) execution as the company scales and enters new markets and rolls out a new global online operations center, 3) increased competition, 4) increased regulatory scrutiny, and 5) longer-term DC risks.

Universal Technical Institute (UTI)
Our $19 price objective is based on 11x our CY12 EPS estimate of $1 .77. While we are not as positive on the longer-term story which remains heavily focused on automotive and lacks program diversification in our view, we see less risk at these valuation levels. Specifically, we believe UTI has minimal exposure to gainful employment risks. Risks are: company's concentrated automotive/transportation curriculum, execution risk around curriculum overhaul and new campus expansion, and regulatolry risks.

Link to Definitions
Industrials
Click here for definitions of commonly used terms.

Analyst Certification
I, Sara Gubins, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.
US-Business, Education & Professional Services Coverage Cluster Investment rating Company
Apollo Group Capella Education Corporate Executive Board DeVry Inc Ecolab Inc Grand Canyon Education

BofAML ticker
APOL CPLA EXBD DV ECL LOPE

Bloomberg symbol
APOLUS CPLAUS EXBDUS DVUS ECLUS LOPE US

Analyst
Sara Gubins Sara Gubins David Ridley-Lane Sara Gubins David Ridley-Lane Sara Gubins

BUY

5
CR

Bank of America~ Merrill Lynch
22 September 2010

Business, Education & Profess ional Services

US-Business, Education & Professional Services Coverage Cluster Investment rating Company K12 Manpower Resources Connection Strayer Education Inc. TrueBiue
Career Education CB Rtchard Ellis Group Inc Jones Lang LaSalle Inc Lincoln Educational Services Corp Universal Technicallnstitute

BofAML ticker LRN MAN RECN STRA TBI
CECO CBG JLL LING UTI

Bloomberg symbol LRN US MANUS RECNUS STRA US TBIUS
CECOUS CBGUS JLLUS LING US UTI US

Analyst Sara Gubins Sara Gubins Sara Gubms Sara Gubins Sara Gubms
Sara Gubins Sara Gubtns Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins Sara Gubins

NEUTRAL

UNDERPERFORM
Corinthian Colleges Inc Education Management Corporation ITI Educational Services Robert Half International

coco
EOMC ESI RHI

coco us
EOMCUS ESIUS RHI US

6
CR

Bank of America~ Merrill Lynch

Business, Education & Professional Services

22 Sep tember 20 10

Important Disclosures
Investment Rating Distribution: Education & Training Services Group (as of 01 Jul2010) Coverage Universe Count Percent lnv. Banking Relationships· Count Percent 60.00",{, Buy 10 55.56% Buy 6 Neutral 6 33.33% Neutral 5 83.33% Sell 2 11.1 1 % Sell 2 100.00% Investment Rating Distribution: Global Group (as of 01 Jul2010) Coverage Universe Count Percent lnv. Banking Relationships· Percent Count Buy 1922 54.14% Buy 1042 59.85% 24.62% 874 Neutral Neutral 496 62.78% 21.24% Sell 754 Sell 362 51.86% * Com panies in respect of which MLPF&S or an affiliate has received compensation for investm banking services within the past 12 months. For purposes of this distribution, a stock ent rated Underperformis included as a Sell. FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RA T/NGS, indicators of potential price fluctuation, are: A- Low, B- Medium and C- High. INVESTMENT RATINGS reflect the analyst's assessment of a stock's: (Q absolute total return potential and (iQ attractiveness for investment relative to other stocks within its Coverage Cluster(defined below). There are three investment ratings: 1 -Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a stock and the firm's guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst's view of the potential price appreciation (depreciation). Investment rating Buy
~~

Total return expectation (within 12-month period of date of initial rating) 2: 10"/o
~~

Ratings dispersion guidelines for coverage cluster* :5 70",{,
s~

Underperform N/A ~ 20",{, • Ratings disperstons may vary fromtime to time where BofAML Research beheves it better reflects the investm prospects of stocks in a Coverage Cluster. ent

INCOME RATINGS. indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8- same/lower (dividend not considered to be secure) and 9- pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock's coverage cluster is included in the most recent BofAML Comment referencing the stock.
Price charts for the securities referenced in this research report are available at http://pricecharts.ml.com, or caii1-888-ML-CHART to have them mailed.

MLPF&S or one of its affiliates acts as a market maker for the equity securities recommended in the report: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, Grand Canyon, ITT, K12, Lincoln, Strayer, Universal Tech. MLPF&S or an affiliate was a manager of a public offering of securities of this company within the last 12 months: Education Mgmt The company is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: Apollo Group, Career Education. Corinthian Coli, DeVry, Education Mgmt, Grand Canyon, lincoln. MLPF&S or an affiliate has received compensation from the company for non-investment banking services or products within the past 12 months: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, ITI, K12, Lincoln, Strayer, Universal Tech. The company is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, ITI, K12, lincoln, Strayer, Universal Tech. MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months: Apollo Group, Career Education, Corinthian Coli, DeVry, Education Mgmt, Grand Canyon, lincoln. MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company or an affiliate of the company within the next three months: Apollo Group, Career Education, Corinthian Coli, DeVry, Education Mgmt, Grand Canyon, ITT, Universal Tech. MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the company on a principal basis: Apollo Group, Capella Education, Career Education, Corinthian Coli, DeVry, Education Mgmt, Grand Canyon, ITT, K12, lincoln, Strayer, Universal Tech. The company is or was, within the last 12 months, a securities business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: Apollo Group, Career Education, Corinthian Coli, DeVry, Education Mgmt, ITT, Strayer. The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall profitability of Bank of America Corporation, including profits derived from investment banking revenues. Merrill lynch is affiliated with an NYSE Designated Market Maker (DMM) that specializes in one or more securities issued by the subject companies. This affiliated NYSE DMM makes a market in, and may maintain a long or short position in or be on the opposite side of orders executed on the Floor of the NYSE in connection with one or more of the securities issued by these companies: Corinthian Coli, K12

7
CR

Bank of America~ Merrill Lynch

Business, Education & Professional Services

22 Sep tember 20 10

Other Important Disclosures
SofA Merrill Lynch (BofAML) Research refers to the combined Global Research operations of Merrill Lynch and BAS. Officers of MLPF&S or one or more of its affiliates (other than research analysts) may have a financial interest in securities of the issuer(s) or in related investments. Merrill Lynch Research policies relating to conflicts of interest are described at http://www.ml.comlmedia/43347.pdf. "Merrill l ynch" includes Merrill l ynch, Pierce, Fenner & Smith Incorporated ("Ml PF&S") and its affiliates, including SofA (defined below). "SofA" refers to Bane of America Securities llC ("BAS'~, Bane of America Securities limited ("BASl'~ and their affiliates. Investors should contact their Merrill lynch or BofA representative if they have questions concerning this report. Information relating to Non-US affiliates of Merrill l ynch and Distribution of Affiliate Research Reports: MLPF&S, BAS, and BASL distribute, or may in the future distribute, research reports of the following non-US affiliates in the US (short name: legal name): Merrill Lynch (France): Merrill Lynch Capital Markets (France) SAS; Merrill Lynch (Frankfurt): Merrill Lynch International Bank Ltd, Frankfurt Branch; Merrill Lynch (South Africa): Merrill Lynch South Africa (Pty) Ltd; Merrill Lynch (Milan): Merrill Lynch International Bank Limited; MLPF&S (UK): Merrill Lynch, Pierce, Fenner & Smith Lim~ed; Merrill Lynch (Australia): Merrill Lynch Equ~ies (Australia) Limited; Merrill Lynch (Hong Kong): Merrill Lynch (Asia Pacific) Limited; Merrill Lynch (Singapore): Merrill Lynch (Singapore) Pte ltd; Merrill Lynch (Canada): Merrill Lynch Canada Inc; Merrill Lynch (Mexico): Merrill Lynch Mexico, SA de CV, Casa de Bolsa; Merrill Lynch (Argentina): Merrill Lynch Argentina SA; Merrill Lynch (Japan): Merrill Lynch Japan Securities Co, Ltd; Merrill Lynch (Seoul): Merrill Lynch International Incorporated (Seoul Branch); Merrill Lynch (Taiwan): Merrill Lynch Securities (Taiwan) Ltd.; DSP Merrill Lynch (India): DSP Merrill Lynch Limited; PT Merrill Lynch (Indonesia): PT Merrill Lynch Indonesia; Merrill Lynch (Israel): Merrill Lynch Israel Limited; Merrill Lynch (Russia): Merrill Lynch CIS Limited, Moscow; Merrill Lynch (Turkey): Merrill Lynch Yatirim Bankasi A.S.; Merrill Lynch (Dubai): Merrill Lynch International, Dubai Branch; MLPF&S (ZOrich rep. office): MLPF&S Incorporated ZOrich representative office; Merrill Lynch (Spain): Merrill Lynch Capital Markets Espana, S.A.S.V.; Merrill Lynch (Brazil): Banco Merrill Lynch de lnvestimentos S.A. This note has been approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited and BASL, which are authorized and regulated by the Financial Services Author~y; has been considered and distributed in Japan by Merrill Lynch Japan Securities Co, ltd and Bane of America Securities- Japan, Inc., registered securities dealers under the Financial Instruments and Exchange Law in Japan; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Limited and Bane of America Securities Asia Limited, which are regulated by the Hong Kong SFC and the Hong Kong Monetary Authority; is issued and distributed in Taiwan by Merrill Lynch Securities (Taiwan) Ltd.; is issued and distributed in India by DSP Merrill Lynch Limited; and is issued and distributed in Singapore by Merrill Lynch International Bank Limited (Merchant Bank), Merrill Lynch (Singapore) Pte ltd (Company Registration No.'s F 06872E and 198602883D respectively) and Bank of America Singapore Limited (Merchant Bank). Merrill Lynch International Bank Limited (Merchant Bank), Merrill Lynch (Singapore) Pte ltd and Bank of America Singapore Limited (Merchant Bank) are regulated by the Monetary Authority of Singapore. Merrill Lynch Equities (Australia) Limited (ABN 65 006 276 795), AFS License 235132 provides this note in Australia in accordance w~h section 911 B of the Corporations Act 2001 and neither it nor any of ~s affiliates involved in preparing this note is an Authorised Deposit-Taking lnstttution under the Banking Act 1959 nor regulated by the Australian Prudential Regulation Authority. No approval is required for publication or distribution of this note in Brazil. This research report has been prepared and issued by MLPF&S and/or one or more of ~s non-US affiliates. MLPF&S is the distributor of this research report in the US and accepts full responsibility for research reports of its non-US affiliates distributed to MLPF&S clients in the US. Any US person (other than BAS and its respective clients) receiving this research report and wishing to effect any transaction in any security discussed in the report should do so through MLPF&S and not such foreign affiliates. BAS distributes this research report to its clients and accepts responsibility for the distribution of this report in the US to BAS clients. Transactions by US persons that are BAS clients in any security discussed herein must be carried out through BAS. General Investment Related Disclosures: This research report provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options, futures, warrants, and contracts for differences). This report is not intended to provide personal investment advice and it does not take into account the specific investment objectives, financial situation and the particular needs of any specific person. Investors should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Any decision to purchase or subscribe for securities in any offering must be based solely on existing public information on such security or the information in the prospectus or other offering document issued in connection with such offering, and not on this report. Securities and other financial instruments discussed in this report, or recommended, offered or sold by Merrill Lynch, are not insured by the Federal Deposit Insurance Corporation and are not depos~s or other obligations of any insured depository institution (including, Bank of America, N.A.). Investments in general and, derivatives, in particular, involve numerous risks, including, among others, market risk, counterparty default risk and liquidity risk. No secur~. financial instrument or derivative is suitable for all investors. In some cases, securities and other financial instruments may be difficult to value or sell and reliable information about the value or risks related to the secur~y or financial instrument may be difficult to obtain. Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment. Past performance is not necessarily a guide to future performance. Levels and basis for taxation may change. This report may contain a short-term trading idea or recommendation, which highlights a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company. Short-term trading ideas and recommendations are different from and do not affect a stock's fundamental equity rating, which reflects both a longer term total return expectation and attractiveness for investment relative to other stocks w~hin its Coverage Cluster. Short-term trading ideas and recommendations may be more or less positive than a stock's fundamental equity rating. SofA Merrill Lynch is aware that the implementation of the ideas expressed in this report may depend upon an investor's ability to "short'' securities or other financial instruments and that such action may be limited by regulations prohibiting or restricting "shortselling" in many jurisdictions. Investors are urged to seek advice regarding the applicability of such regulations prior to executing any short idea contained in this report Foreign currency rates of exchange may adversely affect the value, price or income of any secur~ or financial instrument mentioned in this report. Investors in such secur~ies and instruments, including ADRs, effectively assume currency risk. UK Readers: The protections provided by the U.K. regulatory regime, including the Financial Services Scheme, do not apply in general to business coordinated by Merrill Lynch entities located outside of the United Kingdom. These disclosures should be read in conjunction with the BASL general policy statement on the handling of research conflicts, which is available upon request Officers of MLPF&S or one or more of its affiliates (other than research analysts) may have a financial interest in securities of the issuer(s) or in related investments. Merrill Lynch is a regular issuer of traded financial instruments linked to securities that may have been recommended in this report. Merrill Lynch may, at any time, hold a trading position (long or short) in the securities and financial instruments discussed in this report. Merrill Lynch, through business units other than BofAML Research, may have issued and may in the future issue trading ideas or recommendations that are inconsistent with, and reach different conclusions from, the information presented in this report. Such ideas or recommendations reflect the different time frames,

8
CR

Bank of America~ Merrill Lynch

Business, Education & Professional Services

22 Sep tember 20 10

assumptions, views and analytical methods of the persons who prepared them, and Merrill Lynch is under no obligation to ensure that such other trading ideas or recommendations are brought to the attention of any recipient of this report. In the event that the recipient received this report pursuant to a contract between the recipient and MLPF&S for the provision of research services for a separate fee, and in connection therewith MLPF&S may be deemed to be acting as an investment adviser, such status relates, if at all, solely to the person with whom MLPF&S has contracted directly and does not extend beyond the delivery of this report (unless otherwise agreed specifically in writing by MLPF&S). MLPF&S is and continues to act solely as a broker-dealer in connection w~h the execution of any transactions, including transactions in any securities mentioned in this report. Copyright and General Information regarding Research Reports: Copyright 2010 Merrill Lynch, Pierce, Fenner & Smith Incorporated. All rights reserved. iQmethod, iQmethod 2.0, iQprofile, iQtoolkit, iQworks are service marks of Merrill Lynch & Co., Inc. iQanalytics®, iQcustom®, iQdatabase® are registered service marks of Merrill Lynch & Co., Inc. This research report is prepared for the use of Merrill Lynch clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express wr~ten consent of Merrill Lynch. Merrill Lynch research reports are distributed simultaneously to internal and client websites and other portals by Merrill Lynch and are not publiclyavailable materials. Any unauthorized use or disclosure is prohibited. Receipt and review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets) without first obtaining expressed permission from an authorized officer of Merrill Lynch. Materials prepared by Merrill Lynch research personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Merrill Lynch, including investment banking personnel. Merrill Lynch has established information barriers between BofAML Research and certain business groups. As a result, Merrill Lynch does not disclose certain client relationships w~h. or compensation received from, such companies in research reports. To the extent this report discusses any legal proceeding or issues, it has not been prepared as nor is it intended to express any legal conclusion, opinion or advice. Investors should consult their own legal advisers as to issues of law relating to the subject matter of this report. Merrill Lynch research personnel's knowledge of legal proceedings in which any Merrill Lynch entity and/or ~s directors, officers and employees may be plaintiffs, defendants, co-defendants or co-plaintiffs with or involving companies mentioned in this report is based on public information. Facts and views presented in this material that relate to any such proceedings have not been reviewed by, discussed with, and may not renee! information known to, professionals in other business areas of Merrill Lynch in connection with the legal proceedings or matters relevant to such proceedings. This report has been prepared independently of any issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of any securities. None of MLPF&S, any of its affiliates or their research analysts has any authority whatsoever to make any representation or warranty on behalf of the issuer(s). Merrill Lynch policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer prior to the publication of a research report containing such rating, recommendation or investment thesis. Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional. The information herein (other than disclosure information relating to Merrill Lynch and its affiliates) was obtained from various sources and we do not guarantee its accuracy. This report may contain links to third-party websites. Merrill Lynch is not responsible for the content of any third-party website or any linked content contained in a third-party website. Content contained on such third-party webs~es is not part of this report and is not incorporated by reference into this report. The inclusion of a link in this report does not imply any endorsement by or any affiliation with Merrill Lynch. Access to any third-party website is at your own risk, and you should always review the terms and privacy policies at third-party websites before submitting any personal information to them. Merrill Lynch is not responsible for such terms and privacy policies and expressly disclaims any liabil~ for them. Subject to the quiet period applicable under laws of the various jurisdictions in which we distribute research reports and other legal and Merrill Lynch policyrelated restrictions on the publication of research reports, fundamental equ~y reports are produced on a regular basis as necessary to keep the investment recommendation current. Certain outstanding reports may contain discussions and/or investment opinions relating to secur~ies, financial instruments and/or issuers that are no longer current Always refer to the most recent research report relating to a company or issuer prior to making an investment decision. In some cases, a company or issuer may be classified as Restricted or may be Under Review or Extended Review. In each case, investors should consider any investment opinion relating to such company or issuer (or its security and/or financial instruments) to be suspended or withdrawn and should not rely on the analyses and investment opinion(s) pertaining to such issuer (or its securities and/or financial instruments) nor should the analyses or opinion(s) be considered a solicitation of any kind. Sales persons and financial advisors affiliated with BAS, MLPF&S or any of their affiliates may not solicit purchases of securities or financial instruments that are Restricted or Under Review and may only solicit securities under Extended Review in accordance with firm policies. Neither Merrill Lynch nor any officer or employee of Merrill Lynch accepts any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use of this report or ~s contents.

9
CR

From: Rob MacArthur <rmacarthur@altresearch com> To: Rob MacArthur CC: Date: 11/23/2009 11 :28: 14 AM
Subject:

This research belongs to a competitor of mine. I alluded to the 3rd year calculation change in Philadelphia speech. It would be nice if the Department actually release defaults in the third year.

y T :

Washington , DC · November 23, 2009

For-Profit Education: Regulatory Outlook Part II
New cohort default numbers could be a negative for the group (especially certain companies such as COCO, LINC and Kaplan), simply because they don't screen well given our analysis of the new 3-yr cohort default rates (CDRs). We believe cohort default data could be moderately significant for two reasons: (1) it would be the first time the Department of Education (DOE) has released such numbers; and (2) the numbers are coming from the DOE, which furthers the bear case that the more the DOE knows, the worse things will get. We see the real trade in the group will be in the draft rules we expect from the DOE next week, NOT in the final rules. If the rules come in less onerous than expected, that will set the floor in expectations. If the rules are onerous, it turns into a 'it can't get much worse from here' thesis. Of the two coming data points, 3-year CDRs and a preliminary rule from the DOE, the CDR numbers could come first and then the DOE rule. EXJSTING RULES. Existing rules pose a near-term threat to Title IV funds and enrollment. Cohort Default Rates Cpe. 2). The new method of calculating cohort default rates (CDRs) established last year by Congress (effective 2012) could make several institutions vulnerable to sanction by the DOE for the first time (see Figures 6-8). Our analysis of moving from the current 2-yr CDR window to the new 3-yr CDR window shows that 25% of LINC's, 47% of COCO's, 50% of APOL's, and 60% of Kaplan's institutions could come under some form of DOE sanction, including the possible loss of Title IV eligibility. In addition, the DOE may try to give schools a benchmark of where they stand by releasing provisional 3-year CDR data as early as this week (in advance of the DOE's Fall Conference in Nashville- December 2-4, 2009).
90/10 Rule Cpe. 8). The % ofrevenues derived from federal student aid is expected
)arrel Price 202-629-0003 jprice@heightanalytics.com Andrew Parmentier 202-629-0002 aparmentier@heightanalytics.com

to trend up in 2010 and in order to avoid losing Title IV eligibility, we expect vulnerable schools (see Figure 11) to rely on mitigation strategies that could impact enrollment growth and bring increased congressional scrutiny.
Recent Research

Audits & Proeyam Reviews fpe. 10). The DOE is awarding contracts to improve its ability to review financial statements from for-profits and the DOE's Inspector General is pursuing examples of fraud exposed in the August 2009 GAO rep01t on for-profit schools.

October 26, 2009, "For-Profit Ed: Negotiated Rulemaking Committee May Examine Advertising" October 22, 2009, "For-Profit Ed:

NEW RULES (front-end). Risk will be driven by investor sentiment around the release of Support Expressell on For-Profit CFPA Amendment; Vote Today" the draft rule and the fina l set of regulations issued 1Q-2Q10. Coneress (pe, 11), Near-term organic congressional action is unlikely and we think a catalyst/news event will be needed to make for-profit legislation a sufficiently imp01tant political priority. In the absence of better alternatives, there is growing pressure to accept another 90/10 Rule "fix" in the education reform bill (SAFRA). Neeotjated Rulemakine (pe. 11), We do not have good visibility heading into the draft rule next week, but based on what we saw during NegReg Session One, gainful employment (see page 13) and incentive compensation (see page 15) represent the greatest threats to the for-profit business model. A brief analysis of all 14 NegReg topics can be found on page 16. NEW RULES (back-end). Rather than singling out the for-profit industry for direct regulation, Congress appears more comfottable addressing some of the after effects (especially indebtedness) that come from high cost loans and current economic conditions. Coneyess (PI:· 17). Congress will consider several proposals to regulate private student loans in an etlort to help students who receive a poor ROI and are stuck with debt loads they can't repay (e.g. CFPA/Treasuty oversight, discharging in bankruptcy, private debt "swap," etc).
Height Analytics, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.heightanalytics.com

October 16, 2009, "For-Profit Ed: Amendment Proposes CFPA Oversight of For-Profit Loans" October 15, 2009, "For-Profit Ed: Hearing Recap- Congress Looks to DOE for Robust Rulemaking" September 24, 2009, "Education Finance: Congress to Examine Changes to Bankruptcy Law•

y T :

Washington , DC · November 23, 2009

EXISTING RULES

Cohort Default Rates - Macro Factors & 3-yr Calcu1ation Cou1d Pressure Enrol1ment Summary: Last year, Congress authorized a new cohort default rate (CDR) calculation that will
increase the default rates evaluated by the DOE. The Higher Education Opportunity Act (HEOA) of 2008 increased the CDR window from 2-yrs to 3-yrs. The legislation also changed the CDR thresholds used to determine Title IV eligibility (see Figure 1).

Figure 1. 2-yr & 3-yr CDR Comparison
2-YearCDR
Current law

Release Dates
Draft FY09 -2/2011 Final FY09 -9/2011

Penalties
CDR> 25% =provisional status CDR >25% for 3-years =loss of Title IV eligibility CDR >40"-1> =loss ofTitle IV eligibility

I FXQ9 j I FY!9J
FY09 1
3-YearCDR
HEOA changes effective 2012

l FY09 -j I FY10 -j.· FY11 ·j ·
FY09

Draft FY09-2/2012 Final FY09 -g/2012

J
The denominator is the number of borrowers who enter repayment within a cohort period

CDR> 30% =develop default prevention plan CDR> 30% for 3-years =loss of Title IV eligibility CDR >40% =loss of Title IV eligibility

._l_......,J
· -

The numerator is the number of borrowers from the denominator's cohort who default within a given year

Sources: Department of Education, Height Analytics LLC

To partially offset the new 3-year calculation, HEOA 2008 also increased the threshold default rate from 25% to 30%. If a school exceeds the 30% CDR in any given year, it must provide the DOE with a plan to reduce their CDR. If a school remains over 30% for three consecutive years, it may be deemed ineligible for Title IV programs. Separately, if a school exceeds 40% CDR in any given year, it is deemed ineligible for Title IV programs. The DOE calculates CDRs and issues sanctions based on unique DOE ID#'s that are issued to "main campuses" (some schools have several, others have only one).
~The

new 3-yr CDR could pressure enrollment growth. Schools with high CDRs will have to change their enrollment strategies to recruit a student body with a lower risk of default. We expect that ending open enrollment and moving up-market will have a negative impact on enrollment growth. In addition, the new 3-yr window will limit options commonly relied on by schools to manipulate their CDR data (see page 5). Regulators are focused on student outcomes; new CDRs could bring unwanted scrutiny. Given that Congress is intently focused on ensuring a good RO l for students, we think lawmakers will have a very negative opinion of these new CDR estimates (see page 5). During the October 14, 2009, hearing on for-profits, lawmakers were divided about whether higher default rates should be blamed on the ownership structure or whether they more accurately reflected the demographics and default risk of the student body (see Figure 2).

Height Analytics, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.height analytics.com

2

y T :

Washington , DC · November 23, 2009

~gu re2 . CDRsbyTyp e o_ ln ti t__i_ n__________________~ ~__f __s__ ut o_
12.0% 10.0%
8.6% 9.7%
11.0%

a: :; 4:!
0

"' n;

8.0% 6.0%

"' t::
Q

8 4.0%
2.0% 0.0% 2003 Cohort 2004 Cohort 2005 Cohort • Public 2006 Cohort For-Profit 2007 Cohort

.s:

• Private Non-Profit

Sources: Department of Education, Height Analytics LLC

Congressional scrutiny could increase, however, when new lifetime default data starts circulating around Capitol Hill (see Figure 3). DOE's budgetary lifetime default rate (based on the projected o/o of dollars entering default) shows lifetime defaults at 2-yr for-profit institutions >40% (these lifetime default rates will now be provided to Congress each December).

1 gure 3 Sta nd ard 2 -yr CDRs & Burge t L' fe f Ime De f;au ltRa t es d 1
Cohort Yr 2003 Cohort Yr 2004 CohortYr 2005 Cohort Yr2006 Cohort Yr 2007 Oefualt Rate Defualt Rate Defualt Rate Defualt.Rate Defualt Rate
Traditlona/2-Year Window CDR (based on BORROWERS) '

Private Non-Prof it Public For-Profit Public and Private Non· Profit (2-yr.) For-Profit (2 yr.)

2.8% 4.3% 7.3%

3.0"/o 4.7% 8.6%

2.4% 4.3% 8.2%

2.5% 4.7% 9.7%

3.7% 5.9% 11.0%

Budget lifetime Defualt Rate (based on DOLLARS) 2

25.8% 39.9%

26.5% 38.6%

26.8% 38.0%

26.7% 40.8%

N/A N/A

Sources: Department of Education, He1gllt Analyt1cs LLC

Traditional 2-yr window CDR - Under current law, the DOE evaluates each institutions' CDR by the number of FFELP and DLP borrow ers who enter repayment during a particular federal fiscal year and then default during that same year or the next fiscal year (a 2-yr window). 2 Budget lifetime default rate- Projected % in .!12.ll.aG oftl1e FFELP and DLP loans originated in a particular tisca l year and that may default during a projected 20-year life of the loan period.

1

New 3-yr CDR calculation will significa ntly increase default rates. Using FY04 data, the DOE projected the impact of moving from a traditional 2-y r CDR to a 3-yr and 4-y r window (see Figure 4). The DOE estimate shows that moving to a 3-yr window increases CDRs at for-profi t institutions by 94.2% and moving to a 4-yr window increases CDRs at for-profits by 170.9%.

Height Analytics, LLC
975 F Street NW. Suite 520 - Washington, DC 20004 - 202.629.0000 - www.heightanalytics.com

3

y T :

Washington , DC · November 23, 2009

. Jgure4. DOEEst1mates f<or 2-yr, 3 -yr, & 4-yr CDR W"ndows (using FY2004 data) I
Cohort Yr 2004 Default Rate
Overall 2-YearCDR 3-YearCDR 4-YearCDR

Private Non-Profit Public For-Profit
2- Year Schools

3.0"..6 4.7% 8.6%
2-YearCDR

4.7% 7.2% 16.7%
3-YearCDR

6.5% 9.5% 23.3%
4-YearCDR

Private Non-Profit Public For-Profit 4- Year Schools Private Non-Profit

7.4% 8.1% 9.9%
2-YearCDR

12.2% 12.9% 19.5%
3-YearCDR

16.2% 16.6% 27.2%
4-YearCDR

2.8% 4.5% 6.2% Public 3.5% 5.3% 7.1% For-Profit 7.3% 13.7% 19.2% .. Sources: Government Accountability Office (GAO), He1ght Ana/yt1cs LLC

This FY04 data suggests that the rate of increase in defaults slows overtime (94.2% increase from years 2 to 3, but an increase of only 39.5% from years 3 to 4). Additional cumulative default rate data found in the DOE's Office of Federal Student Aid (FSA) FY09 Annual Report (released November 16, 2009) seems to confirm the notion that the most pronounced increase in default rates is in the first several years of repayment Figure 5 shows the percentage increase in default rates slow as you move from the 2nd year of repayment to the 6th year.
" 1 gure 5% .::1 m Dfau ts bIY Length e 0
Enters Repayment
2()()() 2001 2002 2003 2004 2005 2006 1.4 1.5 1.5 1.2 1 1.1 1.2 1.1

0

fR epay ment (Cumul ative Li fetime DefauJts1 )
YrSto Yr6 0.9 1 1 0.9

Yr2to Yr3

Yr3to Yr4

Yr4to
'((5

1.8 2.1 1.9 1.8

Sources: DOE's Office of Federal Student A1d, He1ght Anu/ytiCs LLC
1

Cumulative lifetime default rates track loans not borrowers like the traditional CDR calculation (or the budgetary lifetime default rate, shown in Figure 3, which is based on dollars). Therefore, cumulative lifetime default rates are typically much lower than CDRs used to sanction schools by the DOE.

Although this seems to confirm that default rates slow over-time, the rate is still increasing. Outlook; Based on current FY07 CDR data, none of the for-profit institutions we examine are over the regulatory threshold of 25% CDR, however, our estimates for a 3-year CDR window (increasing each institution's FY07 CDR by 94.2%) shows that 25% of LINe's, 47% of COCO's, 50% of APOL's, and 60% of Kaplan's institutions could come under some form of DOE sanction (see Figures 6 & 7). Although the DOE sanctions schools by the institution, Figu re B shows the % of borrowers who attend vulnerable institutions. These institutions represent 32.2% of LINe's borrowers, 49.7% of COCO's borrowers, 16.9% of APOL's borrowers, and 37.2% of Kaplan's borrowers. This analysis provides a good indication of how important vulnerable institutions are to revenues and how easy/difficult it will be for companies to reduce averages by transferring high CDR programs to institutions with lower CDRs.
Height Analytlcs, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.heightanalytics.com
4

y T :

Washington , DC · November 23, 2009

Impact of Changing to a Cohort Default Rate (CDR) with a 3-Year Window
7 Data)

ure 7. Breakdown oflnstitutions & Their 3-yr CDRs

20

3·yr CDR•

j t0 +---------------------· · ------------1-------------------------'- -----------1

~ $ -~--~--------------------O L_je-_~ I [ 1_~._____-.,. .c.-JIWI ·~=ui
APEI APOL BPI CECO COCO CPLA DV ESI LINC LOPE STRA UTI WPO

I-(1) (l) (3)

().9.9%

• 10-19.9% e20.29.9% 3().39.9% •40-49.9%

(2)

(2)

(2)

(17)

(38)

(1)

(8)

(29)

(20)

(20)

Companies and the #of DOE Recognized Institutions

Sources: Department of Education, Height Analytics LLC

8. % of Borrowers at Institutions Over 30% and 40% Thresholds
.:Z0.29. 9'J6 CDR

30-39.996 CDR

Sources: Department of Education Height Analytics LLC

Height Analytics, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.heightanalytics.com

5

y T :

Washington , DC · November 23, 2009

Enro11me nt Threat- Default Ra tes Trend i ng Up & CDRs More Difficult to Manipulate Summary: Historically companies have been able to manipulate their CDRs with relative ease to avoid DOE sanctions. However, the longer 3-yr window will make it more difficult for these default rates to be altered. Furthermore, job loss (likely through lQlO), and the subsequent lag in the unemployment rate, can only serve to compound growing default rates.

Risk: In the past, schools have been able to push defaults beyond the 2-year window by helping students secure forbearance and deferments so that defaults would not be included in the official CDR calculation. It will be increasingly difficult for schools to manipulate their CDRs tmder the new calculation because schools will have to "max out" delays to push defaults beyond the 3-year window. In addition, Figure 8 shows that, given the large number of students affected, it could be very difficult for some schools to move a sufficient munber of programs with high CDRs to other institutions to reduce their overall average. Further, we expectCDRs to increase in coming years due to a combination of factors including: macro economic/unemployment outlook, aftereffects of a wave of loan consolidations, increased student borrowing, and decreased availability of forbearances.
Fi ~re

9. U.S. Unem 1oyment Rate
...... Unemployment Rate

12% E
11%

10%

9%

6%

4%
3%

2%

0 0 0 0 "' "' "' ..... "' 0"' 0"' "' "' 00 0 0 00 0 0 0 0 "::? ~ ~ ~ ...... ~ ~ ~ "::? "::? < < 0 s < < ~ a s "' ... .... .... "' ...
N

0 0

..

N

0 0

... ... ... ...
0 0

s

~

< % a ....

~

~

0 0

0 0

"::?

N

"'

s

~

0 0

00

< < "' ...

~

0 0

00

0 0

00

~

"::? ......
~

N

0 0

00

s

~

0 0 0 "' 0"' "' 0 0

< < .....

~

~

"'
"::? ...... 0
N

0 0

"'

....

Source: Bureau of Labor and Statistics

As shown in Figure 9, the recent upward trend in unemployment didn't start until 2008. Therefore, associated defaults are only partially accounted for in the 2-yr window of the FY07 CDRs shown in Figure 10.

Height Analytics, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.height analytics.com

6

y T :

Washington , DC · November 23, 2009

~gu re
25.00% 20.00%
15.00%

10. Historical CDRs
2 2.40%·

- -H-:-20_.%' " - - - _ _ . . . , . , . - - - - - - - - - - - - - - - - - - - - - - - - - - - - ~60• ~----------------------

-

10.00% 4.50% 5.00% 0.00%

--

---6~ 70%

1987 1988 1989 19 90 19911992 19 93 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Cohort Default Rate

Sources: Department ofEducation, Height Ana/ytics LLC

In his November 19, 2009 report titled, "Economic & Market Outlook: Good Enough, Considering," our Chief Strategist Steve East wrote that despite looking for nonfarm payrolls to turn positive in the first half of 2010 (likely around the end of 1Q10), he still thinks it will be a long time before the unemployment rate reaches a politically acceptable level. East notes that assuming current population growth trends and assuming a stable labor force participation rate, employment growth of 115,000 per month would merely keep the unemployment rate stable at 10.2%. Continued unemployment will likely pressure student loan default rates as we push further into FY08, FY09 & FY10 CDR data. Even if the DOE doesn't release the 3-yr CDR data in the coming weeks, the companies shown to be vulnerable in our analysis will have to work aggressively to reduce their default rates; thus pressuring enrollment. Also, draft FY08 CDR numbers (released in February 2010) are expected to show a significant uptick in default rates and several schools that we follow could face DOE sanction. COCO's 1Q10 earnings call (October 29, 2009) provided some evidence of the potential increase in next year's FY08 CDR data. Despite most of COCO's institutions showing FY07 CDRs in the mid- to upper-teens, the company signaled that internal estimates for FY08 showed 10-12 of their institutions crossing the 25% regulatory threshold.
Outlook: Given high default rates among dropouts, increasing completion rates is a good way for schools to improve their CDRs. In addition to working with current students, schools will likely increase pre-enrollment screening to boost graduation, job placement, and loan repayment rates. We expect that ending open enrollment and moving up-market will have a negative impact on enrollment growth (schools will be less inclined to attract "starts" who are at risk of dropping out just to inflate their enrollment numbers).

Schools may appeal sanctions based on mitigating circumstances (e.g. servicing a disproportionately low-income student body), however, it remains unclear if appeals will be a legitimate option for any of the for-profit schools we follow.

Height Analytics, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.height analytics.com

7

y T :

Washington , DC · November 23, 2009

90/10 Rule- Expected Upward Trend in 2010 Could Have Unappea ling Consequences

.s.wnm.arx.;. In order to receive Title IV funds, ~10% of revenues at for-profit schools must come from
private funding sources (non-federal student aid monies). Economic conditions and other factors have lead 90/10 ratios to trend upward, putting some schools in jeopardy of crossing the allowed threshold (see Figure 11). Under current law, if a school violates the 90/10 Rule for two consecutive years, it may be deemed ineligible to received Title IV funds.
R.Wi;. During a recent investor conference, APOL Co-Chief Executive Officer Chas Edelstein

highlighted the unintended consequences of the 90/10 Rule when he stated that if APOL comes in jeopardy of crossing the 90% threshold, "[the company] would definitely consider raising prices." The 90/10 Rule "fixes" described below should provide some relief for the most vulnerable schools. On the other hand, if Congress decides to regulate private student loans (see page 17), access to private sources of funding decrease and we would expect students to rely more on federal student aid; increasing the 90/10 risk for some schools.
Outlook: Last fall Congress passed a 90/10 Rule "fix" that excluded some federal loans from the

calculation and lawmakers are now considering a second "fix" that Rep. Robert Andrews (D-NJ) added to the House version ofSAFRA (the legislative outlook of this 2nd "fix" is discussed on page 11). Both "fixes" would provide some relief for the schools. However, 90/10 ratios are expected to trend up in 2010 and we think vulnerable schools (see Figure 11) will have to consider mitigation strategies including: raising tuition, promoting private loans, lending internally to students, partnering with employers and the armed services, andjor moving up-market to reduce reliance on Title IV funding. Most of these options could be expected to pressure enrollment and/or increase congressional scrutiny.

Height Analytics, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.height analytics.com

8

y T :

Washington , DC · November 23, 2009

Figure 11. 90/ 10 Per ce ntages by Ins titutio n
Company College/University Title IV Revenues• Dat e. of Report Notes/Trends The company reports that most of its institutions range from UNC Uncoln Education 69.7-89% 69.7-89%(except for Briar wood College which has a ratio of 12/31/08 45.5%). The ratios are not broken out by institution. The company estimates that the 2008 HEOA 00/10 Rule fix wi ll drop their Title IV generated revenues to 81.3%. The 6/30/09 ratios are not broken out by institution. 12/31/08 The company estimates that the 2008 HEOA 00/10 Rule fix could drop Title IV revenues 50 -300 bps. Company expects it APOL DV BPI CECO DV LOPE DV DV CPLA University of Phoenix Ross University University of the Rockies Career Education Apollo College Grand Canyon University Western Career College DeVry University (undergraduate) Capella University 86.0% 81.0% 80.8% 80.0% 79.0% 78.6% wil l continue to trend toward 90%in 2010and says it will 8/31/09 employ measures to avoid violating the rule. Company says that YOY increase (-5-10%) due to increased 6/30/09 Title IV loan limits. 8/11/09 The company reports thatthis ratio is up from 67.2% YOY. The 9/30/09 ratios are not broken out by institution. Company says that YOY increase ("'5-10'/o) due to increased 6/30/09 Title IV loan limits. 12/31/08 Company says that YOY increase ("'5-10'/o) due to increased 6/30/09 Title IV loan limits. Company says that YOY increase ("'5-10%) due to increased 6/30/09 Title IV loan limits. 12/31/08 Only a 1% increase YOY. The company expects an upward trend in its 00/10 ratio due to increased ntle IV limits/borrowing and the economic ESI UTI STRA ITITech Universal Technical Institute Strayer University 62-75% 70-74% 72.0'/o 12/31/08 downturn. 9/30/08 The ratios are not broken out by institution. The company reports that its 00/10 ratio is unchanged at 72% 12/31/08 from 2007 numbers. Company says that YOY increase ("'5-10'/o) due to increased

coco
BPI

Corinthian Colleges Ashford University

88.9% 86.8%

77.0'/o
75.0% 75.0'/o

DV Chamberlin College of Nursing 62.0'/o 6/30/09 Title IV loan limits. APOL Western International University 57.0'/o 8/31/09 APE I American Public University System 14.0% 12/31/08 TI1e ratios are not broken out by institution. * Note: The 00/10 Rule fix contained in HEOA 2008 is not represented in these numbers. These ratios could decrease once the DOE issues fina l rules for the calculation and companies apply the fix to their calcu lations.
Sources: Company Reports, He1ght Analyttcs LLC

Height Analy tics, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.height analytics.com

9

y T :

Washington , DC · November 23, 2009

Audits & Program Reviews - DOE is Improving Its Financial Analysis Capabilities
Summa~:

The DOE is finalizing a contract award for a financial analysis consultant to help improve its ability to evaluate financial statements from for-profit institutions (solicitation #: EDOFSA-09-R0046). The DOE's RFP, issued July 9, 2009, outlined a contract with five major areas of focus: (1) identify financial and other performance strengths, wealrnesses related to trends of reviewed companies; (2) identify potential accounting irregularities or fraud in the financial statements of the audited companies; (3) identify if any of the companies are in distress or approaching insolvency; (4) identify risks to these companies and provide a means to forecast financial distress and insolvency; and, (5) training for DOE staff. stated goal of the contract is to help the DOE "ensure that these [for-profit education] companies are able to continue to provide contracted services to students and remain current with financial obligations in a highly competitive environment that is under pressure to meet shareholder demands." During NegReg Session One, the DOE commented that one of the primary objectives of the new rules will be to provide its enforcement arm with more capacity to audit bad actors. In addition, during the October 14, 2009, House Education and Labor hearing on for-profits, the DOE Office of Inspector General promised to follow-up on the examples of fraud cited in the August 2009 GAO report

~The

Outlook: Given congressional interest, high-profile media reports, and growing pressure to maintain enrollment figures, it is reasonable to assume that DOE audits and program reviews will continue and possibly pick-up in frequency over the next 12 months.

Height Analytics, LLC
975 F Street NW. Suite 520 - Washington, DC 20004 - 202.629.0000 - www.height analytics.com

10

y T :

Washington , DC · November 23, 2009

NEW RULES (Front-end)

.s.wnm.arx.;. We have witnessed that regulators generally approach options to regulate the for-profit
sector differently based on whether the measure is preventative with up-front implications for the business model or if the proposal is reactionary and just treats the symptoms.
Risk: There is a wide variety of preventative rules that regulators could ultimately adopt, ranging

from disclosures aimed at preventing ill-informed enrollment decisions by students, to more robust restrictions on Title IV funding, marketing spend, incentive compensation, lending practices, and even tuition costs.

Outlook: Historically, the for-profit industry has been sheltered from onerous front-end regulation, at least in part, due to fears that restrictions would reduce access to higher education. However, support is growing in Congress and the DOE to develop a new front-end regulatory structure that ensures a better ROI for students and taxpayers. Regulators are focused on establishing new methods of evaluating ROI for students and taxpayers. See below for an analysis of potential front-end regulation from Congress and the DOE's NegReg.
Congress- For-Profit Action Unlikely Before 2Q10, 90/10 Rule "Fix" Gaining Support
Summary: The education committees have little bandwidth for anything other than healthcare this fall and, based on our conversations with Washington sources, direct regulation of the for-profit sector prior to the release of the NegReg's final rule does not appear likely.
~Even

heading into 2 H10, we think preventative congressional action will have to be driven by some external catalyst/news event (in our opinion, there is a greater likelihood that Congress will take a back-end approach to address indebtedness and private loans - see page 17).

QpJ:look; As mentioned above, Congress is increasingly focused on ensuring ROI (e.g. completion, job placement, indebtedness, post-graduation wages), but key offices remain undecided on how to improve the oversight of outcomes. There is widespread criticism that the 90/10 Rule is no longer a good measure of school quality, but there is also a noticeable lack of alternatives. Therefore, despite initial opposition, the Senate is under increasing pressure to accept a 90/10 Rule "fix" in the final version ofSAFRA in order minimize tuition hikes and other undesirable outcomes.
DOE's Negotiated Rulemaking - Draft Rule Will Kick-Start Negotiations
Summarv: The DOE's NegReg process will result in new regulations for the space. However, many of the 14 topics (see Figure 12) are apt to result in disclosure-based rules that may marginally increase the cost of compliance, but won't fundamentally change the business model or impair enrollment growth. That said, investors should not discount the threat because: the DOE wants to develop an outcome-based regulatory structure; the DOE recognizes that its rules are outdated; and, based on our experience in Washington, recent congressional interest may pressure the DOE to issue a fair but tough rule to help stave-off legislative action (witness the Fed's recent rule on overdraft fees after years of inaction, at least in part, due to the threat of legislation from congressional banking committees). See Figure 17 for a brief analysis of all14 NegReg topics.

Height Analytics, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.height analytics.com

11

y T :

Washington , DC · November 23, 2009

F' 1gure 12 Neg1Reg T OplCS
Negotiated Rulemaking Committee Topics
1. Satisfactory academic progress 2. Incentive compensation 3. Gainful employment in a recognized occupation 4. Ver·ification of infonnation included on a Free Application fm· Feder·al Student Aid (FAFSA) 5. State authorization as a component of institutional eligibility 6. Misrepresentation of information provided to students and lpr·ospective ~"tudents 7. Definition of a credit hour 8. Ability to benefit 9. Agreements between institutions of higher· education 10. Retaking coursework 11. Institutions required to take attendance for purposes of the Rerum of Title IV Funds r·equirements 12. Term-based module progr·ams 13. Definition of a high school diploma for purposes of establishing eligibility to receive Feder·al student aid 14. Timeliness and method of disbursement of Title IV funds

Sources: Department ofEducatiOn, Hetght Analyttcs LLC

Risk: The NegReg analysis below highlights the two topics we think present the greatest potential risk to the for-profit sector: gainful employment and incentive compensation.
Outlook: We are not far enough into the NegReg process to make a high conviction call whether the regulations present a genuine threat to margins and enrollment. Our thesis continues to develop based on the tmderstanding that the DOE strikes first by issuing a draft rule next week that will be consistent with its priorities (former negotiators have made it clear that the DOE will not be impartial during this process). However, Kaplan's Elaine Neely (the industry's lone representation) showed during NegReg Session One that the minority can take a lead role in these proceedings and we expect her to be a sizeable force for moderation.

F' 1gure 13 T' rme o fN egJRegan dC ongressronalAcf ron rme
Date

Event

Description
Consultant to improve DOE's evaluation of for-profit financial statements (EDOFSA-09-R-0046) Despite initia l opposition, the Senate is under increasing pressure to accept a 90/10 Rule "fix" in the final version of SAFRA The DOE hopes to release a draft rul e 1-week prior to Session Two of the NegReg. Drafl rule could be released section-by-section Negotiators debate and suggest changes to the DOE's draft rul e The DOE hopes to release an updated rule 1-week prior to Session Three of the NegReg Negotiators debate and try to reach unanimous consent on each or the 14 topics Negotiators must reach unanimous agreement or DOE can develop its own regulatory language- published in Federal Register Federal Register announcement will solicit public comments DOE considers publ ic comments and develops final rul e · published in Federal Register The Master Calendar prohibits implementing these rules before july 1, 2011

DOE 1-"inancial Analysis 4Q09 -lQlO (approx.) Contract Award Introduction of Senate 4Q09 (approx.) Education Reform Bill Week of Release of Draft NegReg Rule November 30, 2009 December 7 ·11, 2009 NeaRea Session Two Week of Release of Updated Draft january 18, 2009 NegRegRule january 25-29, 2010 NegReg Session Three 1Q10 (approx.) Proposed Rule

1Q10 - 2Q10 (approx. Public Comment Period November 1, 2010 Final Rule (or earlier) July 1, 2011 (or later) Final Rttle Effective Date

Source: Department of Educatton, Hetght Ana/yttcs LLC

TimelinejProcess. The DOE will release draft regulations (probably piecemeal) as soon as the week of November 30. Negotiators will then amend this rule during the December 7-11 and january 25-29 NegReg sessions. If the NegReg Committee fails to reach unanimous consent on the 14 topics, the DOE is authorized to rewrite anyfall of the rules (in practice they will likely accept any approved topics as-is). Although the process gives a structural advantage to the minority, the for-profits are incentivized to broker a deal wherever possible to avoid giving a blank check back to the DOE. Dissent could also come from consumer advocate and former-California Deputy Attorney General Margaret Reiter. Past NegReg negotiators have commented to us that attorneys are notoriously
Height Analytics, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.heightanalytics.com

12

y T :

Washington , DC · November 23, 2009

problematic in efforts to reach consensus. Based on what we witnessed during NegReg Session One and the controversial nature of these topics, it is difficult for us to see how the Committee will reach unanimous consent on several of the topics.

Gainful Employmen t- Top Priority for the DOE, but Logistical Nightmare
Summary: Under current statute, all for-profit programs and vocational offerings at not for-profit institutions must demonstrate that they provide training towards "gainful employment in a recognized occupation" in order to maintain their Title IV eligibility (see Figure 14). While schools have had to associate their programs with a Department of Labor database of "recognized occupations," the DOE has never defined "gainful employment"

Figure 14. Institutional Eligibility for Federal Student Aid
Public or Private Nonprofit Institution of Higher Education Privat e For-Profit Institution of Higher Education Postsecondary Vocational Public or Private Nonprofit Institution

Program offered: must Rrovide training for gainful emRIOl£ment in a Program offered: recognized occuRation, and must meet the criteria of at least one category below. ( 1) Associate, bachelor's, graduate, or professional degree, or (2) At least a two-year program that is acceptable for full credittoward a bachelor's degree, or
{3) At least a one-year training

{1) Provides at least a 15-week (instructional time) undergraduate program of 600 clock hours, 16 semester or trimester hours, or 24 quarter hours. May admit students without an associate degree or equivalent. {2) Provides at least a lD-week (instructional time) program of 300 clock hours, 8 semester or trimester hours, or 12 quarter hours. Must be a graduate/professional program, or must admit only students with an associate degree or equivalent.
{3) Provides at least a lD-week (instructional time) undergraduate

program that leads to a degree or certificate (or other recognized educational credential) and prepares students for gainful employment in a recognized occupation.

program of 3Cl0-599 clock hours. Must admit at least some students who do not have an associate degree or equivalent, and must meet specific qualitative standards. Note: These programs are eligible only for FFEL and Direct Loan participation. "Two-Year Rule" (applicable to proprietary and postsecondary vocational institutions)- Legally authorized to give (and continuously has been giving) the same postsecondary instruction for at least two consecutive years. 90/10 Rule (applicable to proprietary institutions)- Derives no more than

900/o of its revenues from FSA funds. Note: Cohort Default Rates (CDR), Satisfactory Academic Progress (SAP), and other DOE thresholds can affect a school 's ability to participate in FSA programs, but the above criteria determine the eligibility of an institution .
Sources: DOE's 2009-2010 Federal Student Aid Handbook, Height Analytics LLC

.R.Wi;, The DOE's NegReg Issue Paper on gainful employment (released prior to NegReg Session One),

proposed tying Title IV eligibility to a federal definition of gainful employment that included criteria such as: tuition, fee charges, indebtedness, and expected earnings. Such a federal definition of gainful employment could pose a significant threat to enrollment at schools regardless of ownership structw·e (current statute would apply the definition to for-profits and other vocational programs). The DOE may also propose moving to the latest Department of Labor database to evaluate
Height Analytics, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.heightanalytics.com

13

y T :

Washington , DC · November 23, 2009

"recognized occupation," but we do not think such a systems upgrade will have a material impact on reporting standards. Outlook: There is genuine interest at the DOE to tie Title IV eligibility to a federal definition of gainful employment, but given the implementation challenges, we think the easiest path forward for the DOE could be requiring gainful employment disclosw·es to help prospective students develop "reasonable outcome assumptions." Challenges to implementing a federal standard for gainful employment include: maintaining a system agile enough to account for economic downturns; ability to track post-graduation wages; flexibility to evaluate the wide variety of programs offerings; sensitivity to student privacy issues.

FigureR~~·f:~s:~~=t::::s in)Congress & the DOE
...._________,""-Source: HeiBh t Ana/ytics LLC

taxpayers

_

Outcomes

Gainful Employment ____;·...____---

)

The slide below will be used to explain the NegReg process during the DOE's Fall Conference in Nashville (December 2-4, 2009). The DOE is not expected to go in-depth about the definition of gainful employment, but we have been told that the DOE added the emphasis shown below because they consider gainful employment one of the most important topics before the NegReg Committee (see Figu re 16).

Figure 16. Slide to be Used During DOE's Fall Conference (Session #29, Slide #8)
l}~i
~eg

Reg Includes Consumer P1·otection
.:ng~g~J

ln.:cmi\ c ~o·ompcrNttion 1>:ud b~ irhntmim" to perwrt• or <:ntilics

m \tudl.lltt rc1.'t\lrtmg M trdtnt>-\iPil n~o'lh tti .. -,.

• Gainful employment in a recognized occupation
<;tate nutbortL:allon as ;r ~umpom:nt of nl>lttutumal dtgibihty ()elirlcllont)f ~rcdu hour -lo d~tenmriC J>n•grom di!!tbtlit~
p~rti.:ularlyin the OO>IIextnfu"anlin~ !'ell (or:m" \"en!i~31lO!l

'"'ttr;...

o( lllt(lnuati<m tnclu\lcd o)ll ;nrdcn! aldapphcllll('lb

I hgh ,dwol JipJ,,rmt-k-liniuon a_, ;1 conJili<'n •>f re.:dving F<'<l<'r:tl
:>n•tlcnt Aod

Source: DOE O ffice of Federal St udent Aid

We think there are two primary hurdles that the DOE will have to overcome if they are to offer a federal definition of gainful employment in the draft rule set to be released next week: 1) the DOE will have to manage to create a system to evaluate gainful employment in the three weeks since NegReg Session One; and, 2) the DOE will have to be able to adequately separate definitions of gainful employment for vocational and degree-based programs at for-profits (as shown in Figure 14, the statute would apply the definition to all for-profit programs).
Height Analytics, LLC
975 F Street NW. Suite 520 - Washington, DC 20004 - 202.629.0000 - www.height analytics.com

14

y T :

Washington , DC · November 23, 2009

Finally. if the DOE proposes a federal definition of gainful employment in the draft rule, we think a unified front of opposition could emerge among the schools because the standard would be applied to their vocational programs as well. Therefore, we would expect negotiators to push back and try to move the DOE's proposal toward the middle.
Incentive Compensation- Rules on Lead Generation Could Pressure Enrollment

Summar : In 2002, the DOE carved 12 safe harbors out of its general prohibition on incentive compensation for recruiting, enrollments, or other admissions activities. The NegReg Committee is now debating whether these safe harbors opened the door for abuse and whether some, or all, should be scaled back/eliminated.

In particular, two safe harbors protect incentive compensation for 3rd party non-recruiting activities (e.g. marketing and advertising) and internet recruiting (defined as people who, "provide information about the institution to prospective students, refer prospective students to the institution, or permit prospective students to apply for admission on-line." According to the DOE, incentive compensation payments to 3•d party lead aggregators are not restricted under current law.
Risk: The risk is that DOE will eliminatejscale back safe harbors in a manner that restricts schools'

ability to generate leads and recruit on-line (both important for continued enrollment growth). Scaling back the safe harbors that allow incentive compensation for Internet-based recruiting and 3•d party non-recruiting cou ld increase the cost of enrolling each student. Changing the safe harbor for Internet recruiting could harm one of the least expensive forms of recruiting. Scaling back or eliminating these safe harbors could also have a negative impact on partnerships with lead aggregators; driving up costs-per-lead (CPL) and, ultimately, per-enrollment These changes could become especially problematic if schools are forced to increase reliance on marketing spend to offset declines in organic starts due to reputation damage.
Outlook: While not for-profits and public institutions also rely on lead generation and voiced some

concerns about restricting all types of pay-per-click advertising, the DOE is clearly interested in updating the safe harbors to reflect the technological advances since 2002. Our sources suggest that internet recruiting practices may face increased restrictions, but that traditional schools will help protect several kinds of web-based advertising. Ultimately, the impact on internet recruiting and lead generation from the elimination/scale-back of safe harbors will be determined by two factors: (1) if the DOE scales back the safe harbors in a manner that threatens lead generation; and, (2) if public and not for-profit schools join the for-profit industry in opposing restrictions on web-based pay-per-click advertising during the NegReg sessions. We do not think the DOE is interested in eliminating all of the incentive compensation safe harbors, but there remains some risk that the NegReg could recommend changes that would make it increasingly difficu lt for schools to offset churn and maintain recent enrollment growth.
See below f ora brief analysis ofa/114 NegReg topics.

Height Analytics, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.height analytics.com

15

y T :

Washington , DC · November 23, 2009

ew - D ra ft RuI e Pr ev1ew 1gure 17 Neg1 eg Rev1 R
Issue
1. Definition of a High School Diploma 2. Abilit y-to-Benefit (ATB) Tests 3. Misrepresentation of Information to Students and Prospective Students

Analysis
Expect some greater oversight to help DOE reduce access to diploma mills. The controversial issue is whether the DOE orthe schools will have to shoulder the burden of authenticating high schools. Ironically, these regs may force schools to increase reliance on ability-to-benefit tests. DOE will increase oversight of how test publishers administer the ATB tests (more frequent re· certification requirements). but fears that the DOE would replace the ATB with a more onerous entrance exam appear unfounded. DOE is primarily focused on improving its auditing capabilities to help prevent false claims during recruitment. The DOE is not interested in capping marketing spend. The consumer and student advocates, however, argued that the DOE should require affirmative disclosures (e.g. cost, indebtedness, lifetime default rates, job placement, credit transfers, post-graduation wages, etc.) to help prospective students make "reasonable outcome assumptions." This idea came up again during the gainful employment discussion. Regulation of internet recruiting and lead generation could pressure enrollments. See above. States that do not provide oversight/authorization for proprietary schools increase the opportunity for fraud, but the panel was cautious about mandating state action without state representatives on the panel. There is genuine interest at the DOE to tie Title IV eligibility to a federal definition of gainful employment, but given the implementation challenges, we think the easiest path forward for the DOE could be requiring gainful employment disclosures to help prospective students develop " reasonable outcome assumptions." See above.

4. Incentive Comp. 5. State Authorization

6. Gai nful Employment

7. Definition of a Credit Hour

DOE is considering defining a credit hour for the purposes of distributing Title IV funds because it is concerned that the growing variety of products (e.g. on -line, non-tradiional, accelerated, etc.) has made it difficult to determine what Title IV funds are truly going towards. However, proposals to establish DOE benchmarks for accreditors was met with stiff resistance because accreditors are increasingly relying on outputs/learning outcomes rather than just inputs (i.e. time in a seat).

8. Agreements between Although oversight of these consortium agreements will require further discussion, there is Institutions general consensus that schools receiving Title IV funding should have to provide at least a portion 9. Verification of Information on Financial Aid Apps of the program if it is going to confer a degree bearing its name. Consistent with a broader Obama Administration objective, the DOE may propose simplifying the FAFSA process and synchronization with IRS data.

10. Satisfactory Academic Debate focused on the bizarre ru le that, at some schools, Title IV funds can only be used to retake Progress classes students have failed (you cannot use Title IV funds to retake a class in an effort to improve your grade). The DOE may use this issue to advance a broader administration goal of developing a new completion metric such as "semester-to-semester continuous enrollment" due to a recognition that traditional graduation rates don't account for non-traditional students (part-time, 11. RetakingCoursework transfers, or continuing education) and may not be appropriate for disadvantaged subpopulations. Most of the debate focused on how the DOE might harmonize standards between clock- hour and credit-hour programs. The DOE may establish a maximum length of absence before a student must retake coursework. 12. Return o f Title IV Funds: Term-Based Programs 13. Return ofTitl e IV Funds: Taking Attendance DOE has identified abuse where schools structure very short "module" courses in the beginning of the semester to increase the number of courses "completed" before a student withdraws. The DOE is expected to issue new rules to preserve the spirit and intent of Title IV return policies. Attendance requirements are left to states and accreditors so there is great inconsistency in return policies. Therefore, DOE is considering a federal attendance standard that would level playing

field. It was noteworthy to us that, despite recent investor concerns, attendance policies for on· line programs were not a focus of the panel. 14. Disbursements of Title DOE may establish new Title IV distribution requirements to make sure that schools aren't withholding the funds from their students (forcing many students to take private loans in the IV Funds interim). Schools countered that such practices aren't malicious, but are aimed to avoid unnecessary administrative and repayment burdens during high churn periods early in the semester.

Sources: Department of Educattoll, Hmg!Jt AnalytLC LLC S
Height Analy tlcs, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.height analytics.com

16

y T :

Washington , DC · November 23, 2009

NEW RULES (Back-end)
Rather than singling out the for-profit industry for direct regulation, there is more support from lawmakers to address some of the after effects (especially indebtedness) that come from high cost loans and current economic conditions. For example, during the otherwise balanced October 14, 2009, House Education and Labor Committee hearing on for-profit schools, Chairman George Miller (D-CA) launched into a harsh criticism of institutional loans: comparing for-profit lending to the subprime liar loan crisis; citing 2Q09 earnings calls during which companies showed their willingness to have losses >50% on institutional loans; and, recommending a watch list for schools with questionable lending practices. In addition, on November 17, 2009, the Government Accountability Office (GAO) sent a report to Congress examining the private student loan market and showed that for-profit students rely on private loans more than their private not for-profits and public institutions counterparts (42.%, 24.3%, and 8.7% respectively).

Congress- Support Growing to Provide Student Debt Relief
Summary: Congress is taking particular aim at private student loans and internal lending practices at for-profit schools. Lawmakers ar e considering bills that would: 1) make it easier to discharge private student loans in bankruptcy; 2) allow certain private student loans to be "swapped" for unsubsidized Stafford loans; and, 3) increasing oversight either through the CFPA or a new jointTreasury /Education ombudsman. Risk: Discharging private student loans could increase 90/10 risk. During a September 23, 2009, House Judiciary Committee hearing, Subcommittee Chairman Steve Cohen (D-TN) announced plans to introduce legislation that would make it easier for students to be released from private student loan debt during bankruptcy. Education and Labor Committee Chairman George Miller has announced support for the measure and Republicans signaled they could be open to a compromise that would lower the "undue hardship" standard that students must show in order to discharge loans. The biggest threat from such legislation, in our opinion, would come from further retreat in the private loan market. Less private loans could reduce the revenue for-profit institutions derive from non-Title IV funding sources, thus increasing the risk that institutions violate the 90/10 Rule. Dischargeability would also likely change the risk profile/ratings for private student loan portfolios. Debt swap could improve recovery rates for lenders and schools. On July 30, 2009, Sen. Sherrod Brown (D-OH) introduced a bill called the "Private Student Loan Debt Swap Act of 2009" (S.1541) that would allow certain students with private student loans to refinance into lower rate unsubsidized Stafford loans (the bill would focus eligibility retroactively to avoid schools andjor lenders gaming the system). If the legislation is evaluated or "scored" by the Congressional Budget Office (CBO) in time (supporters are hopeful that the bill will be scored cost-neutral because of Stafford interest payments), Sen. Brown will try to add the proposal to the Senate education reform bill (SAFRA) that is currently before the Senate. The unintended consequence of such legislation would be 100% repayment on swapped loans for lenders and schools (only loans in good-standing would be eligible). Several plans would expand private loan oversight in the financial regulatory reform package. During the House Financial Services Committee's consideration of the financial regulatory reform package, Rep. Maxine Waters (D-CA) tried to give the Consumer Financial Protection Agency (CFPA)
Height Analytics, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.height analytics.com

17

y T :

Washington , DC · November 23, 2009

explicit authority over internal loans made directly by for-profit schools to their students. Due to an intense lobbying effort, the measw·e was narrowly defeated 35 to 33. On November 5, 2009, Sen. Brown was joined by Sens. Mikulski (D-MD), Franken (D-MN), and Bennet (D-CO), in introducing, 'The Private Education Loan Ombudsman Act" (S. 2733). The bill would establish an office in the Treasury Department to resolve complaints, compile data, and make recommendations about private student loans to the DOE, Treasury, and Congress. Sen. Brown will likely try to add this proposal to the CFPA once the Senate turns its sites on financial regulatory reform later this year. Since the Banking Committee is just starting its consideration of the CFPA, it's too early to place high conviction on this proposal, but given that the ombudsman would have no rule malting or enforcement authority, we would consider its adoption relatively benign.

Height Analytics, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.height analytics.com

18

y T :

Washington , DC · November 23, 2009

The legislative and regulatory agendas are subject to change at the discretion of leadership. Unprecedented economic conditions could instigate unanticipated and/or sweeping shifts in policy. Predicting the futur e is a hazardous endeavor and economic I market forecasting is an imprecise science. Actual outcomes may differ substantially from our forecasts. The predictions and opinions expressed herein are subject to change at any time. ANALYST CERT1FICATION I, jarrel Price, certifY that (i) the recommendations and opinions expressed in this research report accurately reflect the research analyst's personal views about any and all of the subject securities or issuers discussed herein and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in the research report I, Andrew Parmentier, certifY that (i) the recommendations and opinions expressed in this research report accurately reflect the research analyst's personal views about any and all of the subject securities or issuers discussed herein and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the research analyst in the research report. DISCLAIMER This report is intended for the private use of Height Analytics' clients and prospective clients. Reproduction or editing by any means, in whole or in part, or any other unauthorized use, disclosure or redistribution of the contents without the express written pennission of Height Analytics is strictly prohibited. The information contained in this report has been obtained from sources which Height Analytics believes to be reliable; however, Height Analytics does not guarantee the accuracy, completeness or timeliness of any information or analysis contained in the report Opinions in this report constitute the personal judgment of the analysts and are subject to change without notice. The information in the report is not an offer to purchase or sell any security. Users assume the entire cost and risk of any investment decisions they choose to make. Height Analytics shall not be liable for any loss or damages resulting from the use of the information contained in the report, or for errors of transmission of information, or for any third party claims of any nature. Nothing herein shall constitute a waiver or limitation of any person's rights under relevant federal or state securities laws.

Height Analytics, LLC
975 F Street NW. Suite 520- Washington, DC 20004 - 202.629.0000 - www.height analytics.com

19

From:

To:

Finley Steve Vierling Chris Hale. Milton Kistler Keith Kolotos, John Kerrigan, Brian 10/29/2009 11 :25:26 AM "The Subprime Student Loan Racket" article

CC: Date:
Subject:

A Stephen Burd article from Washington Monthly http://www. washingtonmonthly.com/features/2009/09ll.burd.html

The Sub prime Student Loan Racket With help from Washington, the for-profit college industry is loading up millions of low-income students with debt they'll never pay off

At the age of forty-three, Martine Leveque decided it was time to start over. For several years, she had worked in the movie business, writing subtitles in Italian and French for English-language films, but her employer moved overseas. She then tried her hand at sales, but each time the economy dipped sales tumbled, along with her income, and as a single mother with a teenage son, she wanted a job that offered more security. She decided to pursue a career in nursing, a high-demand field where she could also do some good. While researching her options online, Leveque stumbled on the Web site for Everest College, part of the Corinthian Colleges chain, which pictured students in lab coats and scrubs probing a replica of a human heart and a string of glowing testimonials from graduates. "Now I know exactly where I am going. And now I'm making very good money," enthused a former student named Anjali B. The school, near Leveque's home in AJhambra, California, offered a Licensed Vocational Nursi ng program that would take her just one year to complete. When Leveque contacted the admissions office, she was told she would receive hands-on training from experienced nurses in state-of-the-art labs with the most modem equipment-including a recently purchased $30,000 mannequin that could simulate the birthing process. She also says recruiters told her that she would be able to do rotations at the University of California, Los Angeles Medical Center, one of the nation 's best hospitals. Leveque was intrigued, though she was initially put off by the $29,000 tuition. But the school's recruiters assured her there was nothing to be concerned about: Everest had an exceptional track record of helping students find employment-they claimed the typical Everest College LVN graduates landed a job paying between $28 and $35 an hour straight out of school. And the school would arrange a financial aid package to cover her costs.
In the end, Leveque decided to enroll. The day she came in to fill out her paperwork, she says, the recruiters rushed her

through the process and discouraged her from taking the forms home to look over. They told her that she would be taking out private loans in addition to federal loans that are traditionally used to pay educational expenses, but did not explain what the terms of those loans would be. "They just kept telling me that ' we're with you,' and that they would try to get me the maximum amount of federal loans allowed," she says. Only later did she learn that those private loans-which made up two-thirds of her "financial aid" package--carried double-digit interest rates and other onerous terms. To make matters worse, the program did not come close to delivering on the promises that had been made. The instructors had little recent medical experience. Instead of really teaching, she says, they usually just read textbooks aloud in class and sometimes offered students the answers on tests ahead of time. On the rare occasions when Leveque and her class were given time in the lab, she found that the equipment was broken down and shoddy-except for the expensive new mannequin, which no one knew how to use. Instead ofthe promised rotations at UCLA Medical Center, her clinical training consisted of helping pass out pills at a nursing home. (A spokeswoman for Corinthian Colleges denied many ofLeveque's allegations, insisting that the company does not condone cheating, that all L VN instructors at Everest College have "at least the minimum qualifications" set by the California Board ofVocational Nursing, and that UCLA Medical Center "is not and has never been" one of the school's official clinical training sites.) Since graduating in 2008, Leveque has been unable to find a nursing job, perhaps because she never teamed how to perform basic tasks such as giving shots. Instead, she works as an occasional home health care aid earning at the most $1,200 a month-not enough to pay her rent on the cramped apartment she shares with her sister and son or keep gas in her car, much less pay off her student loans. As a result, her loan balance has ballooned to $40,000, and she has no idea how she will ever pay it off ''My credit is ruined," Leveque says. "I made one mistake, and I will be paying for it for the rest ofmy life." Leveque's story is far from unique. Each year, more than two million Americans enroll in for-profit colleges, also known as proprietary schools, and their popularity has only grown since the financial crisis. While traditional four-year colleges are struggling with dwindling student bodies and budget gaps, proprietary schools are reporting record enrollments as the newly unemployed try to retool their skills so they can wade back into the job market. Some of the largest for-profit chains say their numbers have doubled over the last year. The students who are flocking to these schools are mostly poor and working class, and they rely heavily on student loans to cover tuition. According to a College Board analysis ofDepartrnent ofEducation data, 60 percent of bachelor's degree recipients at for-profit colleges graduate with $30,000 or more in student loans-one and a halftimes the percentage of those at traditional private colleges and three times more than those at four-year public colleges and universities. Similarly, those who earn two-year degrees from proprietary schools rack up nearly three times as much debt as those at community colleges, which serve a similar student population. Proprietary school students are also much more likely to take on private student loans, which, unlike their federal counterparts, are not guaranteed by the federal government, offer scant consumer protections, and tend to charge astronomical interest-in some cases as high as 20 percent. These figures are all the more troubling in light of these schools' spotty record of graduating students; the median graduation rate for proprietary schools is only 38 percent-by far the lowest rate in the higher education sector. What's more, even those students who make it through often can't find jobs. The reason for this is simple: while some proprietary schools offer a good education, many more are subpar at best. Thus large numbers of students leave with little to show for their effort other than a heap of debt. Not surprisingly, students at proprietary schools are far more likely to default on their loans than those at other colleges. The appalling treatment of disadvantaged students at the hands of proprietary schools ought to be a national scandal, especiaJJy at a time when America desperately needs more college graduates to stay competitive. But the problem has

barely registered in Washington. That's partly because the proprietary school lobby has enough clout among lawmakers on both sides of the aisle to keep the issue quiet. But Congress and the Obama administration have also had their hands full advancing other higher education reforms-in particular, legislation to kick private lenders out of the federally subsidized student loan program. This will create tens of billions of dollars in cost savings that will go toward larger Pell grants for low-income students. But that measure, vital as it is, affects only lending within the federal student loan program. It leaves untouched the private loans that are increasingly being foisted on students like Leveque and the loosely regulated schools that are profiting as a result. he for-profit higher education sector is no stranger to scandal. In the 1980s and early '90s, it came to light that hundreds of fly-by-night schools had been set up solely to reap profits from the federal student loan programs, in part by preying on poor people and minorities. The most unscrupulous of them enrolled people straight off the welfare lines, and got them to sign up for the maximum amount offederal student loans available-sometimes without their knowledge or consent. The rampant abuses caught the attention of the news media, sent shockwaves through Capitol Hill, and led to a yearlong, high-profile Senate investigation led by Senator Sam Nunn, the Georgia Democrat. The standing-room-only hearings had all the trappings of scandal, with trade school officials pleading the Fifth and a school owner, who had been convicted of defrauding the government, brought to the witness table in handcuffs and leg irons. Key lawmakers considered kicking all trade schools out of the federal student aid programs-a virtual death sentence given the institutions' heavy reliance on these funds. But Congress ultimately stepped back from the brink and instead strengthened the Department ofEducation's authority to weed out problem institutions. Under the new rules, for-profit colleges had to get at least 15 percent of their tuition money from sources other than federal loans and financial aid. Also, if more than a quarter of a school's students consistently defaulted on their loans within two years of graduating or dropping out, the school could be barred from participating in federal financial aid programs. The idea was to get rid of those schools that were set up solely to feed on federal funds and didn't provide the meaningful training students needed to get jobs and pay off their debt. As a result, during the 1990s more than 1,500 proprietary schools were either kicked out of the government's financial aid programs altogether or witl1drew voluntarily. In an effort to rein in abusive recruiting tactics, in 1992 Congress also barred schools from compensating recruiters based on the number of students they brought in. These changes shook up the industry. The old generation of trade schools gradually died off and were replaced by a new breed of for-profit colleges-mostly huge, publicly traded corporations. The largest, the Apollo Group, owns the University of Phoenix, which serves more than 400,000 students at some ninety campuses and 150 learning centers worldwide. Others include the Career Education Corporation, which serves 90,000 students at seventy-five campuses around the world, and Corinthian Colleges, which serves 69,000 students at more than 100 colleges in the United States and Canada. Not only did these companies promise that their schools would be more responsive to the needs of students and employers than the previous generation, they also said they would be more accountable to the public because, as publicly traded companies, they were heavily regulated. "We've seen a fire across the prairie, and that fire has had a purifying effect," Orner Waddles, then the president of the Career College Association, told the Chronicle ofHigher Education in 1997. "As our sector has weathered the storms of recent years, a stronger group of schools is emerging to carry, at a high level of credibility, the mantle oftraining and career development."
In reality, the new breed of schools had quite a bit in common with their predecessors; in some cases, they even operated out of the same buildings and employed the same personnel. What's more, rather than making them more accountable, the fact that they were publicly traded created a powerful incentive for them to game the system. After all, to keep their stock prices up and investors happy, the schools had to show that they were constantly expanding, which

meant there was intense pressure to get students in the door and signed up for classes and financial aid. With so much at stake, these schools quickly found ways to skirt the new rules. To get around the caps on student loan default rates, for instance, many of them began hiring agencies to help former students get forbearances or offering lines of credit so alums could make their student-loan payments-but only during the initial two-year window, when defaults were counted against the school by the Department of Education. After that, students were left to wrestle with the debt on their own. As for the rule requiring schools to get at least 15 percent of tuition from nongovernment sources, it had some unintended consequences. Rather than, say, enrolling people who could afford to pay some tuition out of pocket, many schools started pushing students to take out private student loans. Previously, this kind ofloan had gone exclusively to graduate and professional students pursuing careers in high-paying fields like law and medicine. The financially needy students who attend for-profit institutions couldn't qualify for them because of their less-than-stellar credit records, their lousy graduation rates, and their spotty record of finding work in their field. But this began to change around 2000. At the time, college tuition was skyrocketing-a trend that has only accelerated-and federal grants and loans weren't keeping pace. To ftll the gap, financial aid officers started cutting deals with lenders to bring in private loan money. In the case of proprietary colleges, most of the large publicly traded chains forged arrangements with Sallie Mae, the nation's largest student loan company. (Once a quasi-government agency like Fannie Mae, it became entirely private in 2004.) In exchange for pots of private student loan funds that they could dole out at will-meaning without regard for students' ability to repay the debt-the schools gave Sallie Mae the right to be the exclusive provider of federal student loans on their campuses. Lenders vie fiercely for this privilege because federal loans are guaranteed by the government, meaning the Treasury pays back nearly all the money if the borrower defaults. Thus lenders get to pocket generous fees and interest and bear almost no risk. Sallie Mae clearly understood that these private loans were going mostly to sub prime borrowers who might not be able to pay them back; in 2007, Senate investigators uncovered internal company documents showing that executives expected a staggering 70 percent of its private student loans at one for-profit school to end in default Investigators concluded that Sallie Mae viewed these loans as a "marketing expense"-a token sum to be paid in exchange for the chance to gorge on federal funds. From the schools' perspective, it didn't much matter whether students would be able to pay off their debt any more than it mattered if they stuck with the program or graduated with the skills they needed. As long as students were enrolled long enough to be considered a "start," meaning that they attended classes for a week or two, the schools got to keep some of the money, and they got to include students in their official enrollment tally, which gave Wall Street the impression they were expanding. Having a cache of private loan funds to dole out also allowed the schools to clinch the deal right away-no need to grind through a stack of forms or wait for a third party to approve the loan application. Thus recruiters could lock students in before they experienced buyer's remorse. At best, the George W. Bush administration and the Republican-led Congress turned a blind eye to these schemes. At worst, they made it easier for the schools to carry them out. In his first term, Bush packed the Department of Education with allies of the proprietary colleges. Before becoming the assistant secretary for post-secondary education, for example, Sally Stroup worked as a lobbyist for the University of Phoenix. Under her leadership, the agency took the teeth out of regulations that were designed to rein in abuses of the 1990s, including the incentive-compensation ban for recruiters. Not surprisingly, many schools began resorting to hard-sell tactics to bring students in. In 2004, the Department of Education found that corporate bosses at the University ofPhoenix routinely pressured and intimidated their recruiters to put "asses in the classes." At some of the campuses, enrollment counselors who didn't meet their targets were sent to the "Red Room," a glassed-in space where they worked the phones under intense management supervision. What's more, in recent years dozens of former students have filed suits alleging they were misled about classes and programs proprietary

schools offered, as well as about their prospects for graduating and getting jobs in their fields of study. While the seriousness of the abuses vary, in some cases they amount to outright fraud, with recruiters pressuring students to sign up for classes that don't actually exist or to enroll in programs where the instructors lack even basic expertise in the field. The push to get students in the door also created more pressure to steer people into private loans. The frenzy only intensified after Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005. This made it almost impossible for those who took out private student loans to discharge them in bankruptcy and, not surprisingly, turned the private student loan market into a much more appealing target for lenders. sa result of these changes, private loan borrowing has skyrocketed. In the last decade alone, it has grown an astounding 674 percent at colleges overall, when adjusted for inflation. The growth has been most dramatic at for-profit colleges, where the percentage of students taking out private loans jumped from 16 percent to 43 percent between 2004 and 2008, according to Department of Education data. The spike in private loan borrowing is dismal news for students. Unlike traditional student loans, which have low, fixed interest rates, private educational loans generally have uncapped variable rates that can climb as high as 20 percent-on par with the most predatory credit cards. Private loans also come with much less flexible repayment options. BotTowers can't defer payments if they suffer economic hardship, for instance, and the size of their payment is not tied to income, as it sometimes is in the federal program. Private loans also lack basic consumer protections available to federal loan borrowers. With a traditional federal student loan, for example, if a borrower dies or becomes permanently disabled, the debt is forgiven, meaning they or their kin are no longer responsible for paying it off. The same goes if the school unexpectedly shuts down before a student graduates. But none of this is true of private loans. AJso, because it is so difficult to discharge private student loans in bankruptcy, when students take them out to attend schools that provide no meaningful training or skills they can find themselves trapped in a spiral of debt that they have little prospect of escaping. Theresa Sweet, a thirty-three-year-old California resident, took out about $100,000 in private loans between 2003 and 2006 to study photography at the Brooks Institute in Santa Barbara, which is owned by the Career Education Corporation. At the time, she says the Brooks recruiters-who have frequently been accused of misleading students-told her that graduates of their photography program typically made at least $60,000 straight out of school. In fact, since graduating three years ago she has been unable to find paid work in her field, and, while she has managed to get forbearances on her student loans, the interest has continued to stack up. She now owes more than $200,000. Looking back, Sweet admits that she was naive in ttusting the recruiters. But she can't help but wonder how she ever qualified for the loans in the first place, especially given that when she applied she was unemployed. "If it were me, I never would have loaned me the money," she says. "Who in their right mind would lend $100,000 in unsecured debt to an art major?" Like Sweet, graduates of proprietary coll eges often struggle to find jobs in their fields. This is because, in many cases, they don't get the skills they need to compete. After all, it's far easier and less expensive for schools to boost enrollment numbers through aggressive advertising and recruitment than to expend the resources to build quality schools. Corinthian and Career Education, which own the schools Leveque and Sweet attended, have faced the most damning allegations when it comes to educational quality and steering students into shady private loans. Other chains have better reputations on these fronts, among them the University ofPhoenix and DeVry University. But even they have a spotty record of graduating students. or awhil e it looked like the meltdown on Wall Street, and the ensuing credit crunch, would put an end to predatory lending at for-profit schools. In 2008 Sallie Mae quit offering sub prime private loans to students at for-profit colleges because the astronomical default rates had helped throw its stock price into a nosedive. But the proprietary college industry has found a way around this roadblock, namely making private loans directly to students, much the way used-

car lots loan money to buyers rather than going through a third party. For example, in a recent earnings call with investors and analysts, Corinthian said that it plans to dole out roughly $130 million in "institutional loans" this year, while Career Education and ITT Educational Services Inc., another for-profit chain, have reported that they expect to lend a combined total of$125 million. These loans could prove to be even more toxic than the private ones offered by Sallie Mae. This is because some schools are packaging them as ordinary consumer credit, which has even fewer built-in safeguards than private student loans, especially when it comes to disclosure requirements. This makes it easier for schools to mislead borrowers about the terms of the debt they are taking on. In one class-action lawsuit filed earlier this year, former students of Coloradobased Westwood Colleges allege they were duped into borrowing institutional loans at a staggering 18 percent interest. According to the complaint, the college's corporate bosses advise their admissions officers to sign students up for these loans without revealing how costly they are going to be. Thus borrowers don't learn about the steep interest until after they leave school and receive their first loan bill. Worse, the lawsuit alleges that some students have been signed up for loans without their permission. lillian L. Estes, a Florida lawyer who represents the plaintiffs in the case, says she has been approached by two dozen former Westwood admissions representatives who admit that they deliberately avoided telling students about the terms of these loans. "They knew they' d never be able to enroll these students if they were up front with them," Estes explains. (In their written response to the lawsuit, Westwood College officials offered a "categorical rejection" of the allegations brought by Estes and her clients.) Significantly, many proprietary schools are pushing institutional loans even when they know students won't be able to pay them off; Career Education and Corinthian Colleges only expect to recover roughly half ofthe money they distribute through their institutional lending programs, according to communications with shareholders. Why would they lend knowing they won't get the money back? Because any loss is more than offset by federal loans and financial aid dollars, which, despite the surge in private educational lending, still fund the bulk of tuition at proprietary schools. Say a student gets a $60,000 federal financial aid package and supplements it with a $20,000 institutional loan. The school comes out $40,000 ahead even if the borrower ultimately defaults. Plus, getting students in the door pumps up enrollment numbers, which makes for happy shareholders. Meanwhile, as the credit crunch eases, traditional lenders may well go back to making private loans to proprietary school students, especially given the changes afoot in the industry. President Obama aims to get rid of the program that allows lending companies to collect lucrative fees and interest for serving as the middleman on federal student loans and instead have the government offer the loans directly. Once forced out of the federal student Joan program, traditional lenders will have a powerful incentive to seek profits by wading deeper into the private student loan market, and forprofit schools, with their exponential growth, could once again be an appealing target. The good news is that the Obama administration seems more inclined than its predecessor to stand up against the abuses of proprietary schools. In May, the Department of Education revealed that it was considering reversing changes the Bush administration made to weaken the incentive-compensation ban. It is also thinking about adding teeth to the rules requiting proprietary colleges to show that graduates are finding "gainful employment" in their field and cracking down on schools that willfully mislead prospective students. "Our overall goal at the Department of Education in post-secondary education is to make sure that students ... have the information they need to make good choices," Robert Shireman, the deputy undersecretary of education, told financial analysts and investors during a conference call earlier this year. These proposals are a good start, but more steps will be needed. For starters, the Department ofEducation should publish the data that it already collects on the number of students at each school who default over the lifetime of their loans. At the moment, it only releases the number who default during the first two years after leaving college, which is of limited value, not only because this is such a short time span, but also because the rates can be easily manipulated by

schools. Just publishing lifetime default rates would give prospective students a clearer picture of the risks of enrolling in a particular school. But the impact would be far greater if Congress used this data, along with graduation rates, to weed out abusive institutions; ideally, any school that failed to meet a certain threshold should be kicked out of the federal financial aid programs. At the same time, Congress should require companies that offer private student loans to give the same kinds offlexible repayment options and consumer protections as are available through the federal student loan program, including allowing borrowers to repay their loans as a percentage of their income. Lawmakers also need to revisit changes Congress made to the bankruptcy code in 2005, which make it exceeding difficult for financially distressed borrowers, including those with private student loans, to discharge their debt in bankruptcy. These changes would go a long way toward helping people like Martine Leveque escape their mountains of debt and ensuring that future students don't wind up in the same situation. It would also guarantee that taxpayers don't go on bankrolling giant companies that profit by exploiting those who are struggling to build better lives.

From:

To:

Finley Steve Vierling Chris Hale. Milton Kistler Keith Kolotos, John Kerrigan, Brian 10/29/2009 11 :25:26 AM "The Subprime Student Loan Racket" article

CC: Date:
Subject:

A Stephen Burd article from Washington Monthly http://www. washingtonmonthly.com/features/2009/09ll.burd.html

The Sub prime Student Loan Racket With help from Washington, the for-profit college industry is loading up millions of low-income students with debt they'll never pay off

At the age of forty-three, Martine Leveque decided it was time to start over. For several years, she had worked in the movie business, writing subtitles in Italian and French for English-language films, but her employer moved overseas. She then tried her hand at sales, but each time the economy dipped sales tumbled, along with her income, and as a single mother with a teenage son, she wanted a job that offered more security. She decided to pursue a career in nursing, a high-demand field where she could also do some good. While researching her options online, Leveque stumbled on the Web site for Everest College, part of the Corinthian Colleges chain, which pictured students in lab coats and scrubs probing a replica of a human heart and a string of glowing testimonials from graduates. "Now I know exactly where I am going. And now I'm making very good money," enthused a former student named Anjali B. The school, near Leveque's home in AJhambra, California, offered a Licensed Vocational Nursi ng program that would take her just one year to complete. When Leveque contacted the admissions office, she was told she would receive hands-on training from experienced nurses in state-of-the-art labs with the most modem equipment-including a recently purchased $30,000 mannequin that could simulate the birthing process. She also says recruiters told her that she would be able to do rotations at the University of California, Los Angeles Medical Center, one of the nation 's best hospitals. Leveque was intrigued, though she was initially put off by the $29,000 tuition. But the school's recruiters assured her there was nothing to be concerned about: Everest had an exceptional track record of helping students find employment-they claimed the typical Everest College LVN graduates landed a job paying between $28 and $35 an hour straight out of school. And the school would arrange a financial aid package to cover her costs.
In the end, Leveque decided to enroll. The day she came in to fill out her paperwork, she says, the recruiters rushed her

through the process and discouraged her from taking the forms home to look over. They told her that she would be taking out private loans in addition to federal loans that are traditionally used to pay educational expenses, but did not explain what the terms of those loans would be. "They just kept telling me that ' we're with you,' and that they would try to get me the maximum amount of federal loans allowed," she says. Only later did she learn that those private loans-which made up two-thirds of her "financial aid" package--carried double-digit interest rates and other onerous terms. To make matters worse, the program did not come close to delivering on the promises that had been made. The instructors had little recent medical experience. Instead of really teaching, she says, they usually just read textbooks aloud in class and sometimes offered students the answers on tests ahead of time. On the rare occasions when Leveque and her class were given time in the lab, she found that the equipment was broken down and shoddy-except for the expensive new mannequin, which no one knew how to use. Instead ofthe promised rotations at UCLA Medical Center, her clinical training consisted of helping pass out pills at a nursing home. (A spokeswoman for Corinthian Colleges denied many ofLeveque's allegations, insisting that the company does not condone cheating, that all L VN instructors at Everest College have "at least the minimum qualifications" set by the California Board ofVocational Nursing, and that UCLA Medical Center "is not and has never been" one of the school's official clinical training sites.) Since graduating in 2008, Leveque has been unable to find a nursing job, perhaps because she never teamed how to perform basic tasks such as giving shots. Instead, she works as an occasional home health care aid earning at the most $1,200 a month-not enough to pay her rent on the cramped apartment she shares with her sister and son or keep gas in her car, much less pay off her student loans. As a result, her loan balance has ballooned to $40,000, and she has no idea how she will ever pay it off ''My credit is ruined," Leveque says. "I made one mistake, and I will be paying for it for the rest ofmy life." Leveque's story is far from unique. Each year, more than two million Americans enroll in for-profit colleges, also known as proprietary schools, and their popularity has only grown since the financial crisis. While traditional four-year colleges are struggling with dwindling student bodies and budget gaps, proprietary schools are reporting record enrollments as the newly unemployed try to retool their skills so they can wade back into the job market. Some of the largest for-profit chains say their numbers have doubled over the last year. The students who are flocking to these schools are mostly poor and working class, and they rely heavily on student loans to cover tuition. According to a College Board analysis ofDepartrnent ofEducation data, 60 percent of bachelor's degree recipients at for-profit colleges graduate with $30,000 or more in student loans-one and a halftimes the percentage of those at traditional private colleges and three times more than those at four-year public colleges and universities. Similarly, those who earn two-year degrees from proprietary schools rack up nearly three times as much debt as those at community colleges, which serve a similar student population. Proprietary school students are also much more likely to take on private student loans, which, unlike their federal counterparts, are not guaranteed by the federal government, offer scant consumer protections, and tend to charge astronomical interest-in some cases as high as 20 percent. These figures are all the more troubling in light of these schools' spotty record of graduating students; the median graduation rate for proprietary schools is only 38 percent-by far the lowest rate in the higher education sector. What's more, even those students who make it through often can't find jobs. The reason for this is simple: while some proprietary schools offer a good education, many more are subpar at best. Thus large numbers of students leave with little to show for their effort other than a heap of debt. Not surprisingly, students at proprietary schools are far more likely to default on their loans than those at other colleges. The appalling treatment of disadvantaged students at the hands of proprietary schools ought to be a national scandal, especiaJJy at a time when America desperately needs more college graduates to stay competitive. But the problem has

barely registered in Washington. That's partly because the proprietary school lobby has enough clout among lawmakers on both sides of the aisle to keep the issue quiet. But Congress and the Obama administration have also had their hands full advancing other higher education reforms-in particular, legislation to kick private lenders out of the federally subsidized student loan program. This will create tens of billions of dollars in cost savings that will go toward larger Pell grants for low-income students. But that measure, vital as it is, affects only lending within the federal student loan program. It leaves untouched the private loans that are increasingly being foisted on students like Leveque and the loosely regulated schools that are profiting as a result. he for-profit higher education sector is no stranger to scandal. In the 1980s and early '90s, it came to light that hundreds of fly-by-night schools had been set up solely to reap profits from the federal student loan programs, in part by preying on poor people and minorities. The most unscrupulous of them enrolled people straight off the welfare lines, and got them to sign up for the maximum amount offederal student loans available-sometimes without their knowledge or consent. The rampant abuses caught the attention of the news media, sent shockwaves through Capitol Hill, and led to a yearlong, high-profile Senate investigation led by Senator Sam Nunn, the Georgia Democrat. The standing-room-only hearings had all the trappings of scandal, with trade school officials pleading the Fifth and a school owner, who had been convicted of defrauding the government, brought to the witness table in handcuffs and leg irons. Key lawmakers considered kicking all trade schools out of the federal student aid programs-a virtual death sentence given the institutions' heavy reliance on these funds. But Congress ultimately stepped back from the brink and instead strengthened the Department ofEducation's authority to weed out problem institutions. Under the new rules, for-profit colleges had to get at least 15 percent of their tuition money from sources other than federal loans and financial aid. Also, if more than a quarter of a school's students consistently defaulted on their loans within two years of graduating or dropping out, the school could be barred from participating in federal financial aid programs. The idea was to get rid of those schools that were set up solely to feed on federal funds and didn't provide the meaningful training students needed to get jobs and pay off their debt. As a result, during the 1990s more than 1,500 proprietary schools were either kicked out of the government's financial aid programs altogether or witl1drew voluntarily. In an effort to rein in abusive recruiting tactics, in 1992 Congress also barred schools from compensating recruiters based on the number of students they brought in. These changes shook up the industry. The old generation of trade schools gradually died off and were replaced by a new breed of for-profit colleges-mostly huge, publicly traded corporations. The largest, the Apollo Group, owns the University of Phoenix, which serves more than 400,000 students at some ninety campuses and 150 learning centers worldwide. Others include the Career Education Corporation, which serves 90,000 students at seventy-five campuses around the world, and Corinthian Colleges, which serves 69,000 students at more than 100 colleges in the United States and Canada. Not only did these companies promise that their schools would be more responsive to the needs of students and employers than the previous generation, they also said they would be more accountable to the public because, as publicly traded companies, they were heavily regulated. "We've seen a fire across the prairie, and that fire has had a purifying effect," Orner Waddles, then the president of the Career College Association, told the Chronicle ofHigher Education in 1997. "As our sector has weathered the storms of recent years, a stronger group of schools is emerging to carry, at a high level of credibility, the mantle oftraining and career development."
In reality, the new breed of schools had quite a bit in common with their predecessors; in some cases, they even operated out of the same buildings and employed the same personnel. What's more, rather than making them more accountable, the fact that they were publicly traded created a powerful incentive for them to game the system. After all, to keep their stock prices up and investors happy, the schools had to show that they were constantly expanding, which

meant there was intense pressure to get students in the door and signed up for classes and financial aid. With so much at stake, these schools quickly found ways to skirt the new rules. To get around the caps on student loan default rates, for instance, many of them began hiring agencies to help former students get forbearances or offering lines of credit so alums could make their student-loan payments-but only during the initial two-year window, when defaults were counted against the school by the Department of Education. After that, students were left to wrestle with the debt on their own. As for the rule requiring schools to get at least 15 percent of tuition from nongovernment sources, it had some unintended consequences. Rather than, say, enrolling people who could afford to pay some tuition out of pocket, many schools started pushing students to take out private student loans. Previously, this kind ofloan had gone exclusively to graduate and professional students pursuing careers in high-paying fields like law and medicine. The financially needy students who attend for-profit institutions couldn't qualify for them because of their less-than-stellar credit records, their lousy graduation rates, and their spotty record of finding work in their field. But this began to change around 2000. At the time, college tuition was skyrocketing-a trend that has only accelerated-and federal grants and loans weren't keeping pace. To ftll the gap, financial aid officers started cutting deals with lenders to bring in private loan money. In the case of proprietary colleges, most of the large publicly traded chains forged arrangements with Sallie Mae, the nation's largest student loan company. (Once a quasi-government agency like Fannie Mae, it became entirely private in 2004.) In exchange for pots of private student loan funds that they could dole out at will-meaning without regard for students' ability to repay the debt-the schools gave Sallie Mae the right to be the exclusive provider of federal student loans on their campuses. Lenders vie fiercely for this privilege because federal loans are guaranteed by the government, meaning the Treasury pays back nearly all the money if the borrower defaults. Thus lenders get to pocket generous fees and interest and bear almost no risk. Sallie Mae clearly understood that these private loans were going mostly to sub prime borrowers who might not be able to pay them back; in 2007, Senate investigators uncovered internal company documents showing that executives expected a staggering 70 percent of its private student loans at one for-profit school to end in default Investigators concluded that Sallie Mae viewed these loans as a "marketing expense"-a token sum to be paid in exchange for the chance to gorge on federal funds. From the schools' perspective, it didn't much matter whether students would be able to pay off their debt any more than it mattered if they stuck with the program or graduated with the skills they needed. As long as students were enrolled long enough to be considered a "start," meaning that they attended classes for a week or two, the schools got to keep some of the money, and they got to include students in their official enrollment tally, which gave Wall Street the impression they were expanding. Having a cache of private loan funds to dole out also allowed the schools to clinch the deal right away-no need to grind through a stack of forms or wait for a third party to approve the loan application. Thus recruiters could lock students in before they experienced buyer's remorse. At best, the George W. Bush administration and the Republican-led Congress turned a blind eye to these schemes. At worst, they made it easier for the schools to carry them out. In his first term, Bush packed the Department of Education with allies of the proprietary colleges. Before becoming the assistant secretary for post-secondary education, for example, Sally Stroup worked as a lobbyist for the University of Phoenix. Under her leadership, the agency took the teeth out of regulations that were designed to rein in abuses of the 1990s, including the incentive-compensation ban for recruiters. Not surprisingly, many schools began resorting to hard-sell tactics to bring students in. In 2004, the Department of Education found that corporate bosses at the University ofPhoenix routinely pressured and intimidated their recruiters to put "asses in the classes." At some of the campuses, enrollment counselors who didn't meet their targets were sent to the "Red Room," a glassed-in space where they worked the phones under intense management supervision. What's more, in recent years dozens of former students have filed suits alleging they were misled about classes and programs proprietary

schools offered, as well as about their prospects for graduating and getting jobs in their fields of study. While the seriousness of the abuses vary, in some cases they amount to outright fraud, with recruiters pressuring students to sign up for classes that don't actually exist or to enroll in programs where the instructors lack even basic expertise in the field. The push to get students in the door also created more pressure to steer people into private loans. The frenzy only intensified after Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005. This made it almost impossible for those who took out private student loans to discharge them in bankruptcy and, not surprisingly, turned the private student loan market into a much more appealing target for lenders. sa result of these changes, private loan borrowing has skyrocketed. In the last decade alone, it has grown an astounding 674 percent at colleges overall, when adjusted for inflation. The growth has been most dramatic at for-profit colleges, where the percentage of students taking out private loans jumped from 16 percent to 43 percent between 2004 and 2008, according to Department of Education data. The spike in private loan borrowing is dismal news for students. Unlike traditional student loans, which have low, fixed interest rates, private educational loans generally have uncapped variable rates that can climb as high as 20 percent-on par with the most predatory credit cards. Private loans also come with much less flexible repayment options. BotTowers can't defer payments if they suffer economic hardship, for instance, and the size of their payment is not tied to income, as it sometimes is in the federal program. Private loans also lack basic consumer protections available to federal loan borrowers. With a traditional federal student loan, for example, if a borrower dies or becomes permanently disabled, the debt is forgiven, meaning they or their kin are no longer responsible for paying it off. The same goes if the school unexpectedly shuts down before a student graduates. But none of this is true of private loans. AJso, because it is so difficult to discharge private student loans in bankruptcy, when students take them out to attend schools that provide no meaningful training or skills they can find themselves trapped in a spiral of debt that they have little prospect of escaping. Theresa Sweet, a thirty-three-year-old California resident, took out about $100,000 in private loans between 2003 and 2006 to study photography at the Brooks Institute in Santa Barbara, which is owned by the Career Education Corporation. At the time, she says the Brooks recruiters-who have frequently been accused of misleading students-told her that graduates of their photography program typically made at least $60,000 straight out of school. In fact, since graduating three years ago she has been unable to find paid work in her field, and, while she has managed to get forbearances on her student loans, the interest has continued to stack up. She now owes more than $200,000. Looking back, Sweet admits that she was naive in ttusting the recruiters. But she can't help but wonder how she ever qualified for the loans in the first place, especially given that when she applied she was unemployed. "If it were me, I never would have loaned me the money," she says. "Who in their right mind would lend $100,000 in unsecured debt to an art major?" Like Sweet, graduates of proprietary coll eges often struggle to find jobs in their fields. This is because, in many cases, they don't get the skills they need to compete. After all, it's far easier and less expensive for schools to boost enrollment numbers through aggressive advertising and recruitment than to expend the resources to build quality schools. Corinthian and Career Education, which own the schools Leveque and Sweet attended, have faced the most damning allegations when it comes to educational quality and steering students into shady private loans. Other chains have better reputations on these fronts, among them the University ofPhoenix and DeVry University. But even they have a spotty record of graduating students. or awhil e it looked like the meltdown on Wall Street, and the ensuing credit crunch, would put an end to predatory lending at for-profit schools. In 2008 Sallie Mae quit offering sub prime private loans to students at for-profit colleges because the astronomical default rates had helped throw its stock price into a nosedive. But the proprietary college industry has found a way around this roadblock, namely making private loans directly to students, much the way used-

car lots loan money to buyers rather than going through a third party. For example, in a recent earnings call with investors and analysts, Corinthian said that it plans to dole out roughly $130 million in "institutional loans" this year, while Career Education and ITT Educational Services Inc., another for-profit chain, have reported that they expect to lend a combined total of$125 million. These loans could prove to be even more toxic than the private ones offered by Sallie Mae. This is because some schools are packaging them as ordinary consumer credit, which has even fewer built-in safeguards than private student loans, especially when it comes to disclosure requirements. This makes it easier for schools to mislead borrowers about the terms of the debt they are taking on. In one class-action lawsuit filed earlier this year, former students of Coloradobased Westwood Colleges allege they were duped into borrowing institutional loans at a staggering 18 percent interest. According to the complaint, the college's corporate bosses advise their admissions officers to sign students up for these loans without revealing how costly they are going to be. Thus borrowers don't learn about the steep interest until after they leave school and receive their first loan bill. Worse, the lawsuit alleges that some students have been signed up for loans without their permission. lillian L. Estes, a Florida lawyer who represents the plaintiffs in the case, says she has been approached by two dozen former Westwood admissions representatives who admit that they deliberately avoided telling students about the terms of these loans. "They knew they' d never be able to enroll these students if they were up front with them," Estes explains. (In their written response to the lawsuit, Westwood College officials offered a "categorical rejection" of the allegations brought by Estes and her clients.) Significantly, many proprietary schools are pushing institutional loans even when they know students won't be able to pay them off; Career Education and Corinthian Colleges only expect to recover roughly half ofthe money they distribute through their institutional lending programs, according to communications with shareholders. Why would they lend knowing they won't get the money back? Because any loss is more than offset by federal loans and financial aid dollars, which, despite the surge in private educational lending, still fund the bulk of tuition at proprietary schools. Say a student gets a $60,000 federal financial aid package and supplements it with a $20,000 institutional loan. The school comes out $40,000 ahead even if the borrower ultimately defaults. Plus, getting students in the door pumps up enrollment numbers, which makes for happy shareholders. Meanwhile, as the credit crunch eases, traditional lenders may well go back to making private loans to proprietary school students, especially given the changes afoot in the industry. President Obama aims to get rid of the program that allows lending companies to collect lucrative fees and interest for serving as the middleman on federal student loans and instead have the government offer the loans directly. Once forced out of the federal student Joan program, traditional lenders will have a powerful incentive to seek profits by wading deeper into the private student loan market, and forprofit schools, with their exponential growth, could once again be an appealing target. The good news is that the Obama administration seems more inclined than its predecessor to stand up against the abuses of proprietary schools. In May, the Department of Education revealed that it was considering reversing changes the Bush administration made to weaken the incentive-compensation ban. It is also thinking about adding teeth to the rules requiting proprietary colleges to show that graduates are finding "gainful employment" in their field and cracking down on schools that willfully mislead prospective students. "Our overall goal at the Department of Education in post-secondary education is to make sure that students ... have the information they need to make good choices," Robert Shireman, the deputy undersecretary of education, told financial analysts and investors during a conference call earlier this year. These proposals are a good start, but more steps will be needed. For starters, the Department ofEducation should publish the data that it already collects on the number of students at each school who default over the lifetime of their loans. At the moment, it only releases the number who default during the first two years after leaving college, which is of limited value, not only because this is such a short time span, but also because the rates can be easily manipulated by

schools. Just publishing lifetime default rates would give prospective students a clearer picture of the risks of enrolling in a particular school. But the impact would be far greater if Congress used this data, along with graduation rates, to weed out abusive institutions; ideally, any school that failed to meet a certain threshold should be kicked out of the federal financial aid programs. At the same time, Congress should require companies that offer private student loans to give the same kinds offlexible repayment options and consumer protections as are available through the federal student loan program, including allowing borrowers to repay their loans as a percentage of their income. Lawmakers also need to revisit changes Congress made to the bankruptcy code in 2005, which make it exceeding difficult for financially distressed borrowers, including those with private student loans, to discharge their debt in bankruptcy. These changes would go a long way toward helping people like Martine Leveque escape their mountains of debt and ensuring that future students don't wind up in the same situation. It would also guarantee that taxpayers don't go on bankrolling giant companies that profit by exploiting those who are struggling to build better lives.

From: Rob MacArthur <rmacarthur@altresearch com>
To:
Rob MacArthur 9/22/2009 12:08:26 PM 46488941 .pdf

CC:
Date: Subject:

Business Services Research
September 22, 2009

Education Services
GAO Report Related to Proprietary Schools Relatively Benign
Amy W. Junker ajunker@rwbaird.com 414.765.3790 Gordan Lasic glasic@rwbaird.com 414.298.6049 Blair Minarik bmlnarik@rwbaird.com 414.298.5224

Action
Near-term thesis unchanged. Education stocks rallied yesterday following the release of a highly anticipated GAO report which turned out to be relatively benign, in our opinion, as many of the report's findings were either already known or widely expected . Our thesis on the group is unchanged. We continue to believe that meaningfu l multiple expansion in unlikely given expectations for decelerating trends head ing into 2010.

Summary
• Relief rally post release due to relatively benign GAO report. Higher education stocks saw strength yesterday after recommendations from a Government Accountability Office (GAO) report focused on oversight within proprietary schools turned out to be relatively benign, in our opinion. - The highly anticipated report, entitled "Proprietary Schools: Stronger Department of Education Oversight Needed to Help Ensure Only Eligible Students Receive Federal Student Aid," was requested by Rep. Ruben Hinojosa (D-TX, Chairman of the House Subcommittee on Higher Education). • Key findings and recommendations. The report recommends stronger monitoring of federal aid eligibility requirements within for-profits given the sector's relatively higher cohort default rates. Importantly, many of the report's findings were either already known or widely expected , in our view. Additionally, recommendations had a limited focus, including: - Improving monitoring of basic skills tests and target schools for further review. - Revising regulations to strengthen controls over basic skills tests. - Providing information and guidance on valid high school diplomas for use in gaining access to federal aid . • No widespread problems among for-profits, according to report. While the GAO reported some violations among for-profits (including one publicly traded school) such as test tempering and helping students obtain invalid high school diplomas, its "findings do not represent nor imply widespread problems" at proprietary schools. - Focus on ability-to-benefit provision. The report found non-compliance related to ability-to-benefit (ATB, passing basic math and English skills) testing procedures at some for-profits. o Possible changes to this provision could potentially impact schools like Corinthian which include a meaningful percentage of ATB students (24% of F2009 enrollment) . o Conversely, companies like Capella and Strayer have little ATB exposure as their incoming students have college cred it. Thus the findings and recommendations hold little implication. o However, as this is already a topic of interest in the negotiated rulemaking process, we do not expect additional action from the DOE in the near term.

Please refer to Appendix- Important Disclosures and Analyst Certification.

Education Services
September 22, 2009

Details
GAO Report Focused on High School Proficiency The GAO report focused on improved oversight to ensure that students enrolling in proprietary schools meet the proper eligibility requirements, specifically high school proficiency. While the GAO concluded that its "findings do not represent nor imply widespread problems" at proprietary schools, it did report some violations among for-profits (including one publicly traded school) such as helping students obtain invalid high school diplomas. Specifically, the GAO identified cases in which proprietary schools helped students obtain high school diplomas from diploma mills in order to obtain access to federal student loans.

Additionally, the report found non-compliance related to ability-to-benefit (ATB, passing basic math and English skills) testing procedures at some for-profits. In order to be eligible for Title IV funding, incoming students must have a high school diploma or GED, or they must pass ability-to-benefit (ATB) tests. The intent of the test is to measure whether students have the basic skills needed to benefit from higher education, thus allowing student who pass the tests to finish their high school diploma and work toward their associates degree concurrently. Test administrators are responsible for administering ATB tests at schools in accordance with test publisher rules. Upon the GAO's recommendations for increased oversight in monitoring student eligibility (given instances of violations) , the DOE commented that it is considering the management of the ATB testing process as a topic to include in the new round of negotiated rulemaking. As such, we do not expect the GAO report to spur additional regulatory action from the DOE related to this topic.
Cohort Default Rates The report analyzed cohort default rates (CDR) among proprietary institutions over a 2-, 3-, and 4-year period, attributing the relatively higher rates to a variety of factors including borrowers' family income and level of parental education. It is widely known that cohort default rates are higher among proprietary institutions given their student make-up, as they often attract a relatively higher mix of first-time college students given their open enrollment policy. However, there has been interest in the the level of increase in CDR following the extension of the calculation period to 3 years from 2 years for the F2009 (released in F2012). According to the GAO report CDR among for-profits nearly doubled when expanding the calculation from a 2-year rate to a 3-year rate (based on F2004 CDR data). If this hold true when the calculation period is expanded in F2009, some schools with relatively higher 2-year rates will be in danger of tripping DOE guidelines, despite the increased thresholds.

Robert W. Baird & Co.

2

Education Services
September 22, 2009

Cohort Default Rates by Type of Institution (2- to 4-Year CDR of F2004 data) 23.3%

16.7%

8.6%

9.5%
7.2%

2-year rate

3-year rate

4-year rate

•Public

Private non-profit

Proprietary

Source: Department of Education and the Government Accountability Office
Cohort Default Rates Among Four-year Schools (2- to 4-Year CDR of F2004 data)

19.2%

13.7%

7.3% 5.3% 4.5% 3.5% 2.8%

7.1 % 6.2%

2-year rate •Public

3-year rate Private non-profit

4-year rate Proprietary

Source: Department of Education and the Government Accountability Office

Robert W. Baird & Co.

3

Education Services
September 22, 2009

Cohort Default Rates Among Two-Year Schools (2- to 4-Year CDR of F2004 data)

23.3%

16.7%

8.6%

9.5%

7.2%

2-year rate •Public

3-year rate Private non-profit

4-year rate Proprietary

Source: Department of Education and the Government Accountability Office F2007 Cohort Default Rates by School
F2007 >10% Over l ast Three years 36 14 23 17

coco
LINC ESI CECO DV* APOL UTI STRA CPLA

6.9%-22.3% 7.1%-21 .9% 9.3%-15.2% 0.3%-12.3% 0.2%-10.2% 9.3% 6.2%-6.8% 6.0% 2.5%

Source: Department of Education and company reports * DeVry University 9.0%

Recent Changes to CDR Calculation
The Higher Education Act (HEA) reauthorization (signed into law 9/08) changed the way the Department of Education (DOE) calculates college default rates (defined as the percentage of student-loan borrowers who default on their student loan repayments within a certain time period). It expands the calculation period of default rates to 3 years from 2 years, which is likely to increase the cohort default rate at many institutions. The HEA also increased the threshold for penalties associated with this starting in F2012. Currently schools lose access to Title IV funding if they cross 40% for one year and 25% for three consecutive years. In 2012 the rate would increase to 30% for three consecutive years.

Robert W. Baird & Co.

4

Education Services
September 22, 2009

Appendix- Important Disclosures and Analyst Certification
1 Robert W. Baird & Co. maintains a trading market in the securities of APEI, APOL, CECO, COCO, CPLA, DV. ESI , LINC and STRA. 2 Robert W. Baird & Co. and/or its affiliates managed or co-managed a public offering of securities of Lincoln Educational Services Corp in the past 12 months. 3 Robert W. Baird & Co. and/or its affiliates have received investment banking compensation from Lincoln Educational Services Corp in the past 12 months. 10 Robert W. Baird & Co. and/or its affiliates have been compensated by ITT Educational Services, Inc. and Strayer Education, Inc. for non-investment banking-securities related services in the past 12 months.

Robert W. Baird & Co. and/or its affiliates expect to receive or intend to seek investment banking related compensation from the company or companies mentioned in this report within the next three months.lnvestment Ratings: Outperform (0) - Expected to outperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Neutral (N)- Expected to perform in line with the broader U.S. equity market over the next 12 months. Underperform (U) - Expected to underperform on a total return, risk-adjusted basis the broader U.S. equity market over the next 12 months. Risk Ratings: L - Lower Risk - Higher-quality companies for investors seeking capital appreciation or income with an emphasis on safety. Company characteristics may include: stable earnings, conservative balance sheets, and an established history of revenue and earnings. A - Average Risk - Growth situations for investors seeking capital appreciation with an emphasis on safety. Company characteristics may include: moderate volatility, modest balance-sheet leverage, and stable patterns of revenue and earnings. H- Higher Risk- Higher-growth situations appropriate for investors seeking capital appreciation with the acceptance of risk. Company characteristics may include: higher balance-sheet leverage, dynamic business environments, and higher levels of earnings and price volatility. S - Speculative Risk - High-growth situations appropriate only for investors willing to accept a high degree of volatility and risk. Company characteristics may include: unpredictable earnings, small capitalization, aggressive growth strategies, rapidly changing market dynamics, high leverage, extreme price volatility and unknown competitive challenges. Valuation, Ratings and Risks. The recommendation and price target contained within this report are based on a time horizon of 12 months but there is no guarantee the objective will be achieved within the specified time horizon. Price targets are determined by a subjective review of fundamental and/or quantitative factors of the issuer, its industry, and the security type. A variety of methods may be used to determine the value of a security including, but not limited to, discounted cash flow, earnings multiples, peer group comparisons, and sum of the parts. Overall market risk, interest rate risk, and general economic risks impact all securities. Specific information regarding the price target and recommendation is provided in the text of our most recent research report. Distribution of Investment Ratings. As of August 31, 2009, Baird U.S. Equity Research covered 591 companies, with 41% rated Outperform/Buy, 57% rated Neutral/Hold and 2% rated Underperform/Sell. Within these rating categories, 8% of Outperform/Buy-rated, and 6% of Neutral/Hold-rated companies have compensated Baird for investment banking services in the past 12 months and/or Baird managed or co-managed a public offering of securities for these companies in the past 12 months. Analyst Compensation. Analyst compensation is based on: 1) The correlation between the analyst's recommendations and stock price performance; 2) Ratings and direct feedback from our investing clients, our sales force and from independent rating services; and 3) The analyst's productivity, including the quality of the analyst's research and the analyst's contribution to the growth and development of our overall research effort. This compensation criteria and actual compensation is reviewed and approved on an annual basis by Baird's Research Oversight Committee. Analyst compensation is derived from all revenue sources of the firm, including revenues from investment banking. Baird does not compensate research analysts based on specific investment banking transactions. A complete listing of all companies covered by Baird U.S. Equity Research and applicable research disclosures can be accessed at http://www.rwbaird.com/research-insights/research/coverage/research-disclosure.aspx. You can also call 1-800-792-2473 or write: Robert W. Baird & Co., Equity Research, 24th Floor, 777 E. Wisconsin Avenue, Milwaukee, WI 53202.
5

Robert W. Baird & Co.

Education Services
September 22, 2009

Analyst Certification

The senior research analyst(s) certifies that the views expressed in this research report and/or financial model accurately reflect such senior analyst's personal views about the subject securities or issuers and that no part of his or her compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report.
Disclaimers Baird prohibits analysts from owning stock in companies they cover.

This is not a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. The information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy.
ADDITIONAL INFORMATION ON COMPANIES MENTIONED HEREIN IS AVAILABLE UPON REQUEST

The Dow Jones Industrial Average, S&P 500, S&P 400 and Russell 2000 are unmanaged common stock indices used to measure and report performance of various sectors of the stock market; direct investment in indices is not available. Baird is exempt from the requirement to hold an Australian financial services license. Baird is regulated by the United States Securities and Exchange Commission, FINRA, and various other self-regulatory organizations and those laws and regulations may differ from Australian laws. This report has been prepared in accordance with the laws and regulations governing United States broker-dealers and not Australian laws.
Copyright 2009 Robert W. Baird & Co. Incorporated Other Disclosures UK disclosure requirements for the purpose of distributing this research into the UK and other countries for which Robert W. Baird Limited holds an ISO passport.

This report is for distribution into the United Kingdom only to persons who fall within Article 19 or Article 49(2) of the Financial Services and Markets Act 2000 (financial promotion) order 2001 being persons who are investment professionals and may not be distributed to private clients. Issued in the United Kingdom by Robert W. Baird Limited , which has offices at Mint House 77 Mansell Street, London, E1 8AF, and is a company authorized and regulated by the Financial Services Authority. For the purposes of the Financial Services Authority requirements, this investment research report is classified as objective. Robert W. Baird Limited ("RWBL") is exempt from the requirement to hold an Australian financial services license. RWBL is regulated by the Financial Services Authority ("FSA") under UK laws and those laws may differ from Australian laws. This document has been prepared in accordance with FSA requirements and not Australian laws.

Ask the analyst a question

Click here to unsubscribe

Robert W. Baird & Co.

6

From: Rob MacArthur <rmacarthur@altresearch com> To: Rob MacArthur CC: Date: 1115/2009 12:36:00 PM Subject: 4687703 3.pdf

Company Update

BUY

Equity I United States I Education & Training Se1V1ces 04 November 2009

Bank of America~ Merrill Lynch
• Continued focus on quality
We hosted a meeting with Strayer's CEO Rob Silberman. We continue to be impressed by Strayer's consistent focus on quality of education. Takeaways are: 1.) Strayer does not expect to be significantly impacted by potential changes out of current negotiated rulemaking sessions, 2.) graduation rates for students with some college experience are high, 3.) Strayer draws down Title IV federal financial aid funds one class at a time; -70% of students receive Title IV.
Kevin C. Doherty Research Analyst MLPF&S kevin.doherty@bamtcom Sara Gubins Research Analyst MLPF&S sara.gub1ns@baml.com David Chu Research Analyst MLPF&S dav1d.j.chu@baml.com +1 646 855 5607

+1 646 855 1961

+1 646 855 2589

Dept. of Ed. neg- reg outcomes not expected to have impact
Strayer does not expect any regulatory changes resulting from the current Dept. of Ed. negotiated-rulemaking sessions to have a material impact on its operations. Enrollment advisors salaries are adjusted 1x/yr based on length of service and grade, with no incentive comp. He does not believe Strayer would be subject to potential changes to 'gainful employment' (in part because students are already employed & it wouldn't make sense), but this may be a subject of debate.
Stock Data Price Price Objective Date Established Investment Opinion Volabhly RISk 52-Week Range Mrkt Val/ Shares Out (mn} BofAML Ticker I Exchange Bloomberg I Reuters ROE (2009E} Total Obi to Cap (Sep-2009A} Est. 5-Yr EPS I DPS Growth

High levels of student success
Strayer's graduation rate was in the high 70's% for grad students & students with >2 years of college credit (6-yr grad rate for 2002 cohort). Students entering with <45 college credits graduated at a 32% rate, overall institution rate was 53%.

US$19921 US$23600 30-Jul-2009 B-1-7 MEDIUM USS143.53-239 99 US$2,725/13 7 STRA/NAS STRA US I STRA 0 57 4%

0%
24.5%/4.2%

Lower drops helping revenue per student
As discussed in 3Q, the increase in rev/student this year (+5.7% in 3Q) has been helped by a lower number of students dropping out Yet this benefit should flatten out over time. Management noted 20% enrollment growth is needed for flat margins in 2010 in part due to the number of new schools (lower margins vs mature schools) & the online center, which will lose an equivalent amount as in '09. The second online center provides redundancy & makes it easier to serve West Coast students. Over time, leverage should come from selling & promotional and G&A costs vs. instructional services.
• Estimates (Dec) (US$) EPS GAAPEPS EPS Change (YoY) Consensus EPS (Bloomberg) Oivldend Rate Valuation (Dec) PIE GAAPPIE Dividend Y1eld EV /EBITOA' Free Cash Flow Yield'
• For ftAIdolililons of iQmt~hod"' measures, soc pago 4.

2007A 4.47 4.47 23.8% 1.31

2008A 5.67 5.67 26.8% 3.63

2009[ 7.59 7.59 33.9% 7.58 2.00

2010[ 950 9.50 252% 9.52 250

2011[ 1160 1160 221% 1159 306

2007A 44.6x 44.6x 0.7% 25.3x 2.4%

2008A 35.1x 35.1x 1.8% 19.5x 2.5%

2009[ 26.2x 26.2x 1.0% 14.4x 3.7%

2010[ 21.0x 21.0x 1.3% 11.7x 4.8%

2011[ 172x 17 2x 1.5% 9.8x 4.9%

Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 5 to 7. Analyst Certification on Page 3. Price Objective Basis/Risk on page 3. 10885035
CR

Bank of America~ Merrill Lynch 04 November 2009

Strayer Education Inc.

iQproflle St rayer Education Inc .
SM

iQmerhod!JM - Bus Performance·
(US$ Millions) Return on Capital Employed Return on Equity Operating Margin Free Cash Flow 2007A 34.3% 36.1% 30.7% 66 200BA 41.7% 44.3% 320"k 68 2009E 54.0% 57 4% 33.7% 101 2010E 60.5% 64.1% 33.3% 130 2011E 51.8% 54.1% 32.7% 135

Com~an:t Descri~tion

iQmerhod"" - Qualit~ of Earnings•
(US$ Millions) Cash Realization Ratio Asset Replacemen t Ratio Tax Rate Net Debt-to-Equity Ratio Interest Cover 2007A 1.2x 1.7x 37.6% -50.4% NA 200BA 1.1x 1.9x 38.5% -32.0% NA 2009E 1.3x 2.4x 39.5% -29.3% NA 2010E 1.3x 2.1x 39.5% -35.0",{, NA 2011E 1.1x 1.9x 39.5% -53.8% NA

Strayer Education, Inc., consists of the Strayer University and Strayer University Online brands. The company operates 71 campuses in 15 states and Washington, D.C., and had Fall2009 term enrollment of more than 54,000, including nearly 33,000 purely online students. The company generated revenue of nearly $400mn in 2008 and employs a workforce of approximately 3,000 (roughly 1,600 faculty). Investment Thesis We have a favorable opinion of the company given: (1) the company's organic growth prospects from geographic expansion and continued online penetration, (2) superior profitability from leveraging a highly standardized operating platform, and, (3) strong track record. We believe Strayer has a significant opportunity to expand its footprint nationally over the next several years from its core base campuses in the Eastern U.S.

Income Statement Data (Dec) (US$ Millions) Sales %Change Gross Profit %Change EBITDA %Change Net Interest & Other Income Net Income (Adjusted) %Change 2007A 318 20.6% 209 21.2% 106 22.5% 6 65 24.1% 200BA 396 24.6% 265 26.9% 138 29.7% 5 81 24.4% 2009E 511 28.9% 346 30.4% 186 35.3% 2 105 29.8% 2010E 635 24.4% 433 25.2% 229 23.2% 2 129 23.1% 2011E

772
21.5% 525 21.1% 274 19.5% 4 155 20.1%

Stock Data Average Daily Volume Quarterl:t Earnings Estimates Q1 Q2 Q3 Q4 2008 1.64A 1.50A 0.83A 1.71A 2009 2.07A 2.00A 1.21A 2.31E 133,990

Free Cash Flow Data {Decl (US$ Millions) Net Income fromCont Operations (GAAP) Depreciation & Amortization Change in Working Capital Deferred Taxation Charge Other Adjustments, Net Capital Expenditure Free Cash Flow %Change 2007A 65 9 16 (6) (3) (15) 66 35.6% 2008A 81 11 6 0 (9) (21) 68 3.1% 2009E 105 14 14 (4) 6 (34) 101 48.3% 2010E 129 18 18 (3) 6 (38) 130 29.2% 2011E 155 22 (4) (4) 8 (42) 135 3.4%

Balance Sheet Data (Dec) (US$ Millions) Cash & Equivalents Trade Receivables Other Current Assets Property, Plant & Equipment Other Non-Current Assets Total Assets Short-Term Debt Other Current liabilities Long-Term Debt Other Non-Current Liabilities Totalliabilities Total Equity Total Equity & liabilities
• For n.1demi ions of iQmethod"' meas.~res, see page 4.

2007A 95 101 80 58 10 344 0 144 0 11 155 189 344

200BA

56
135

58
66 9 325 0 137 0 12 148 176 325

2009E 55 184 62 86 12 399 0 198 0 12 210 189 399

2010E 75 212 57 106 16 466 0 240 0 12 253 213 466

2011E 194 280 65 126 19 684 0 31 1 0 13 323 360 684

2
CR

Bank of America~ Merrill Lynch

Strayer Education Inc.

04 November 2009

Price objective basis & risk
Strayer Education Inc. (STRA)
We believe Strayer should continue to warrant a premium multiple to the peer group given its ample growth prospects, superior profitability, and strong track record. Our $236 target is based on a multiple of 24.8x our 2010 EPS estimate of $9.50, or a 1x PEG ratio. Risks are: 1) execution as the company scales and enters new markets and rolls out a new global online operations center 2) increased competition and 3) increased regulatory scrutiny.

Analyst Certification
I, Kevin C. Doherty, hereby certify that the views expressed in this research report accurately reflect my personal views about the subject securities and issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or view expressed in this research report.

US-Edu, Business Services & Special Sits Coverage Cluster Investment rating
BUY

Company
Capella Education Corinthian Colleges Inc Corporate Executive Board DeVry Inc Ecolab Inc Grand Canyon Education ITI Educational Services K12 Strayer Education Inc.

BofAMl ticker
CPLA

Bloomberg symbol
CPLAUS

Analyst
Sara Gubins Sara Gubins David Ridley-lane Sara Gubins David Ridley-Lane Sara Gubins Sara Gubins Sara Gubins Kevin C. Doherty Sara Gubins Sara Gubins Kevin C. Doherty Kevin C. Doherty Kevin C. Doherty Sara Gubins Sara Gubins Sara Gubins Sara Gubins Kevin C. Doherty Sara Gubins

coco
EXBD DV ECL LOPE ESI LRN STRA APOL CECO CBG FDS JLl LINC MAN RECN RHI UTI MPS

coco us
EXBDUS DVUS ECLUS LOPE US ESIUS LRNUS STRAUS APOLUS CECO US CBG US FDS US JLlUS LINC US MAN US RECNUS RHI US UTI US MPSUS

NEUTRAL

Apollo Group Career Education CB Richard Ellis Group Inc FactSet Research Systems Inc. Jones lang LaSalle Inc Lincoln Educational Services Corp Manpower
UNOERPERFORM

Resources Connection Robert Half International Universal Technicallnstitute
RSTR

MPSGroup

3
CR

Bank of America~ Merrill Lynch

Strayer Education Inc.

04 November 2009

iQmethodSN Measures Definitions Business Performance Numerator
Return On Capital Em ployed Return On Equity Operatmg Margin Earnings Growth Free Cash Flow NOPAT = (EBIT + Interest Income) • (1 -Tax Rate) + GoodNill Amortization Net Income Operating Profit Expected 5-Year CAGR From Latest Actual Cash Flow FromOperations- Total Capex Cash Flow From Operations Capex Tax Charge Net Debt = Tolal Debt, Less Cash & Equivalents EBIT

Denominator
Total Assets- Current Liabilities+ ST Debt + Aocumutated GoodNill Amorhzation Shareholders' Equity Sales N/A N/A Net Income Depreciation Pre-Tax Income Total Equity Interest Expense

Quality of Earnings
Cash Realization Ratio Asset Replacemen t Ratio Tax Rate Net Debt-To-Equity Ratio Interest Cover

Valuation Toolkit
Price I Earnings Ratio Price I Book Value Dividend Yield Free Cash Flow Yield Enterprise Value I Sales EV I EBITDA Current Share Price Diluted Earnings Per Share (Basis As Specified) Current Share Price Shareholders' Equity I Current Basic Shares Annualised Declared Cash Dividend Current Share Price Cash Flow From Operations- Total Capex Markel Cap. = Current Share Pnce · Current Basic Shares EV = Current Share Price • Current Shares + Minority Equity + Net Debt + Sales Other LT Liabilities Enterprise Value Basic EBIT + Depreciation +Amortization

iQmethod"''s the set of BolA Merrill lynch standard measures that setVe to maintain global consistency under three bload headings: Business Perfonna~. Qually of Earrings, and vali da~ons. The key features of iOmethod are: A consistently structured, detalad, arld transparent methodology. Glideines to maximize the effectiveness ofthe comparative valuation proc~ss, and to identify S4me common plfulls. iQtlalaba.te • is our real-time global research da4abasc thai is sourced dicctly from 01.1' equity analysts' camilgs models and includes forecasted as wei as historical data for 11comc sta:cmcnts. balance sheets. and cash low stalcmcnts for companies covered by SofA Mcrrillynch. iQprojlle"", iQJirethod"' are servic~ mart<s of Mcrril Lynch & Co., lnc.iQdarobare"is a re{jstetcd service mark of Merrill lynch & Ol., Inc.

4
CR

Bank of America~ Merrill Lynch
04 November 2009

Strayer Education Inc.

Important Disclosures
STRA Price Chart
30.Jul PO:US$236 US$300 US$270 US$240 US$21 0 US$180

US$150 US$120 US$90 US$60 US$30

usso

1.Jan.07

1.Jan.08

1.Jan.09

STRA - - -

B: Buy, N: Neutral, S: Sell, U: Undefpertonn, PO : Price objective, NA No longervalid
'Prior to May 31, 2008, 1ho IWostmCfll op11K>n system inckldcd Buy, Not.tral and Sell. As of May 31, 2008, 1ho investment op11ion system 11ckldos Buy, Noulrnl and Undorporform. Dark Grey shading in<icalos thai a soctiily rs restricted v.ilh tho opinion wspended.lig~ grey shading inclcales thai a security is underreviewwith the opinion withctawn. The current investment opinion key is cornined at the end oflhe report. Chart is ctirenl as of September 30, 2009 or wch later date as indicated. Bo!Aid. P<itc charts do net reflect analysts' covorngo of tho stock al prior Inns. Hisloncal price charts rclal11g to companies covered as of September 30, 2009 by Iormor Bane of America Socuriios l l C (BAS) analysis arc available lo BAS clonls on tho BAS website.'

Investment Rating Distribution: Education & Training Services Groue (as of 01 See 2009) lnv. Banking Relationships· Coverage Universe Count Percent Count Percent Buy 14 77.78% Buy 8 57.14% Neutral 3 16.67% Neutral 1 33.33% Sell 5.56% Sell 100.00% Investment Rating Distribution: Global Groue ~as of 01 See 2009~ Percent Coverage Universe Percent lnv. Banking Relationships· Count Count Buy 1528 4719% Buy 740 53.86"/o Neutral 815 25.17% Neutral 436 60.39% Sell Sell 378 895 27.64% 45.99% ·Companies in respect of which MLPF&S or an affiliate has received compensation for investment banking services within the past 12 months. For purposes of this distnbution. a stock rated Underperform is included as a Sell. FUNDAMENTAL EQUITY OPINION KEY: Opinions include a Volatility Risk Rating, an Investment Rating and an Income Rating. VOLATILITY RISK RATINGS, indicators of potential price fluctuation, are: A- Low, B- Medium and C- High. INVESTMENT RA TINGSreflect the analyst's assessment of a stock's: (i) absolute total return potential and (iO attractiveness for investment relative to other stocks within its Coverage Cluster(defined below). There are three investment ratings: 1 - Buy stocks are expected to have a total return of at least 10% and are the most attractive stocks in the coverage cluster; 2 - Neutral stocks are expected to remain flat or increase in value and are less attractive than Buy rated stocks and 3 - Underperform stocks are the least attractive stocks in a coverage cluster. Analysts assign investment ratings considering, among other things, the 0-12 month total return expectation for a stock and the firm's guidelines for ratings dispersions (shown in the table below). The current price objective for a stock should be referenced to better understand the total return expectation at any given time. The price objective reflects the analyst's view of the potential price appreciation (depreciation). Investment rating Total return exeectation (within 12-month eeriod of date of initial rating) Ratings diseersion guidelines for coverage cluster· Buy ~ 10% $ 70% Neutral ~ 0% s 30% Underperform N/A ~ 20% ·Ratings dispersions may vary from time to time where BofAML Research believes it better reflects the investment prospects of stocks in a Coverage Cluster.

INCOME RATINGS. indicators of potential cash dividends, are: 7 - same/higher (dividend considered to be secure), 8 - same/lower (dividend not considered to be secure) and 9- pays no cash dividend. Coverage Cluster is comprised of stocks covered by a single analyst or two or more analysts sharing a common industry, sector, region or other classification(s). A stock's coverage cluster is included in the most recent BofAML Comment referencing the stock.

5
CR

Bankof America ~ Merrill Lynch

Strayer Education Inc.

04 November 2009

The company is or was, within the last 12 months, an investment banking client of MLPF&S and/or one or more of its affiliates: Strayer. MLPF&S or an affiliate has received compensation from the company for non-investment banking services or products within the past 12 months: Strayer. The company is or was, within the last 12 months, a non-securities business client of MLPF&S and/or one or more of its affiliates: Strayer. MLPF&S or an affiliate has received compensation for investment banking services from this company within the past 12 months: Strayer. MLPF&S or an affiliate expects to receive or intends to seek compensation for investment banking services from this company or an affiliate of the company within the next three months: Strayer. MLPF&S or one of its affiliates is willing to sell to, or buy from, clients the common equity of the company on a principal basis: Strayer. The company is or was, within the last 12 months, a secur~ies business client (non-investment banking) of MLPF&S and/or one or more of its affiliates: Strayer. The analyst(s) responsible for covering the securities in this report receive compensation based upon, among other factors, the overall prof~ability of Bank of America Corporation, including profits derived from investment banking revenues.

Other Important Disclosures
BofA Merrill Lynch (BofAMl) Re search refers to the combined Global Research operations of Merrill lynch and BAS. Merrill l ynch Research policies relating to conflicts of interest are described at http://www.ml.com/media/43347.pdf. "Merrill lynch" includes Merrill lynch, Pierce, Fenner & Smith Incorporated ("MlPF&S") and its affiliates, including BofA (defined below). "BofA" refers to Bane of America Securities l lC ("BAS"), Bane of America Securities limited ("BASl"), Bane of America Investment Services, Inc ("BAI") and their affiliates. Inv estors should contact their Merrill l ynch or BofA representative if they have questions concerning t his report. Information relating to Non-US affiliates of Merrill l ynch and Distribution of Affiliate Research Reports:

MLPF&S, BAS, BAI, and BASL distribute, or may in the future distribute, research reports of the following non-US affiliates in the US (short name: legal name): Merrill Lynch (France): Merrill Lynch Capital Markets (France) SAS; Merrill Lynch (Frankfurt): Merrill Lynch International Bank Ltd, Frankfurt Branch; Merrill Lynch (South Africa): Merrill Lynch South Africa (Pty) Ltd; Merrill Lynch (Milan): Merrill Lynch International Bank Limited; MLPF&S (UK): Merrill Lynch, Pierce, Fenner & Smith Lim~ed; Merrill Lynch (Australia): Merrill Lynch Equities (Australia) Limited; Merrill Lynch (Hong Kong): Merrill Lynch (Asia Pacific) Limited; Merrill Lynch (Singapore): Merrill Lynch (Singapore) Pte Ltd; Merrill Lynch (Canada): Merrill Lynch Canada Inc; Merrill Lynch (Mexico): Merrill Lynch Mexico, SA de CV, Casa de Balsa; Merrill Lynch (Argentina): Merrill Lynch Argentina SA; Merrill Lynch (Japan): Merrill Lynch Japan Securities Co, Ltd; Merrill Lynch (Seoul): Merrill Lynch International Incorporated (Seoul Branch); Merrill Lynch (Taiwan): Merrill Lynch Secur~ies (Taiwan) Ltd.; DSP Merrill Lynch (India): DSP Merrill Lynch Limited; PT Merrill Lynch (Indonesia): PT Merrill Lynch Indonesia; Merrill Lynch (KL) Sdn. Bhd.: Merrill Lynch (Malaysia); Merrill Lynch (Israel): Merrill Lynch Israel Limited; Merrill Lynch (Russia): Merrill Lynch CIS Limited, Moscow; Merrill Lynch (Turkey): Merrill Lynch Yatirim Bankasi A.S.; Merrill Lynch (Dubai): Merrill Lynch International, Dubai Branch; MLPF&S (ZOrich rep. office): MLPF&S Incorporated ZOrich representative office; Merrill Lynch (Spain); Merrill Lynch Capital Markets Espana, S.A.S.V. This research report has been approved for publication in the United Kingdom by Merrill Lynch, Pierce, Fenner & Smith Limited and BASL, which are authorized and regulated by the Financial Services Authority; has been considered and distributed in Japan by Merrill Lynch Japan Securities Co, Ltd and Bane of America Securities - Japan, Inc., registered securities dealers under the Financial Instruments and Exchange Law in Japan; is distributed in Hong Kong by Merrill Lynch (Asia Pacific) Limited and Bane of America Securities Asia Limited, which are regulated by the Hong Kong SFC and the Hong Kong Monetary Authority; is issued and distributed in Taiwan by Merrill Lynch Securities (Taiwan) Ltd.; is issued and distributed in Malaysia by Merrill Lynch (KL) Sdn. Bhd., a licensed investment adviser regulated by the Malaysian Securities Commission; is issued and distributed in India by DSP Merrill Lynch Lim~ed; and is issued and distributed in Singapore by Merrill Lynch International Bank Limited (Merchant Bank), Merrill Lynch (Singapore) Pte Ltd (Company Registration No.'s F 06872E and 1986028830 respectively) and Bank of America Singapore Limited (Merchant Bank). Merrill Lynch International Bank Lim~ed (Merchant Bank), Merrill Lynch (Singapore) Pte Ltd and Bank of America Singapore Lim~ed (Merchant Bank) are regulated by the Monetary Authority of Singapore. Merrill Lynch Equities (Australia) Limited (ABN 65 006 276 795), AFS License 235132 provides this report in Australia in accordance with section 911 B of the Corporations Act 2001 and neither it nor any of its affiliates involved in preparing this research report is an Authorised Deposit-Taking Institution under the Banking Act 1959 nor regulated by the Australian Prudential Regulation Author~. No approval is required for publication or distribution of this report in Brazil. This research report has been prepared and issued by MLPF&S and/or one or more of ~s non-US affiliates. MLPF&S is the distributor of this research report in the US and accepts full responsibility for research reports of its non-US affiliates distributed to MLPF&S clients in the US. Any US person (other than BAS, BAI and their respective clients) receiving this research report and wishing to effect any transaction in any security discussed in the report should do so through MLPF&S and not such foreign affiliates. BAS distributes this research report to its clients and to its affiliate BAI and accepts responsibility for the distribution of this report in the US to BAS clients, but not to the clients of BAl. BAI is a registered broker-dealer, member of FINRA and SIPC, and is a non-bank subsidiary of Bank of America, N.A. BAI accepts responsibility for the distribution of this report in the US to BAI clients. Transactions by US persons that are BAS or BAI clients in any security discussed herein must be carried out through BAS and BAI, respectively.

6
CR

Bank of America~ Merrill Lynch

Strayer Education Inc.

04 November 2009

General Investment Related Disclosures:

This research report provides general information only. Neither the information nor any opinion expressed constitutes an offer or an invitation to make an offer, to buy or sell any securities or other financial instrument or any derivative related to such securities or instruments (e.g., options, futures, warrants, and contracts for differences). This report is not intended to provide personal investment advice and it does not take into account the specffic investment objectives, financial situation and the particular needs of any specific person. Investors should seek financial advice regarding the appropriateness of investing in financial instruments and implementing investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Any decision to purchase or subscribe for securities in any offering must be based solely on existing public information on such security or the information in the prospectus or other offering document issued in connection with such offering, and not on this report. Securities and other financial instruments discussed in this report, or recommended, offered or sold by Merrill Lynch, are not insured by the Federal Deposit Insurance Corporation and are not depos~s or other obligations of any insured depository institution (including, Bank of America, N.A.). Investments in general and, derivatives, in particular, involve numerous risks, including, among others, market risk, counterparty default risk and liquidity risk. No secur~y. financial instrument or derivative is suitable for all investors. In some cases, securities and other financial instruments may be difficult to value or sell and reliable information about the value or risks related to the secur~ or financial instrument may be difficult to obtain. Investors should note that income from such securities and other financial instruments, if any, may fluctuate and that price or value of such securities and instruments may rise or fall and, in some cases, investors may lose their entire principal investment. Past performance is not necessarily a guide to future performance. Levels and basis for taxation may change. This report may contain a short-term trading idea or recommendation, which highlights a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company. Short-term trading ideas and recommendations are different from and do not affect a stock's fundamental equity rating, which reflects both a longer term total return expectation and attractiveness for investment relative to other stocks within its Coverage Cluster. Short-term trading ideas and recommendations may be more or less positive than a stock's fundamental equity rating. Foreign currency rates of exchange may adversely affect the value, price or income of any secur~ or financial instrument mentioned in this report. Investors in such securities and instruments, including ADRs, effectively assume currency risk. UK Readers: The protections provided by the U.K. regulatory regime, including the Financial Services Scheme. do not apply in general to business coordinated by Merrill Lynch entities located outside of the United Kingdom. These disclosures should be read in conjunction with the BASL general policy statement on the handling of research conflicts, which is available upon request. OffiCers of MLPF&S or one or more of its affiliates (other than research analysts) may have a financial interest in securities of the issuer(s) or in related investments. Merrill Lynch is a regular issuer of traded financial instruments linked to securities that may have been recommended in this report. Merrill Lynch may, at any time, hold a trading position (long or short) in the securities and financial instruments discussed in this report. Merrill Lynch, through business units other than BofAML Research, may have issued and may in the future issue trading ideas or recommendations that are inconsistent with, and reach different conclusions from, the information presented in this report. Such ideas or recommendations reflect the different time frames, assumptions, views and analytical methods of the persons who prepared them, and Merrill Lynch is under no obligation to ensure that such other trading ideas or recommendations are brought to the attention of any recipient of this report.
Copyright and General Information regarding Research Reports:

Copyright 2009 Merrill Lynch, Pierce, Fenner & Smith Incorporated. All rights reserved. iQmethod, iQmethod 2.0, iQprofile, iQtoolkit, iQworks are service marks of Merrill Lynch & Co., Inc. iQanalytics®, iQcustom®, iQdatabase® are registered service marks of Merrill Lynch & Co., Inc. This research report is prepared for the use of Merrill Lynch clients and may not be redistributed, retransmitted or disclosed, in whole or in part, or in any form or manner, without the express wr~ten consent of Merrill Lynch. Merrill Lynch research reports are distributed simultaneously to internal and client websites and other portals by Merrill Lynch and are not publiclyavailable materials. Any unauthorized use or disclosure is prohibited. Receipt and review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets) without first obtaining expressed permission from an authorized officer of Merrill Lynch. Materials prepared by Merrill Lynch research personnel are based on public information. Facts and views presented in this material have not been reviewed by, and may not reflect information known to, professionals in other business areas of Merrill Lynch, including investment banking personnel. Merrill Lynch has established information barriers between BofAML Research and certain business groups. As a resutt, Merrill Lynch does not disclose certain client relationships w~h. or compensation received from, such companies in research reports. To the extent this report discusses any legal proceeding or issues, it has not been prepared as nor is it intended to express any legal conclusion, opinion or advice. Investors should consutt their own legal advisers as to issues of law relating to the subject matter of this report. Merrill Lynch research personnel's knowledge of legal proceedings in which any Merrill Lynch entity and/or ~s directors, officers and employees may be plaintiffs, defendants, co-defendants or co-plaintiffs with or involving companies mentioned in this report is based on public information. Facts and views presented in this material that relate to any such proceedings have not been reviewed by, discussed with, and may not reflect information known to, professionals in other business areas of Merrill Lynch in connection with the legal proceedings or matters relevant to such proceedings." This report has been prepared independently of any issuer of securities mentioned herein and not in connection with any proposed offering of securities or as agent of any issuer of any securities. None of MLPF&S, any of its affiliates or their research analysts has any authority whatsoever to make any representation or warranty on behalf of the issuer(s). Merrill Lynch policy prohibits research personnel from disclosing a recommendation, investment rating, or investment thesis for review by an issuer prior to the publication of a research report containing such rating, recommendation or investment thesis. Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice or to be used by anyone to provide tax advice. Investors are urged to seek tax advice based on their particular circumstances from an independent tax professional. The information herein (other than disclosure information relating to Merrill Lynch and its affiliates) was obtained from various sources and we do not guarantee its accuracy. This report may contain links to third-party websites. Merrill Lynch is not responsible for the content of any third-party website or any linked content contained in a third-party website. Content contained on such third-party websites is not part of this report and is not incorporated by reference into this report. The inclusion of a link in this report does not imply any endorsement by or any affiliation with Merrill Lynch. Access to any third-party website is at your own risk, and you should always review the terms and privacy policies at third-party websites before submitting any personal information to them. Merrill Lynch is not responsible for such terms and privacy policies and expressly disclaims any liabil~ for them. Subject to the quiet period applicable under laws of the various jurisdictions in which we distribute research reports and other legal and Merrill Lynch policy-related restrictions on the publication of research reports, fundamental equ~ reports are produced on a regular basis as necessary to keep the investment recommendation current. Certain outstanding reports may contain discussions and/or investment opinions relating to securities, financial instruments and/or issuers that are no longer current. Always refer to the most recent research report relating to a company or issuer prior to making an investment decision. In some cases, a company or issuer may be classffied as Restricted or may be Under Review or Extended Review. In each case, investors should consider any investment opinion relating to such company or issuer (or its security and/or financial instruments) to be suspended or withdrawn and should not rely on the analyses and investment opinion(s) pertaining to such issuer (or its securities and/or financial instruments) nor should the analyses or opinion(s) be considered a solicitation of any kind. Sales persons and financial advisors affiliated with BAS, BAI, MLPF&S or any of their affiliates may not solicit purchases of securities or financial instruments that are Restricted or Under Review and may only solicit securities under Extended Review in accordance with firm policies. Neither Merrill Lynch nor any officer or employee of Merrill Lynch accepts any liability whatsoever for any direct, indirect or consequential damages or losses arising from any use of this report or its contents.

7
CR

From: Robert MacArthur <rmacarthur@altresearch.com>
To:

CC: 'Aitomease Kennedy'
'Adam Taub' 'Andy Matthes' aardridis@sma1maley.a:m Arlington. Angela afinkenhoefer@eng.I.NVo.ca 'Cope. Brian' Llli L6 J 1JPatt.blackbeny.net 'Bany Yeoman' 'Nassirian. Barmak' celzer@ocmilaw.com cdurranoo@rainmedia.net V\littman. Donna ctwomack@mypherox.com Dan Benari Goldsmith, Elizabeth 'Elizabeth Medina' 'Melissa Davis' grovesb@sec.r;pv ggreen@.Npsir.com 'Leslie Hollingsworth' 'Mary Houston' V\loodward. Jennifer 'Majors, Jay (CIV)' JOberg@aol.com 'Jillian Estes' 'Joshua Mcinerney' 'JingGe' Rb)(6) ')l?roadrunner.com 'Joshua Kuntz' Kem. Joe 'Kelly Field' ku!zg@gao.r;py 'Katie Mac' 'Kantrowitz, Mark'

matthews@dlea.crg
Cueva. Maria-Teresa 'Mike Braun' melvin.r;pldberg@oag.state.ny.us 'Michelle Bruce' mba1t@salud.mm.ed..J 'Miraj Patel' J< bl(6) @gmail.cx:rn

micg@midlgcrg;pv

'Nicole Armstrong' 'Phil Eckian' Tyson Strauser Howard Pat paul basken@chronicle com 'Roberta Baskin' 'Sam MacArthur' 'Shannon Allison' sfrisoli@accesssecurities.com 'Watson, Stuart' 'Tric1a Grimes' tbenberg@sacscoc. org Vince McKnight Smith, Zakiya
Date:
Subject:

8/19/2010 8:27:48 AM

ABC News investigation of APOL--Good Morning America to be followed by nightly news and Nlghtline

Rob MacArthur Alternative Research Services, Inc.
203-244-5174

rmacarthur@altresearch. com

This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report w1thout the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change w1thout notice. This material is intended for use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.

ABC News Investigates For-Profit Education: Recruiters at the University of Phoenix ABC News Gets Answers for Student Who Claims She Was Duped by 0Dhne School

Post a Comment By CHRIS CUOMO, GERRY WAGSCHAL and LAUREN PEARLE Aug. 19, 2010 Ads for online schools are all over the Internet, plastered on billboards in subway cars and on television. The University of Phoenix, with nearly 500,000 students, is the biggest for-profit college. But some fonner students said they were duped into paying big bucks and going deeply in debt by slick and misleading recmiters.

Melissa Dalmier, a 30-year-old single mother of three from Noble, Ill ., enrolled in the associate's degree in education program at the University of Phoenix to reach her drean1 of becoming an elementary school teacher. (ABC News) "I don't want anyone else to be sucked in," said Melissa Dalmier, 30, of Noble, Ill. The mother of three bad big dream s to be an elementary school teacher, so when she saw ads for the University ofPhoeDix pop-up on her computer, she e-mailed them for more infom1ation. A few minutes later, Dalnuer said she got a call from one of the school's recruiters, who she said told her that enrolling in the associate's degree in education program at the University of Phoenix wouJd put her on the fast-track to reaching her drean1. "[The recmiter said] they had an agreement with Illinois State Board of Education and that as soon as I finished their program I'd be ready to start working," she recalled. Within 15 minutes, Dalmicr was enrolled. Since she didn't have enough money to pay for tuition, she said the recmiter helped he r get federal student aid. In total, she took out about $8,000 in federall y-guaranteed student loans.

But just a few months after Dalmier started, she said she learned the horrible tmth : the degree program she was enrolled in would not qualify her to become a public school teacher upon graduation in Illinois. "It was an outright lie. A bold faced lie," she said.

Watch more of the undercover investigation tonight on "World News" at 6:30p.m. ET and later on "Nightline" at 11:35 p.m. ET
It's not the first time that the controversial school, which obtains almost 90 percent of its revenues from students paying tuition from federal aid, has come under fire for its recmiting methods. The University of Phoenix was one of 15 for-profit schools whose aggressive recruiting practices were the subject of hearings held by Sen. Tom Harkin, D-lowa. The Govemment Accountability Office sent investigators to for-profit schools across the country and found that all of them were misleading potential students.

In 2004, the University of Phoenix paid nearly $ 10 million to the Department of Education to settle
allegations that it had violated rules about its recruiting practices. The school did not admit any w rongdoing. "I think maybe the whole orchard is contaminated," Harkin said. "TI1ere's a systemic problem with the system itself that needs to be addressed." ABC News wanted to know firsthand whether what Dalmier said happened to her, would happen to us, so we sent one of our producers undercover to meet with a University of Phoenix recruiter. Our producer told the recruiter, who was working out of an office in Houston, Texas, that he aspired to be a teacher and planned to live in either Texas o r New York. The recruiter told him to enroll in the Bachelor's of Science in Education program, and with that degree and some student teaching, he would be set. Producer: I just want to understand clearly. I can go to University of Phoenix, do my bachelor's degree, and 100 percent for sure I can go back to either Texas, or New York and I can sit for those exams and once I finish those exams... l can teach. Recruiter: Then you can become a teacher. Yes. That is true. What's your e-mail address? Despite her assurances, the recruiter's claim was not true. Even with successful completion of the required certification testing, a degree from the University of Phoenix does not guarantee a teaching certificate in either of those states. When we confronted Dr. William Pepicello, president of the University of Phoenix, about the recruiter's false promise, he said it was "indefensible."

"It's wrong. Can we do better? Absolutely. Do we train our people to give that kind of misadvice? Absolutely not. And we can do better, we will do better, you know, we already have some initiatives that we talked about that we're putting in place because at the end of the day, we have to get it right." But this was not the first time that the university's recruiting practices have come under scrutiny. In December 2009, after two former employees came forward and accused the university of violating federal financial aid regulations with its recruiting practices, without admitting wrongdoing the school agreed to pay $67.5 million to resolve the accusations. The two whistleblowers received $19 million in the settlement. When asked if the 2009 settlement was a sign that "we got caught," Pepicello disagreed. "No, I wouldn't say it's proof that we got caught. I mean, it's certainly proof that we weren't doing as well as we could. We could do better," he said. The recruiter also told our undercover producer he could take out as much as $35,000 in federal financial aid to pay for school. She also said that there might even be some money left over after tuition was paid.

Recruiter: I tell students to take out the max and whatever you don't need or you don't use then use
it [for whatever]. But it's easier to take out more than you need and send back the excess versus you didn't take out enough.

Producer: What are the kinds of things though? I mean in terms of like that I could use it for? I mean,
what if I just ... because you're going to have to have money to walk around.

Recruiter: They don't care. Right. They don't. They just tell you use it for educational purposes. Producer: And they don't ...They don't what? Recruiter: No one follows up. No one says, What happened to this money? You received a check for
$562, where did you spend it?

Producer: It's your business.
The university president said that there was no excuse for a recruiter to push someone to borrow to the max. 'It's absolutely indefensible. It is not the way that I intend to run this university," Pepicello said.

For-Profit Universities Contributing to Financial Crisis?
Experts say recruiters who are misleading students may only be the tip of the iceberg. Students who have attended for-profit schools are defaulting on their loans at an alarming rate, which experts say may be contributing to the next big financial crisis. At the University of Phoenix's headquarters, the loan repayment rate was 44 percent, according to data from 2009 provided by the Department of Education; students at their Nellis Air Force location had a repayment rate of 36 percent. At the headquarters of Brown Mackie College, another for-profit

school, the repayment rate was 27 percent. Harris Miller, who heads the for-profit industry's lobby group, told Chris Cuomo that default rates at for profit schools are comparable to other schools which service similar student populations. Recruiters from for-profit schools obtained $24 billion in student loan and grant money for the 2008-2009 school year, according to Government Accountability Office and Senate reports. "These schools are marketing machines masquerading as universities," said Steve Eisman, a renowned hedge fund investor who predicted the last big mortgage crisis. "I thought there would never again be an opportunity to be involved in the short side as an industry as social destructive and morally bankrupt as the sub-prime mortgage industry... Unfortunately, I was wrong." Though for-profits get the lion's share of their tuition from financial aid, the default rates on loans for students who attended for profit schools are alarming. About 50 percent of the students at for-profits drop out, according to Eisman, so schools need to keep adding new students, and have to try to recruit just about anyone-- even those most vulnerable in society, he says. Benson Rawlins was considered homeless last year when he met two recruiters from the University of Phoenix, who gave three seminars at Y-Haven, a shelter for transitional men in Cleveland, Ohio, or in effect, a homeless shelter. Rawlins doesn't have aGED, but said the recruiters had no qualms trying to sell him an expensive associate's degree. "It seems like it is just too much all about money," he said, "Instead of helping someone get an education." The university told ABC News it does not tolerate recruitment at facilities like Y-Haven. "We can assure you that anyone who participated in the recruitment of residents from homeless facilities in Cleveland no longer works for the University," said Alex Clark, a spokesperson for the University of Phoenix. "Any such activity is strictly forbidden by our Code of Business Conduct and Ethics, and employees who violate this policy face disciplinary action up to and including termination." Harris Miller said even though the schools serve an important role by providing higher education to students who wouldn't ordinarily get one, many schools' recruiting practices need to be changed. Miller claimed that universities began to change even before the GAO's report on their misleading practices, including changing how recruiters are compensated (so they do not receive bonuses or prizes for recruiting students), offering "test drive" programs to help people figure out if higher education is for them and focusing more on consumer protection. When asked why for-profit universities don't return money back to those who have been misled by their solicitations, Miller said: "There are other countries in the world like Canada which have a different system and it's something we're going to look at." But Miller admitted that the industry has no plan in place to pay back those who are carrying a debt from for-profit schools.

Whatever the industry's plans for future, Oalmier said it won't help heal what happened. "If they tell you something, investigate it before you enroll in their program. You really need to find out the truth and how to further your passion or your dream," she said. "That way, you don't end up like me." After ABC News' interview with Pepicello, the University of Phoenix offered Oalmier a scholarship for a bachelor's degree of her choosing. Oalmier said she is considering their proposal. Pepicello also said he plans to change the school's recruiting practices, especially the current model of compensation, and will be offering students a "test drive."

Click HERE to read a letter to ABC News from William Pepicello.

'-=

~1!,niversity of Phoenix®
Office of the President
Stte<~ t

4615 Eost Elwood

Phoen•x. AZ 85040

August 18, 2010 Dear ABC News: Thank you for allowing us this opportunity to share our perspective directly with Good Morning America's viewers and online readers, following my recent interview with Chris Cuomo.

As I told Mr. Cuomo, University of Phoenix has strong student protection measures in place, and we do not tolerate deceptive practices by any employee. We have strict and unambiguous policies in place to ensure prospective students are able to make a fullyinformed decision about the University and their ability to succeed here, including the realities of incurring debt to pay for a college education.
It saddens and disappoints me to note that sometimes, these policies are not adhered to by our employees, though I want to stress that we take immediate action to address any such violation, up to and including termination of the employees involved. Let me be clear: even one violation of our student protection policies is one too many, and as president of this University I am committed to ensuring it does not happen. In fact, we have al ready undertaken a number of important new measures focused on student protection, including: • Financial literacy tools that help students understand the facts about financial aid and how much they need to borrow, which has already resulted in an approximate 30-percent decrease in the number of students who take out the maximum loan amount; A free three-week program called University Orientation, which helps students with little or no college experience understand what it takes to succeed in a challenging academic environment like ours, before taking on the burden of college debt; • A digital call-monitoring system to track and record tens of thousands of phone calls every day, between prospective students and counselors, for any evidence of false or misleading information; and • A firm commitment to completely eliminate enrollment targets as a component of the evaluation and compensation of our enrollment advisors. Our main focus is and will always be serving our students, and ensuring their success by equipping them with the tools they need to compete and thrive in a changing global economy. We are extremely proud of our track record in serving students, and even more proud of the thousands of working learners who have improved their lives and advanced their careers after graduati ng from our University. Consider these results from our 2009 Academic Annual Report:

During their enrollment, University of Phoenix students experience greater annual salary increases than the national average for all workers: in 2008, our bachelor's program students experienced an 8.5% percent salary increase, while our master's program students saw an average increase of 9.7%; University of Phoenix students report higher satisfaction rates than their peers across the nation in each of the ten categories surveyed by the National Survey of Student Engagement; We are a leader in educating "non-t raditional" college students, a group that comprises 73% of all college students, according to the U.S. Department of Education; and At about $12,000 per year. Universitv of Phoenix tuition and fees are in the mid· range nationally, and our textbook and material costs are dramatically lower than average.

We are committed to remaining at the forefront of Innovation in higher education and, coupled with the measures we are undertaking to enhance student protection, we are confident University of Phoenix will yield even greater outcomes for our students.

'&£, ~~ J.~ello,

William President University of Phoenix

From:
To:

CC:
Date: Subject:

Kvaal, James Kanter Martha Taggart Bill Ochoa. Eduardo Bergeron, David Madzelan Dan Gomez Gabriella Finley, Steve Yuan. Georgia Hamilton, Justin
8/19/2010 10:35:54 AM

ABC undercover

This story is expected to run tonight

ABC News Investigates For-ProfitEducation: Recmiters at the University ofPhoenix ABC News Gets Answers for Student Who Claims She Was Duped by Online School

Post a Comment By CHRIS CUOMO, GERRY WAGSCHAL and LAUREN PEARLE Aug. 19, 2010 FarkTechnoratiGoogleLiveMy SpaceNewsvineRedditDeliciousMixx Yahoo Ads for online schools are all over the Internet, plastered on billboards in subway cars and on television. The University ofPhoenix, with nearly 500,000 students, is the biggest for-profit college. But some former students said they were duped into paying big bucks and going deeply in debt by slick and misleading recruiters.

Melissa Dalmier, a 30-year-old single mother of three from Noble, Ill., enrolled in the associate's degree in education program at the University ofPhoenix to reach her dream of becoming an elementary school teacher. (ABC News) "I don't want anyone else to be sucked in," said Melissa Dalmier, 30, ofNoble, lll.

The mother of three had big dreams to be an elementaty school teacher, so when she saw ads for the University of Phoenix pop-up on her computer, she e-mailed them for more information. A few minutes later, Dalmier said she got a call from one of the school's recruiters, who she said told her that enrolling in the associate's degree in education program at the University ofPhoenix would put her on the fast-track to reaching her dream. "[The recruiter said] they had an agreement with lllinois State Board of Education and that as soon as I finished their program rd be ready to start working," she recalled. Within 15 minutes, Dalmierwas enrolled. Since she didn't have enough money to pay for tuition, she said the recruiter helped her get federal student aid. In total , she took out about $8,000 in federally-guaranteed student loans. But just a few months after Dalmier started, she said she learned the horrible truth: the degree program she was enrolled in would not qualify her to become a public school teacher upon graduation in Illinois. "It was an outright lie. A bold faced lie," she said. Watch more of the undercover investigation tonight on" World News" at 6:30p.m. ET and later on" Nightline" at 11:35 p.m.ET It's not the first time that the controversial school, which obtains almost 90 percent of its revenues from students paying tuition from federal aid, has come under fire for its recruiting methods. The University ofPhoenix was one of 15 for-profit schools whose aggressive recruiting practices were the subject of hearings held by Sen. Tom Harkin, D-Iowa. The Government Accountability Office sent investigators to for-profit schools across the countty and found that all of them were misleading potential students.
In 2004, the University ofPhoenix paid nearly $10 million to the Department ofEducation to settle allegations that it had

violated rules about its recruiting practices. The school did not admit any wrongdoing. "I think maybe the whole orchard is contaminated," Harkin said. "There's a systemic problem with the system itself that needs to be addressed." ABC News wanted to know firsthand whether what Dalmier said happened to her, would happen to us, so we sent one of our producers undercover to meet with a University of .Phoenix recruiter. Our producer told the recruiter, who was working out of an office in Houston, Texas, that he aspired to be a teacher and planned to live in either Texas or New York. The recruiter told him to enroll in the Bachelor's of Science in Education program, and with that degree and some student teaching, he would be set. Producer: I just want to understand clearly. I can go to University of.Phoenix, do my bachelor's degree, and 100 percent for sure I can go back to either Texas, or New York and I can sit for those exams and once I finish those exams .. .! can teach. Recruiter: Then you can become a teacher. Yes. That is true. What's your e-mail address? Despite her assurances, the recruiter's claim was not true. Even with successful completion of the required certification testing, a degree from the University ofPhoenix does not guarantee a teaching certificate in either of those states. When we confronted Dr. William .Pepicello, president of the University of.Phoenix, about the recruiter's false promise, he

said it was "indefensible." "It's wrong. Can we do better? Absolutely. Do we train our people to give that kind ofrnisadvice? Absolutely not. And we can do better, we will do better, you know, we already have some initiatives that we talked about that we're putting in place because at the end of the day, we have to get it right." But this was not the first time that the university's recruiting practices have come under scrutiny. In December 2009, after two former employees came forward and accused the university of violating federal financial aid regulations with its recruiting practices, without admitting wrongdoing the school agreed to pay $67.5 million to resolve the accusations. The two whistleblowers received $19 million in the settlement. When asked if the 2009 settlement was a sign that "we got caught," Pepicello disagreed. "No, I wouldn't say it's proof that we got caught. I mean, it's certainly proof that we weren't doing as well as we could. We could do better," he said. The recruiter also told our undercover producer he could take out as much as $35,000 in federal financial aid to pay for school. She also said that there might even be some money left over after tuition was paid. Recruiter: I tell students to take out the max and whatever you don't need or you don't use then use it [for whatever]. But it's easier to take out more than you need and send back the excess versus you didn't take out enough. Producer: What are the kinds of things though? I mean in terms oflike that I could use it for? I mean, what ifl just... because you're going to have to have money to walk around. Recruiter: They don't care. Right. They don't. They just tell you use it for educational purposes. Producer: And they don't ... They don't what? Recruiter: No one follows up. No one says, What happened to this money? You received a check for $562, where did you spend it? Producer: It's your business. The university president said that there was no excuse for a recruiter to push someone to borrow to the max. 'It's absolutely indefensible. It is not the way that I intend to run this university," Pepicello said. For-Profit Universities Contributing to Financial Crisis? Experts say recruiters who are misleading students may only be the tip of the iceberg. Students who have attended forprofit schools are defaulting on their loans at an alarming rate, which experts say may be contributing to the next big financial crisis. At the University of Phoenix's headquarters, the loan repayment rate was 44 percent, according to data from 2009 provided by the Department ofEducation; students at their Nellis Air Force location had a repayment rate of36 percent. At the headquarters of Brown Mackie College, another for-profit school, the repayment rate was 27 percent. Harris Miller, who heads the for-profit industry's lobby group, told Chris Cuomo that default rates at for profit schools are comparable to other schools which service similar student populations.

Recruiters from for-profit schools obtained $24 billion in student loan and grant money for the 2008-2009 school year, according to Government Accountability Office and Senate reports. "These schools are marketing machines masquerading as universities," said Steve Eisman, a renowned hedge fund investor who predicted the last big mortgage crisis. "I thought there would never again be an opportunity to be involved in the short side as an industry as social destructive and morally bankrupt as the sub-prime mortgage industry ...Unfortunately, I was wrong." Though for-profits get the lion's share of their tuition from financial aid, the default rates on loans for students who attended for profit schools are alarming. About 50 percent of the students at for-profits drop out, according to Eisman, so schools need to keep adding new students, and have to try to recruit just about anyone-- even those most vulnerable in society, he says. Benson Rawlins was considered homeless last year when he met two recruiters from the University of Phoenix, who gave three seminars at Y-Haven, a shelter for transitional men in Cleveland, Ohio, or in effect, a homeless shelter. Rawlins doesn't have aGED, but said the recruiters had no qualms trying to sell him an expensive associate's degree. "It seems like it isjusttoo much all about money," he said, "Instead of helping someone get an education." The university told ABC News it does not tolerate recruitment at facilities like Y-Haven. "We can assure you that anyone who participated in the recruitment of residents from homeless facilities in Cleveland no longer works for the University," said Alex Clark, a spokesperson for the University ofPhoenix. "Any such activity is strictly forbidden by our Code ofBusiness Conduct and Ethics, and employees who violate this policy face disciplinary action up to and including termination." Harris Miller said even though the schools serve an important role by providing higher education to students who wouldn't ordinarily get one, many schools' recruiting practices need to be changed. Miller claimed that universities began to change even before the GAO's report on their misleading practices, including changing how recruiters are compensated (so they do not receive bonuses or prizes for recruiting students), offering "test drive" programs to help people figure out if higher education is for them and focusing more on consumer protection. When asked why for-profit universities don't return money back to those who have been misled by their solicitations, Miller said: "There are other countries in the world like Canada which have a different system and it's something we're going to look at." But Miller admitted that the industry has no plan in place to pay back those who are carrying a debt from for-profit schools. Whatever the industry's plans for future, Dalmier said it won't help heal what happened.

"If they tell you something, investigate it before you enroll in their program. You really need to find out the truth and how to further your passion or your dream," she said. "That way, you don't end up like me."
After ABC News' interview with Pepicello, the University of Phoenix offered Dalmier a scholarship for a bachelors degree of her choosing. Dalmier said she is considering their proposal.

Pepicello also said he plans to change the school's recruiting practices, especially the current model of compensation, and will be offering students a "test drive." Click HERE to read a letter to ABC News from William Pepicello.

From:

To: CC:
Date: Subject:

Robert MacArthur <nnacarthur@altresearch com> Robert MacArthur
3/26/2010 8:40:22 AM APOL -- Weak comments from the Street into the eps numbers on Monday

Rob MacArthur Alternative Research Services, Inc.
203-244-5174

nnacarthur@altresearch.com

This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The finn does not make a market or hold positions in the securities mentioned herein, nor does the finn maintain any investment banking relationships in such securities.

CREDIT SUISSE

26 March 201 0 Americas/United States Equity Research Education Services

Apollo Group Inc.
Rating Price (25 Mar 10, US$) Target price (US$) 52-week price range Market cap. (US$ m) Enterprise value (US$ m) NEUTRAL* [V) 62.43 65.001 78.94 - 53.86 10,161.11 8,300.44

(APOL)

·stock ratilgs are relative to the relevant count!}' benchmarl<. 'Target price is for 12 months. {V] =Stock considered volatie (see Disclosure Appendix).

APOL Q2 Preview: See Few Surprises, But Risks To The Downside
• APOL Reports 02 (February) Results on Monday, March 29, Before Market Open. Call will follow at 8 AM ET. Dial in info is: (877-292-6888, passcode: 56178523). Bottom line. We don't expect any major surprises, but think the risks are to the downside. Expected Operating Results; See Slight Downside Risks To Starts, Not EPS. We don't expect a large EPS surprise versus $0.78 Credit Suisse Estimate (CSE) or $0.81 consensus, as Apollo preannounced $0.77-$0.82 expected EPS on February 19. We do see downside risk to CSE/consensus starts (+10.5% CSE vs +8.4% consensus and Q1 's +13.7%) and enrollment (+15.5% CSE vs +14.6% consensus and vs Q1's +18.4%) estimates due largely to the ongoing business transition that management has indicated may weigh on Associates starts growth; we expect any upside to come from operating margin. See Slight Downside Risks to FY10/ FY11 Consensus; Reduce Ests. We doubt management will give EPS guidance, but we expect broad color on starts, enrollment, margin and negative Q4 BPP seasonality expectations may lead to slight downward revisions to FY10 and FY11 consensus estimates. We are lowering FY1 0 and FY11 EPS estimates from $5.20 to $4.91 (below $4.92 consensus) and from $5.65 to $5.50 (below $5.81 consensus), respectively largely to reflect more conservative starts and bad debt assumptions and more detailed modeling of BPP seasonality. We think risks remain to the downside. Expect Little New Regulatory Color. We don't expect significant incremental commentary regarding informal SEC inquiry or Gainful Employment. Thesis Update. Although we acknowledge (at 13x 201 OE EPS) APOL shares look cheap, there are a few sources of uncertainty that keep us on the sidelines. The uncertain regulatory environment presents obvious risks. However, we believe the biggest source of uncertainty for APOL shares relates to how much earnings growth will be hurt in 03 and beyond by the company's deliberately down-shifting Associates growth.
08/09A 4.22 14.8 85.3 3,974.2 1,220.5 6.02 10.8 7.6 -831 162.76 9.3 -1,202.2 08/10E 4.91 5.20 12.7 88.3 4,914.4 1,416.5 7.59 8.2 5.9 -1 ,861 08/11 E 5.50 5.65 11.4 92.2 5,296.0 1,560.7 8.75 7.1 4.5 -3,187 08/12E 5.80 10.8 99.3 5,532.1 1,628.8 7.81 8.0 3.7 -4,178

Research Analysts Kelly Flynn, CFA 617 556 5752 kelly .flynn@ credit-suisse.com Patrick Elgrably, CFA 312 750 2974 patrick.elgrably@credit-suisse.com Adam Shatek, CPA 312 750 3317 adam.shatek @credit-suisse.com

• •

Share

~rice

performance

Oil¥ M 25. 2009 • MO' 34, 20!0, :Y251111 - USS76 52 ..

:~
Mar·OO
Jtn.09 -pri:e Sep.Q9 Oe;;·OO -lrdexedS&P !'DO
On 03124110 the S&P 500indexc/osedat 1167.72

Quarterl:l EPS 2009A 2010E 2011E

Q1 1.12 1.47

Q2 0.77 0.78

Q3 1.26 1.49

Q4 1.06 1.10

Financial and valuation metrics Year EPS (CS adj.) (US$) Prev. EPS (US$) P/E (x) P/E rei.(%) Revenue (US$ m) EBITDA (US$ m) OCFPS (US$) P/OCF (x) EV/EBITDA (current) Net debt (US$ m) ROIC (%} Number of shares (m) BV/share (08/09A, US$) Net debt (current, US$ m) Net debt!tot. cap. (%)(08/09A,
Source: Ccme.i!n.t: data, Credft Suisse estimates.

IC (08/09A, US$ m) EV/IC (x) Dividend (08/09A, US$) Dividend yield (o/o)

DISCLOSURE APPENDIX CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, INFORMATION ON TRADE ALERTS, ANALYST MODEL PORTFOLIOS AND THE STATUS OF NON-U.S ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

CRCDITSUISSE

26 March 201 0

APOL Earnings Preview
Earnings Date/Call Details
Apollo will report 021 0 earnings on March 29 before market open and will host a conference call at 8 a.m. ET. The dial in# is 877.292.6888; passcode 56178523.

Summary of Modeled Expectations
In the following table, we detail our "key metrics" expectations for the second quarter:

Exhibit 1: Apollo 0210 Earnings
US$ in millions, unless otherwise stated
0210E Feb·10
C red~ Suisse estimate Consensus Actual

0110A Nov.09 NA NA 1,270.3 $

0209A Feb·09 NA NA 876.1

0210E YoY Growth

0210E Seq Growth

0110A YoY Growth

S 1,076.6
1,076.1 NA $

22.9 % 22.8 %

·15.2% ·15.3%

NA NA
30.8%

NA

NA
-46.5% -44.7%

Credn Suisse estimate Consensus Actual

$0.78 0 .81 NA $ 0210E Feb-10

NA NA 1.47 0110A Nov.09 205,400 171 ,000 71,900 7,300 455,600 0110A Nov.09 52,200 32, 100 13,100 700 98,100 0110A Nov.09 2,177 2,850 3,017 3.016 $2.576 2,439 2,090

NA NA

1.7% 5.2%

NA NA
30.7%
0110A YoY Growth

$0.77
0209A Feb-09 170,500 150,200 70,500 6,500 397 7001 0209A Feb-09 4 1,700 25, 100 12,500 700 80,000 0209A Feb·09

NA
0210E YoY Growth

NA
0210E Seq Growth

Total Enrollments Associates Bachelors Masters Doctoral Total

204,019 176,224 72,057 7 ,074 459,373 0210E Feb-10

19.7% 17.3% 22% 8.8% 15.5 %
0210E YoY Growth

·0.7% 3. 1% 0.2% ·3.1% 0.8%
0210E Seq Growth

26.9 % 16.5% 3.0 % 12.3 % 18.4%
0110A YoY Growth

~
Associates Bachelors Masters Doctoral Total 44,619 30,873 12,312 560 88,364 0210E Feb·10 Gross Revenue Per Student Associates Bachelors Masters Doctoral Total Total , Net of Discounts Total, Net of Discounts and Other Revenue

7.0% 23.0 % · 1.5% ·20.0% 10.5%
0210E YoY Growth

· 14.5% ·3.8%

·6.0" /o
·20.0%

·9.9%
0210E Seq Growth

14.0% 23.0% ·1 .5 % ·36.4% 13.7%
0110A YoY Growth

s

1,870 $ 2,501 2,622 2.914 2,112 1,879

$

1,773 2,405 2,469 2649 $2.149 2,os1 1,900

I
I

I

5 .5 % 4.0% 62% 10.0% 4.5% 2 .9 % - 1.1%

·14.1% · 12.2% ·13. 1% ·3.4% ·12.8% -1 3.4% -10.1%

7.4% 4.2 % 6.5 % 15.4% 5.0 % 4.1% -3.3%

Bad Debt (% of Revenue)

0210E Feb-10 6.8%

0110A Nov.09 4.9%

0209A 0210E 0210E 0110A Feb-09 YoY Change Seq Change YoY Change 4.1% 269 bp 186 bp 134 bp

Source: Company data, Credit Suisse estimates

Guidance/Estimate Changes
We doubt management will give EPS guidance, but we expect broad color on starts, enrollment and margin expectations as well as negative 04 BPP seasonality may lead us to slight downward revisions to FY1 0 and FY11 consensus estimates. We are lowering our FY10 and FY11 EPS estimates to $4.91 (+16.5%) and $5.50 (+12.0%) from $5.20 and $5.65, respectively. Our 0210 EPS estimate remains at $0.78, although we have changed line item assumptions, including our bad debt assumption, somewhat. Key changes to 2010 estimates include:

Apollo Group Inc. (APOL)

2

CRCDIT SUISSE • • • • • • Enrollment growth to 14.1% from 15.4%; Starts growth to 9.6% from 12.8%; Revenue per student growth, net of discounts, to 3.7% from 4.8%; Revenue growth to 23.7% ($4,914.4 mm) from 27.7% ($5,075.1 mm); Bad debt ratio to 5.8% from 5.1 %; Operating margin to 26.1% from 26.8%.

26 March 201 0

Key changes to 2011 estimates include: • • • • • Enrollment growth to 4.3% from 5.9%; Revenue per student growth, net of discounts, to 3.6% from 2.4%; Revenue growth to 7.8% ($5,296.0 mm) from 8.7% ($5,484.9 mm); Bad debt ratio to 5.5% from 5.0%; Operating margin to 26.8% from 26.6%.

Discussion of Expectations
Bottom Line: Expected Read-Through and Share Price Reaction

We don't expect many surprises as Apollo negatively preannounced 02 earnings on February 19. However, we think risks to starts, enrollments, FY1 O/FY11 consensus expectations and stock price reaction are to the downside.

We think risks to starts, enrollments, FY1 O/FY11 consensus expectations and stock price reaction are to the downside.

Preannouncement Details
On February 19, management preannounced the following 02 expectations: • • • $1 .07 billion revenue. $0.77-$0.82 EPS including $0.02 litigation-related charge and $0.07-$0.09 negative impact from BPP acquisition. 6.8%-7.1% bad debt expense as a percentage of revenue (for 03 & 04, management expects bad debt to decrease as a percentage of revenue, but be flattish on an absolute basis). The above figures exclude Insight Schools results, which are expected to be reported as discontinued operations beginning in 02. Insight contributed $11 .6 million in revenue in 0110, $6.6 million in 0209, and $20.6 million in FY2009.

In 02, through February 18, Apollo repurchased 3.4 million shares; the Board also authorized an additional $500 million buyback on February 18.

Expectations for Results vs Consensus
Given the recent preannouncement, we don't expect a significant EPS surprise versus $0.78 Credit Suisse Estimate (CSE) or $0.81 consensus. We do, however, see downside risk to CSE/consensus starts (+10.5% CSE vs +8.4% consensus and Q1's +13.7%), and enrollment (+15.5% CSE vs +14 .6% consensus and vs Q1's +18.4%) estimates due largely to the ongoing business transition that management has indicated may weigh on Associates starts growth. As previously discussed, management announced on the 01 earnings call that the company has embarked on a business transition aimed at driving "better prepared" enrollments and shifting the mix away from Associates towards

Apollo Group Inc. (APOL)

3

CRCDITSUISSE Bachelors and Masters enrollments. Pursuant to this effort, Apollo has been piloting a new "University Orientation" program that requires prospective students with fewer than 24 accumulated credit hours to enroll in a free 3-week orientation program prior to enrolling in classes or receiving Title IV loans. Management expects this could hurt short term starts and enrollment growth, but help student retention and other business metrics over time. Management indicated on the 01 earnings call that the "University Orientation" pilot negatively impacted 01 starts growth by - 200 bps during 01; we believe the pace of the pilot rollout, which is very hard to predict given lack of management guidance on this issue, will significantly impact how starts growth will be impacted in 02 and beyond. Also of note, our forecasts reflect our expectation that Apollo starts and enrollment YoY growth rates will be negatively impacted by one fewer enrollment week (12 weeks versus 13 weeks last year) for Associates programs due to a calendar shift; this will not impact revenues, but we estimate it may lower 02 starts growth by 400-500 basis points. We expect any EPS upside will likely come from margin. We forecast a 435 bps YoY decline in operating margin, which calls for further deceleration from 01's -67 bps, 04's +138 bps and 03's +525 bps. We expect margins will be weighed down by BPP results and increased bad debt. BPP is highly seasonal given its more traditional fall start period and the timing of certification exams. Management indicated in the 02 preannouncement that it expects a $0.07-$0.09 loss from BPP for the seasonally weak 02. We forecast 6.8% bad debt expense as a percentage of revenue, versus 4.9% in 0110, 4.1% in 0209 and management's preannounced 6.8%-7.1 %. Management has attributed the increased bad debt expense to the economic climate, the mix shift to Associate program students, and recent operational changes implemented in 0409 such as the 30 day Title IV funds disbursement delay and evaluating transfer credits in advance of loan certification ; we hope they will provide a more detailed explanations on the upcoming earnings call.
Legal/Regulatory Color

26 March 201 0

We expect minimal color on the informal SEC inquiry that Apollo announced the day of the 04 earning release; we would be surprised to see resolution this soon. We also doubt that management will have any new color regarding the Department of Education's Gainful Employment proposal or on any of the "Program Integrity" issues.
How Much EPS/Revenue Outperformance Has Apollo Delivered in The Past?

Apollo exceeded the 0110 consensus EPS estimate by $0.01, excluding one-time items (which equated to a 0.5% upside surprise) after beating earnings by $0.02 in 0409. Apollo has exceeded consensus estimates in each of the past six quarters. Apollo beat the consensus revenue estimate in 0110 by $40.7 million (equaling a 3.3% upside surprise), after exceeding the consensus revenue estimate in 0409 by $42.2 million. Overall, Apollo has exceeded consensus revenue expectations by an average of $32.6 million, or 3.3% over the past six quarters.

APOL has beaten consensus revenue and EPS estimates in each of the prior six quarters.

Apollo Group Inc. (APOL)

4

CRCDIT SUISSE

26 March 201 0

Exhibit 2: EPS Outperformance Versus Consensus ($)
$0.20

Exhibit 3: EPS Outperformance Versus Consensus (%)
25.0% . . - - - - - - - - - - - - - - - - - - - - - - - , 20.0% 19.2%

$0.15

$0.14 15.0%

$0.10 10.0% $0.05 5.0% 0.5%
0.0%

so.oo

Source: Thomson One, First Call

Source: Thomson One, First Call

Exhibit 4: Revenue Outperformance Versus Consensus ($ in millions)
$58.15

Exhibit 5: Revenue Outperformance Versus Consensus

%

$60.00

$40.00

$20.00

$0.00

Source: Thomson One, First Call

Source: Thomson One, First Call

How Have Apollo Shares Traded Around Quarter In the Past?

In the week leading up to the quarterly earnings release for the past six quarters, shares of APOL have been up 0.8% on average. Following the past six quarters' earnings announcements, APOL stock declined 1.6% on average the trading day after the earnings announcement, but returns have varied significantly. The trading day after the 0110 earnings release, shares declined 5.4%.

Exhibit 6: APOL Stock Performance Week Before Earnings Announcement

Exhibit 7: APOL Stock Performance Trading Day After Earnings Announcement
15.0%

5.0%

4.4%

5.0%

·5.0%

· 15.0% ·25.0%
J __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _...J

.8

· 17.7%

0

e
0

<(

Source: FactSet, Credit Suisse estimates

Source: FactSet, Credit Suisse estimates

Apollo Group Inc. (APOL)

5

CRCDIT SUISSE

26 March 201 0

Companies Mentioned (Price as of 25 Mar 10)
Apollo Group Inc. (APOL, $62.43, NEUTRAL [V), TP $65.00)

Disclosure Appendix
Important Global Disclosures

I, Kelly Flynn, CFA, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2} no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for APOL
APOL Date Closing Price (USS) Target Price Initiation/ (USS) Rating Assumption 91 - - - - - - - - - - - - - - - - - - - - - - - - -

ss •

4/2/07 4/9/07 6/18/07 2/21/08 3/28/08 6/20/08 7/30/08 10/29/08 12/2/08 1/9/09 4/21/09 4/29/09 4/30/09 6/8/09 8/18/09

43.25 48.37 63.21 41.21 52.83 62.31 65.01 75.68 85.27 61 .15 62.48 62.95 65.18 64.33

47 70 50 60 70 75 88 95 65
NC N

X

0
~ --~----~~~~-~------------

a~s~7.!-.-~-.--.--,---+-..---.-----.--.-~-.--,---.--.---.----.-o
N

1fT

11\1"'

-~ -~~~ # ~~#~~# ">~~ 4C#~#...~#~ ~ <$"' ~.'1? ~<? ,$'~~ .,~ ~ ~~ ~1> ~ ,_fl, ,g; <o ... ~ ~
Cfooirg Prire

R
N

Ta iiJel Pri:e

0 lnilialiJl!Assurrption

Rating

O=rull!ltom; N:lll!utmt U:Urdefll<!dam R=Restricted; NR=Not Rlled; NC:NotCoveed

65

R N

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts' stock ratings are defined as follows: Outperform (0): The stock's total return is expected to outperiorm the relevant benchmark* by at least 10-15% (or more, depending on perceived risk} over the next 12 months. Neutral (N): The stock's total return is expected to be in line with the relevant benchmark* (range of ±10-15%} over the next 12 months. Underperform (U): The stock's total return is expected to underperiorm the relevant benchmark* by 10-15% or more over the next 12 months. •Relevant benchmark by region: As of 2f!h May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on {1) a stock's absolute total return potential to its current share price and (2) the relative attractiveness of a stock's total return potential within an analyst's coverage universe .., with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock's total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock's total return relative to the analyst's coverage universe*'. For Australian and New Zealand stocks a 22%and a 12% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively, subject to analysts' perceived risk. The 22% and 12% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively, subject to analysts' perceived risk. ..An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts' coverage universe weightings are distinct from analysts' stock ratings and are based on the expected performance of an analyst's coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperiorm the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to periorm in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperiorm the relevant broad market benchmark over the next 12 months. 'An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. ..The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months.

Apollo Group Inc. (APOL)

6

CRCDITSUISSE

26 March 201 0

Credit Suisse's distribution of stock ratings (and banking clients) is: Global Ratings Distribution Outperform/Buy• 43% (59% banking clients) NeutraVHold• 41% (60% banking clients) Underperform/SeW 13% (55% banking clients) Restricted 2%
·For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse's policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein. Credn Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credtt Suisse's Pofides for Managing Conflicts of Interest in connection wi1h Investment Research: http://wNw.csfb.cornlresearch-and-analytics'disclaimer/rnanaging_conflicts_disclaimer.html Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

See the Companies Mentioned section for full company names. Price Target: (12 months} for (APOL} Method: Our $65 target price for APOL is derived from our discounted cash flow (DCF}-based model and based on the following estimates: 2009-19 revenue CAGR (compound average annual growth grate) of 7.0%, 2009 operating margin of 27.5% going to 37.2% by 2019, a WACC (weighted average cost of capital} of 16%, and terminal free cash flow growth of 3%. Risks: Several factors may affect Apollo's achievement of our $65 price target: an economic recovery which has the potential to negatively impact countercyclical post-secondary education services companies, impact of greater regulatory and accrediting agency requirements and a high concentration of Apollo stock ownership within the Sperling family which could vote against proposals that actually benefit Apollo. Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections. See the Companies Mentioned section for full company names. The subject company (APOL} currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse. Credit Suisse provided investment banking services to the subject company (APOL) within the past 12 months. Credit Suisse provided non-investment banking services, which may include Sales and Trading services, to the subject company (APOL} within the past 12 months. Credit Suisse has received investment banking related compensation from the subject company (APOL) within the past 12 months. Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (APOL} within the next 3 months. Credit Suisse has received compensation for products and services other than investment banking services from the subject company (APOL} within the past 12 months. As of the date of this report, Credit Suisse Securities (USA) LLC makes a market in the securities of the subject company (APOL). Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report. The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (APOL} within the past 12 months. Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares. Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report. For Credit Suisse Securities (Canada}, Inc.'s policies and procedures regarding the dissemination of equny research, please visn http://www.csfb.com/legal_terms/canada_research_policy.shtml. As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at anytime after that. CS may have issued a Trade Alert regarding this security. Trade Alerts are short term trading opportunities identified by an analyst on the basis of market events and catalysts, while stock ratings reflect an analyst's investment recommendations based on expected total return over a 12-month period relative to the relevant coverage universe. Because Trade Alerts and stock ratings reflect different assumptions and analytical methods, Trade Alerts may differ directionally from the analyst's stock rating. The author(s) of this report maintains a CS Model Portfolio that he/she regularly adjusts. The security or securities discussed in this report may be a component of the CS Model Portfolio and subject to such adjustments (which, given the composition of the CS Model Portfolio as a whole, may differ

Apollo Group Inc. (APOL)

7

CRCDITSUISSE

26 March 201 0

from the recommendation in this report, as well as opportunities or strategies identified in Trading Alerts concerning the same secur~y). The CS Model Portfolio and important disclosures about it are available at www.credit-suisse.com/ti. To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any} are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at www.creditsuisse.com/researchdisclosures or call+ 1 (877) 291-2683. Disclaimers continue on next page.

Apollo Group Inc. (APOL)

8

CREDIT SUISSE

26 March 201 0 Americas/United States Equity Research

This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availabil~y or use would be contrary to law or regulation or which would subject Credit Suisse AG, the Swiss bank, or ~s subsidiaries or ~s affiliates ("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor ~s content, nor any copy of it, may be ahered in any way, transmitted to, copied or distributed to any other party, without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are su~able for any particular investor. CS will not treat recipients as its customers by virtue of their receiving the report The investments or services contained or referred to in this report may not be suitable for you and it is recommended that you consuh an independent investment advisor if you are in doubt about such investments or investment services. Nothing in this report const~utes investment, legal, acoounting or tax advice or a representation that any investment or strategy is su~able or appropriate to your indMdual circumstances or otherwise constitutes a personal reoommendation to you. CS dces not offer advice on the tax consequences of investment and you are advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. CS believes the information and opinions in the Disclosure Appendix of this report are accurate and complete. Information and opinions presented in the other sections of the report were obtained or derived from sources CS believes are reliable, but CS makes no representations as to their accuracy or completeness. Additional information is available upon request. CS aocepts no liability for loss arising from the use of the material presented in this report, except that this exdusion of liability does not apply to the extent that liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for the exercise of independent judgment. CS may have issued, and may in the future issue, a trading call regarding this security. Trading calls are short term trading opportunities based on market events and catalysts, while stock ratings reflect investment recommendations based on expected total return over a 12-month period as defined in the disclosure section. Because trading calls and stock ratings reflect different assumptions and analytical methods, trading calls may differ directionally from the stock rating. In addition, CS may have issued, and may in the future issue, other reports that are inconsistent with, and reach different conclusions from, the information presented in this report. Those reports reflect the different assumptions, views and analytical methods of the analysts who prepared them and CS is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report CS is involved in many businesses that relate to companies mentioned in this report. These businesses indude specialized trading, risk arbitrage, market making, and other proprietary trading. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgement at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange rate fluctuation that may have a posiitive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADA's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a hgh degree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in eoonomic, financial and political factors (induding, but not limited to, spot and forward interest and exchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consuh with their own professional advisers as to the risks involved in making such a purchase. Some investments discussed in this report have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in the case of some investments the potential losses may exceed the amount of initial investment, in such circumstances you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be used as part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficuh for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, or contain hypertinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed the linked site and takes no responsibility for the content contained therein. Such address or hypertink Qnduding addresses or hyperlinks to CS's own website material) is provided solely for your convenience and information and the content of the linked site does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by Credit Suisse Securities (Europe) Umited, One Cabot Square, London E14 4QJ, England, which is regulated in the United Kingdom by The Financial Services Authority f'FSA"). This report is being distributed in Germany by Credit Suisse Securities (Europe) Um~ed Niederlassung Frankfurt am Main regulated by the Bundesanstah fuer Finanzdienst!eistungsaufsicht ("BaFinj. This report is being distributed in the United States by Credit Suisse Securities (USA) LLC ; in Switzerland by Credit Suisse AG; in Canada by Credit Suisse Securities (Canada), Inc..; in Brazil by Banco de lnvestimentos Credit Suisse (Brasil) S.A.; in Japan by Credit Suisse Securities (Japan) Lim~ed, Financial Instrument Firm, Director-General of Kanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Securities Investment Advisers Association; elsewhere in Asia/Pacific by whichever of the following is the appropriately authorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Um~ed, Credit Suisse Equities (Australia) Limited , Credit Suisse Securities (Thailand) Limited, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited, Credit Suisse Securities (Europe) Lim~ed, Seoul Branch, Credit Suisse AG, Taipei Securities Branch, PT Credit Suisse Securities Indonesia, and elsewhere in the worfd by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business Person. Research pro'vided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn. Bhd., to whom they should direct any queries on t 603 2723 2020. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in acoordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require that the trade be made in acoordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do so only by contacting a representative at Credit Suisse Securiities (USA) LLC in the U.S. Please note that this report was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or inst~utional investor customers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of hs contents. This research may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA or in respect of which the protections of the FSA for private customers and/or the UK compensation scheme may not be available, and further details as to where this may be the case are available upon request in respect of this report. Any Nielsen Media Research material contained in this report represents Nielsen Media Research's estimates and does not represent facts. NMR has nehher reviewed nor approved this report and/or any of the statements made herein. If this report is being distributed by a financial institution other than Credit Suisse AG, or ~s affiliates, that financial instMon is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constiitute investment advice by Cred~ Suisse to the dients of the distributing financial in~ution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees aocept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Copyright 2010 CREDIT SUISSE AG and/or ~s affiliates. All rights reserved.

CREDIT SUISSE SECURITIES (USA) LLC United States of America: +1 (212) 325-2000

APOL 0210 Preview.doc

From: Rob MacArthur <rmacarthur@altresearch com>
To:
Rob MacArthur 11/13/2009 11 :45:42 AM APOL analyst presentation yesterday

CC:
Date: Subject:

FINAL TRANSCRIPT
Thomson StreetEvents"'
APOL- Apollo Group at Signal Hill Education Preview Investor Conference
Event Date/Time: Nov. 12. 2009 I 9:00PM GMT

THOMSON REUTERS STREETEVENTS I www.streetevents.com I Contact Us
02009 Thomson Reuters. All ri ~ls rese<ved. Republication or redslribution ol Thomson Reuters content, Including by framing or similar means. Is prohibited wi1hout the prt(l( wntten consent of Thomson Reuters. 'Thomson ReutE>'s' and 1he Thomson Reuters logo are registE>"ed trademar1<s of Thomson Reuters and its affiliated companies.

FINAL TRANSCRIPT

Nov. 12.2009 I 9:00PM, APOL- Apollo Group at Signal Hill Education Preview Investor Conference

CORPORATE PARTICIPANTS
Chas Edelstein
Apollo Group - Co-CEO, Director

Brian Swartz
Apollo Group - CFO

CONFERENCE CAll PARTICIPANTS
Trace Urdan
Signal Hill Education - Analyst

PRESENTATION
Trace Urdan - Signal Hill Education - Analyst
Okay we're going to go ahead and get started. Please find a seat if you can. That would be great. I am very grateful to Apollo Group today for helping me back cleanup here and, as somebody described, the home stretch between conference and cocktails. We're very delighted to have with their first appearance at our Signal Hill Education Conference, are very excited fort hat reason. There's obviously a lot of interest in what they have to say, so that's another reason to be excited. From the Company today we have Co-CEO, Chas Edelstein, and CFO, Brian Swartz, and so they are going to tell us about their Company and we're going to ask them some questions. Chas?

Chas Edelstein - Apollo Group - Co-CEO, Director
Okay thank you, Trace. It's a privilege to be here. I'll try to spend a brief amount of time on a few overview type slides and then we can leave time for you to ask both of us some questions. The Safe Harbor provisions, I'll just leave here for you to read and just a brief agenda. We'll talk a little bit about our philosophy, how we think about what our mission is and what we're trying to accomplish at Apollo Group and how we look at long-term value creation. An educated world is a better world. It is really the philosophy.ln fact, you may see some of this sort ofthinking in our advertising going forward. It really is a concept that was what the Company founding was based upon over 30 years ago and that there really, you know, at that time there was no good way for adult learners to access the education, post secondary education market, and we've been innovating in that area really ever since. Our on-line education is celebrating its 20-year anniversary this year. When I first saw that I didn't even realize the Internet had been in existence for 20 years but it turns out it has. This is a slide just to give you a sense of how we talk to people internally about what we're trying to do and our values. And these are the four pillars of value, where it talks about our different constituencies and how we think about the way we make decisions in our business. Integrity and social respon sibility, we want to do the right thing and give back to our communities and that's important for our business because the business has a social mission. Changing lives through education is about delivering a high quality education to as many people as possible who can benefit from the education and we deliver that message very consistently to our people. We want to be sure that we have the best job that we can in the education sector and that's how we look to delivery long-term value, which is a cash oriented concept, returns on cash, and that's how we think about the value proposition.

THOMSON REUTERS STREETEVENTS I www.streetevents.com I Contact Us
02009 Thomson Reuters. All ri(1lts reserved. Republication or redstribution ol Thomson Reuters content, Inducing by
framing or similar mean s, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' Wld the

Thomson Reuters l ogo are registered llademarl<s of Thomson Reuters and its affiliated companies.

FINAL TRANSCRIPT

Nov. 12.2009 I 9:00PM, APOL- Apollo Group at Signal Hill Education Preview Investor Conference
Just briefly, in term s of the market, we won't spend much time on this at all. You've been steeped in it all day today but it's important to note that 66% of working adults don't have bachelor's degrees and that's a group of people that can double their income if they have degrees. So the business is really about in the U.S. about reaching the people, who are not in the post secondary system and bringing them in and we tailor our programs to help students that might not be successful at a traditional institution. A lot of our students have risk factors and they have kid s or their jobs or they're married and we put services in place that really help them. That's the premise for how we're looking to grow the business in the U.S. And overseas the numbers are even larger. You know, by 2025 we expect there to be 250 million students in the post secondary education, in need of post secondary education. The numbers are very large and I get asked questions sometimes about where are you in the state of maturity as an industry and our belief is there's a long way to go, both in the U.S. and in overseas for sure. And the reason is, the thing that drives the growth Is, the value proposition to the student and we can never forget that. That is what drives our growth, our own profitability and our cash flows and the value proposition here is one way you see it, which is people with more education are employed, people with more education earn more money, but that's the fundamental piece that we can never lose sight of. This is a surprising statistic here. We talk about traditional schools and serving traditional students. It 's really eye opening to note that 73% of students in the U.S. today and in post secondary education are non traditional so, in fact, traditional students are the minority, traditional being graduating from high school, going and living on campus sort of the way I went to college. Most of the people in post secondary are not in that situation now and that' s another rea son for the growth that we've seen in our market. So we are in the business of providing the flexibility and the services that are needed by these non-traditional students. So how do we do that? an overview of the Apollo organization, the biggest piece by far at University of Phoenix with 90% of the revenues of the combined organization and University of Phoenix is - you know, continues to have good growth and good growth prospects and there'sa number of our other businesses, such as our global business where we're growing internationally, that we're looking to to add to our growth prospects and the longevity of those growth prospects but it's very clear to us that the lion's share of the economics, at least in the near term, in the next several years, is certainly going to be driven by University of Phoenix. The University of Phoenix, just to give you a sense of what it feel s like, it's focused on working adults. They tend to be older. The average age is around 30. They tend to be more female than male and about 46% minority versus around 39% in the population so it 's skewed toward minority students and that's really what we feel is part of our social mission. And so what do we do to meet the needs of this type of student body, our unique type of student body that has some of these risk factors? Well, we talk a lot about the student experience. The way we think about it Is what are the touch points with the student and what help do they need along the way? And that's what we try to bring to bear for those of you that listen to our conference calls, you hear about some of the programs and initiatives that we make in trying to be sure that we're providing the services to these students that they need to get through the program and reap the benefits of the degree that we offer in a high quality way. That includes certainly the faculty and the focus on the academic quality, which we spend a lot of time in terms of training the faculty who tend to be practitioners and really know their subject that they're teaching and the academic quality that we measure in terms of looking at the outcomes to the students and making sure that we're accountable in measuring the academic quality that exists. That's the regional accreditation is important to our students and it's important to us, as well as many of the other programatic accreditations that we have. Maybe I'll just take a minute to show you a commercial if we've got it teed up on what we're showing to the market. (Video Playing)

2
THOMSON REUTERS STREETEVENTS I www.streetevents.com I Contact Us
02009 Thomson Reuters. All ri(1lts reserved. Republication or redstribution ol Thomson Reuters content, Inducing by
framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' Wld the

Thomson Reuters l ogo are registered llademarl<s of Thomson Reuters and its affiliated companies.

FINAL TRANSCRIPT

Nov. 12.2009 I 9:00PM, APOL- Apollo Group at Signal Hill Education Preview Investor Conference

Chas Edelstein - Apollo Group - Co-CEO, Director
This is really the next step of the I am a Phoenix campaign that you may have originally seen where we profiled our students and the successes that they've had. This is a campaign that we've more recently rolled out profiling our professors and our faculty and the success in the backgrounds that they have. Again, our research is showing that's it's important to our student base. It tends to be a more, an adult, an older student base, where they want to know what the backgrounds of the people that are going to be teaching them and so that's-- it's something that we're focusing in on our campaigns, as well as the substance. Maybe just to give you a little background on Apollo Group, for those that don't know us, it's a joint venture that we have with Carlyle. We own over 80% of the venture and we've made three acquisitions, a Chile, Mexico and london in the venture. And really the objective of the venture is to build a global network where our students can have the benefit of places around the world to look at if they might want to transfer to. The schools themselves share best practices and we have a vision of a global network where we're really buying things that will start with a seed, that we can plant and grow from that seed where maybe we can help with technology, where the existing school doesn't have the ability to go on line or help with some marketing practices or where we can add some value to what we buy internationally. Here are the three companies that we purchased already. We see -- we have Western International University on this slide as well because it's another vehicle that we -- even though it's not in the Apollo Group joint venture -- it's another vehicle that we'll look to for international focus and international growth and we're making investments in Western International now, hiring new management team that we've had in place for a few months and really looking to grow that business in addition to the University of Phoenix business certainly. Just a little bit about long-term value creation and how we think about creating value for all the shareholders, as we think about how we deploy our capital, it's very clear that our highest return asset is University of Phoenix and will be for a long time, many years. The incremental returns on capital in that business are almost 200% and that is a very capital efficient model, so certainly any capital requests from the people that are managing the University of Phoenix, those are the very highest things on our list. And then after that we look to other investment opportunities that we have to invest in our existing businesses and WIU, as I just mentioned, is an example where we see an opportunity to get some good returns on the capital investing in that business that already has a good reputation and accreditation and the base that they need. And we look at other acquisitions. We also look at a potential return of capital to shareholders in that equation and think about that in terms of the returns that we're likely to get and, as those of you who have followed us know, we certainly have engaged in share repurchases over the last year or two in a significant way, as well as acquisitions and investing in University of Phoenix. We've been able to really do all of those things because of the very significant cash flow generation characteristics that this business has. Now the investing that we do is really in thinking about how we grow the cash flows in the long run and we believe solidly that the way to grow the cash flows in the long run is to be sure that the student is getting their value. If they are getting a return on their investment, then we are going to get return on investment. So our investments are to make sure the student gets their return. So that's why you see the focus on academic quality and making sure that we're delivering good outcomes to the students, both in an academic sense, what kinds of skills they're bringing to bear and making sure that we're being very up front and I guess educational with our students about what their opportunities are going forward. The other thing that, of course, we have to manage in the business are the risks of the business, the financial risks -- you know, you saw the pyramid that we showed about how we think about where we invest in the relative opportunities in the business. Regulatory and compliance, it's certainly an important risk in the business. The way we think about that is certainly process. We have to make sure we have all t he processes and procedures in place to make sure we're following the rules and we've spent a lot of time making sure we're doing that. It's a highly regulated business.

3
THOMSON REUTERS STREETEVENTS I www.streetevents.com I Contact Us
02009 Thomson Reuters. All ri(1lts reserved. Republication or redstribution ol Thomson Reuters content, Inducing by
framing or similar mean s, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' Wld the

Thomson Reuters l ogo are registered llademarl<s of Thomson Reuters and its affiliated companies.

FINAL TRANSCRIPT

Nov. 12.2009 I 9:00PM, APOL- Apollo Group at Signal Hill Education Preview Investor Conference
The other part of that though is really culture and how we make sure we're doing the right thing by the student. I've talked about that a lot in even these shortened remarks because I want to be sure you understand how important that is to all the aspects of the business, not only the value to the cu stomer but in regulatory and compliance. In the end if we're doing the right thing by our students, then we're managing and having the right culture in that, we're managing the regulatory and compliance ri sk as well. So our reputational risk, the way you think about that is to be sure that everybody understands that we have to follow the highest ethical standards in our business. And so our long-term objectives, as we do that, is to really have a three to five-year growth path and this is what we're investing to do to grow our business at the top line and the revenue basis in the low double-digits and at the operating income level in the mid teens and that's really our objectives. So, with that, it's in a shortened way I wanted to just be sure we leave some time for Q and A, so I'll join my colleague, Brian, our
CFO, and we'll help with whatever we can.

QUESTIONS AND ANSWERS
Trace Urdan - Signal Hill Education - Analyst
Starting off with the last point you made I think, about the culture in the theme of maybe trust but verify, how do you --can you describe kind of the controls that you have basically for making sure that the folks that are still working in ground campuses are doing all the things that they need to? And maybe also speak just to the issue of recruitment and, you know, you have a culture and standards but how do you know that it's also being followed in addition to sort of leading? How do you measure and check and can you talk to that?

Chas Edelstein - Apollo Group -Co-CEO, Director
Sure. Brian, you want to talk a little bit about how we monitor some of the phone calls and the training that we do?

Brian Swartz - Apollo Group - CFO
Yes. I mean, the business is structured as such that we manage the business first of all regionally and for our graduation team s, which was on the slide with composed of finance counselors, academic counselors and enrolment counselors and in each of those functions, which are several thousand of our employees, we have functional leads that help manage both t he delivery of training, the types of people we hire, how we hire them, have frequency of training. We also go through processes of monitoring calling with each one of those counselors when they're on the phone with students, the types of things get said. If we hear things that are said that are maybe said the wrong way there's follow-up actions that are taken to both the manager and the counselors themselves and so it's an iterative process but I think the key is really developing the training and taking the training to the next level to make sure that if we do something wrong but making sure that doesn't become a systemic issue to the system and so we do. We spend a lot of time on talking about that and making sure we're sending the right messages.

Chas Edelstein - Apollo Group - Co-CEO, Director
There are some neat new tools in this area too that if, for example, there is a voice recognition tool where if somebody uses the word "guarantee," for example, unless there is the word "no" before it a flag gets raised, so there are tools you can use to monitor but the key is in training and culture and making sure people understand what's expected of them.

4
THOMSON REUTERS STREETEVENTS I www.streetevents.com I Contact Us
02009 Thomson Reuters. All ri(1lts reserved. Republication or redstribution ol Thomson Reuters content, Inducing by
framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' Wld the

Thomson Reuters l ogo are registered llademarl<s of Thomson Reuters and its affiliated companies.

FINAL TRANSCRIPT

Nov. 12.2009 I 9:00PM, APOL- Apollo Group at Signal Hill Education Preview Investor Conference

Trace Urdan - Signal Hill Education - Analyst
Of course, and then similarly just I don't want to get bogged down with revenue recognition but I am going to ask a question that relates to my own pet theory. So, around attendance taking in the local level, who takes attendance? How does that work? How do you make sure that that's being handled properly, again, just at the ground campuses. Obviously in on line it's a little more straightforward.

Chas Edelstein - Apollo Group -Co-CEO, Director
Want to do it again?

Brian Swartz - Apollo Group - CFO
Yes I mean when students-- generally our students come to class one night a week, so it's one evening, generally Monday through Thursday and when they come into class there's small group sessions. They sign in. We take attendance that's processed through in some cases it's an automated system and some region s where the attendance is loaded into the system and they're either in attendance or if they didn't sign in, they're then out of attendance. And so that's how it happens generally on the ground campuses. In the on-line environment it's a little bit different obviously because there's not one night a week. They can come on line whenever they want, 24 hours a day, seven days a week and attendance occurs once they log onto the system twice in any given week to make sure they are participating in the class discussion.

Chas Edelstein - Apollo Group - Co-CEO, Director
Taking attendance, by the way, is not required.

Brian Swartz - Apollo Group - CFO
We do that at our option yes.

Trace Urdan - Signal Hill Education - Analyst
Chas, you showed that advertisement that I think was pretty compelling and you guys have this Phoenix campaign, which is something relatively new for you in terms of sort of image advertising and it's running in all kinds of places like the NBC Nightly News and places that I am pretty sure are not big sort of lead gen vehicles for you, so can you talk a little bit about what the motivation for the ad campaign is and sort of how you're thinking about it and how you're sort of measuring its effectiveness? How do you know if it's working and what are the standards and then how do you know whether you're meeting those objectives?

Chas Edelstein - Apollo Group -Co-CEO, Director
Well, the philosophy behind it is that the better your reputation is the less money you have to spend on advertising for to get students, to bring students in. So when you think about elite universities, which I understand is not our market, those universities don't spend a lot of money on advertising, yet they still manage to get people coming to them and interested. So we understand fundamentally that reputation lowers -- higher reputation lowers cost of lead generation. So that's the philosophy behind it so that is exactly the thought process there.

5

THOMSON REUTERS STREETEVENTS I www.streetevents.com I Contact Us
02009 Thomson Reuters. All ri(1lts reserved. Republication or redstribution ol Thomson Reuters content, Inducing by
framing or similar mean s, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' Wld the

Thomson Reuters l ogo are registered llademarl<s of Thomson Reuters and its affiliated companies.

FINAL TRANSCRIPT

Nov. 12.2009 I 9:00PM, APOL- Apollo Group at Signal Hill Education Preview Investor Conference
We are spending increasing amounts of money to build reputation, which are not going to generate leads the day after the ads run but we believe will generate longer run benefits. So we measure that in a number of different ways. If, for example, more people or the things that we're doing more people are driven to our website as opposed to coming to through third-party lead aggregators, well our website leads convert at multiples of our other sources, so we can see what's happening in term s of what our costs of a new student enrollment is over time.

Trace Urdan - Signal Hill Education -Analyst
You've referenced in the presentation that you serve working adults and it's certainly true but my perception is that the nature of the work can vary pretty widely in your student population, so an Axia student who has maybe few credits and is really kind of getting going with their college education is very different obviously from somebody who is coming to you for a Masters in business and already has an established career. So how do you think about what the value, how the value proposition is different in that chain and where I am leading to is your guys are working adults? You don't worry so much about finding employment for them but might it not be the case that the students who are coming in at the Axia level really do have the expectation that when they come away with their degree that they really should be able to use that to kind of change the type of employment pretty dramatically and where does your responsibility in that equation fall?

Chas Edelstein - Apollo Group - Co-CEO, Director
Well, it's still the case that most of the students that come to us are working but I think that we are still learning about some of the needs of Axia students, you know, the Associate Degree students. That's newer for the Company though. That's in the last five or six years. It's not a 30-year history and I think in some of the things that we're learning about that we're trying to get better at our mission. And, you know, I talked in my remarks about our mission being trying to reach as many people as we can with a high quality education who can benefit. Well, so reaching as many people as we can speaks to our philosophy of open enrollment and that is going to continue to be our philosophy. But on the other hand, are there more people coming to us today either because we have Associate Degree programs available or maybe because the K-12 system is not preparing people as well as it was 10 years ago or whatever the reason. Are there more people coming to us that are less prepared for college and may have lower success in getting through college? College is hard and so if there are things we can do, given this changing environment, to better identify those students that would be a terrific thing. So the best, the ideal thing, would be if we could figure out how to identify that student before we pay for the lead. That would be perfect if we said, "Well, these are the criteria, leads that have come from this source or students at this number of credit hours" or whatever the criteria are, those are going to be really difficult. We could reject those leads as unlikely to be students that can benefit. You can have another screen, if you will, at the level after a student applies saying what can we do after a student applies to see if we can identify student s who are not likely to benefit and we're working on a test right now of a targeted group of students, students that generally have lower credit hours when they come in and putting them through a three-week orientation program, saying look we're not going to enroll you as students yet. We're not going to charge you. It's free but just go through this three-week program. It will give you a feel for what it's like and we're having students going through that saying, "Wait a minute, I'm not ready for this. This is hard." And they're self selecting out and so there are things that we're trying and doing now because of this increasing number of students that we're getting that are not as well prepared to try to be sure that we're focusing on the students who can benefit from the education. We're not trying to be an exclusive University. We're trying to make sure that the best we can to make sure we focus on students who can benefit.

6
THOMSON REUTERS STREETEVENTS I www.streetevents.com I Contact Us
02009 Thomson Reuters. All ri(1lts reserved. Republication or redstribution ol Thomson Reuters content, Inducing by
framing or similar mean s, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' Wld the

Thomson Reuters l ogo are registered llademarl<s of Thomson Reuters and its affiliated companies.

FINAL TRANSCRIPT

Nov. 12.2009 I 9:00PM, APOL- Apollo Group at Signal Hill Education Preview Investor Conference

Trace Urdan - Signal Hill Education - Analyst
But isn't there- - I mean, I guess my question is basically this. I think that everybody who comes is sort of working adult because they need to live but some of the students I guess I believe, especially maybe more of the students that are coming in at the- in the Axia program and at the - with fewer credit hours are coming to the University with the expectation that this is going to unlock opportunities for me. This is going to go from so I can quit this job that isn't very productive for me and move into a career that I really am excited about and make that transition versus a sort the historical Apollo student who is somebody who is currently already maybe well along in their career path and needed to keep going. So, given that maybe, again, I don't want to put words in your mouth. But, given that maybe some of these students are coming with the expectation of changing their jobs, of moving to a new level, doesn't that kind of drag you guys into the career placement business to some degree?

Chas Edelstein - Apollo Group -Co-CEO, Director
You know, there's a -- that's not the focus of our energies right now. At some point in the future might it be? It's sort of hard to say but, as a university, we want to be in the education business. We're really not looking to be in the job placement business nor do we represent that that's what we're doing.

Trace Urdan - Signal Hill Education - Analyst
Okay fair enough. I want to give the audience a chance to ask questions. I don't want to -- I think maybe there might be. Does anybody have a question? We have some mikes that we can bring around and could we please start with the easy ones? Doug looks like he's going to ask you an easy one. Come on, Doug, ask an easy question back there. All right. I don't think we have anyone brave enough to raise their hand, so I am going to -- there we go.

Chas Edelstein - Apollo Group - Co-CEO, Director
There we go.

Trace Urdan -Signal Hill Education - Analyst
I knew we could do it. Come on down, Doug.

Unidentified Audience Member
I have two very unrelated questions. I'll say them both at once. Number one, just on the marketing side I personally have had bad luck investing with companies at main stadium so I wonder what the thought process behind that investment, how much you think it's worth, how much you spent. That's sort of the first thing I am curious about. And also, I know you've addressed this already but, as much as you can tell us about this SEC thing and how, like how the process begins, what kind of negotiation you might have had before that then if you're looking into it and as much as you possibly can tell us about that.

Chas Edelstein - Apollo Group - Co-CEO, Director
Okay. One, on the stadium question I can't actually tell you what the thought process that went into it. I wasn't at the Company at the time but it is a good partnership that we have with the Cardinals and cost of it we disclosed. It's an escalating cost over
7
THOMSON REUTERS STREETEVENTS I www.streetevents.com I Contact Us
1!:>2009 Thomson Reuters. All ri(1lts reserved. Republication or redstribution ol Thomson Reuters content, Inducing by
framing or similar mean s, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' Wld the

Thomson Reuters l ogo are registered llademarl<s of Thomson Reuters and its affiliated companies.

FINAL TRANSCRIPT

Nov. 12.2009 I 9:00PM, APOL- Apollo Group at Signal Hill Education Preview Investor Conference
time. I think it goes up 3% a year and it's currently around $6 million a year, so it's not a material cost to the Company but the historical thought process I really can't -- it's a 20-year contract though. That I can tell you. And in terms of the SEC informal inquiry, that we -- there wasn't a sort of discussion but, you know, they informed us that they were planning on doing this. It's we disclosed it voluntarily. It's actually what it's called is a non-public informal inquiry but we just -- we thought it was the right thing to do but there wasn't a sort of discussion about it. The fact that we're cooperating with it, that's voluntary as well. An informal inquiry, it's up to us what we want to do. But it's just that's what we want to do. We want them to come in and see whatever it is they need to see. You know, I would say I am -- we take it seriously. I mean, that's a something that you don't want to take sort of lightly. I am comforted by the fact that I know the people that are involved at the Company. I mean, I know the guy sitting next to me, who is our CFO, who has an accounting background and came in to clean up some of the accounting practices that-- and make sure that everything was in good shape during some of the options problems the Company had historically. I know Joe D'Amico, who has a forensic accounting background, who came in as a consultant at that same time and has combed the accounting records of the Company and is now our President after being CFO. So I know the people and where their hearts are and I am very confident about that. You know, it's hard to say much about the substance of anything when you don't have much more of a base to know what it is that you're being asked to comment on. But I -- my hope is that they sort of do the work that they need to do and we can move on with it.

Trace Urdan - Signal Hill Education -Analyst
Chas, you've known this Company for a long, long time before you joined it.

Chas Edelstein - Apollo Group - Co-CEO, Director
True.

Trace Urdan - Signal Hill Education - Analyst
What surprised you most once you kind of came inside versus what you had understood before that happened?

Chas Edelstein - Apollo Group - Co-CEO, Director
I think a couple of surprises, maybe one on the positive side and one on the negative side, the positive one was probably that when you meet -- you know, as an investment banker I sort of know the executives at the Company. I hadn't had a chance to meet people down in the organization. When you go to the campuses I went to Cincinnati yesterday on my way here before I came here and I go to campuses. One or two days a month I spend going and visiting campuses. You meet the people in the organization, the people who are running the regions or running the campuses and they are passionate about what they're doing almost to a religious extent. It's this sort of desire to make a living and get into heaven at the same time, to tell their mother about what they're doing and just they want to tell me the stories about a student that they helped and what they did.lt's an asset that I wish I could just bottle and it's a great asset of the Company that it really didn't -you don't have a feel from the outside looking in to that. It's quite something. Probably the thing I was most negatively surprised about it when I first came a little over a year ago and I talked to people about what strategic ideas were and where we want to head, people would talk to me about one of the things we have to overcome is the fact that we're large and can we still grow and I am thinking large is one of the reasons why I came here. This is the resources that we have are enormous and the things that we can do with those resources and there's so much more room left to grow

8

THOMSON REUTERS STREETEVENTS I www.streetevents.com I Contact Us
0 2009 Thomson Reuters. All ri(1lts reserved. Republication or redstribution ol Thomson Reuters content, Inducing by
framing or similar m eans, is prohibited without the prior written consent of Thomson R euters. 'Thomson R euters' Wld the

Thomson Reuters logo are registered llademarl<s of Thomson Reuters and its affiliated companies.

FINAL TRANSCRIPT

Nov. 12.2009 I 9:00PM, APOL- Apollo Group at Signal Hill Education Preview Investor Conference
and I showed whatever, 60 million people that don't have a degree yet in thi s Country and hundreds of millions of people oversees where on line hasn't even started yet. It's still early in the infancy. I think there's so much opportunity in the industry and there Is -- and our size and resources of the kind s of people we can hire, technology people, like world -cla ss people where we can two or three years from now have a learner management system that is really, you know, it's the next generation. We have the ability to stay in a leadership position. I think that's one of the big exciting things and here I come in and people are telling me that's one of the things to get over. It was just a surprise to me, so 1 -

Trace Urdan - Signal Hill Education - Analyst

Interesting.

Unidentified Audience Member

Kind of following on what you were just talking about, and we heard people discuss earlier today that with certain resources you could develop better and better on-line programs and be more and more competitive in that space. I was listening to Greg talk about something the other day that he basically talked about University of Phoenix and Apollo as a laboratory where you have this huge wealth of information of every keystroke anyone has made on line and you have insight into people's thought processes, things like. Can you talk about how you're using your resources and that information to maybe generate a better product going forward and further distinguish yourself?

Chas Edelstein - Apollo Group - Co-CEO, Director

I think that's one of the things that excites us. I mean, we've been tracking those keystrokes for 20 years and we've got lots and lots of data on hundreds of thousands of people and how they learn. Honestly, I don't think we've taken great advantage of that yet. I think that that's -- I would put that in my category more of opportunity than here is what we've done and here is the result. And because right now I think that that information is more data than information but I think it has the potential to do a lot. I'm not saying we don't do anything with it. I mean, we do some things with it in trying to understand, for example, in retention what are the factors that cause students to drop out with higher frequency? So we know things about their age or where they came from in terms of their zip code or where the lead came in from. There are things that we use the data for but in terms of the cognitive skills and what we can do to the academic quality in terms of our research, I think there's a lot more we can do there, so that's one of the future opportunities really more than past.

Trace Urdan -Signal Hill Education - Analyst

Anyone else?

Unidentified Audience Member

Can you buyback stock?

Trace Urdan -Signal Hill Education - Analyst

Good question.

9
THOMSON REUTERS STREETEVENTS I www.streetevents.com I Contact Us
02009 Thomson Reuters. All ri(1lts reserved. Republication or redstribution ol Thomson Reuters content, Inducing by
framing or similar mean s, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' Wld the

Thomson Reuters l ogo are registered llademarl<s of Thomson Reuters and its affiliated companies.

FINAL TRANSCRIPT

Nov. 12.2009 I 9:00PM, APOL- Apollo Group at Signal Hill Education Preview Investor Conference

Chas Edelstein - Apollo Group - Co-CEO, Director Well, our share repurchase is governed by a couple things. One, I showed you the pyramid where we think about the relative investments and what are the returns of those investments? You add to that with share repurchase when our, what our policies are. You know, we have certain blackout windows where we don't buy stock, you know. at the last month of the quarter and until earnings are released or two days after earnings are released and also the lawyers weigh in on that. so we're in dialogue with lawyers about what are the factors that beyond those policy windows that would enable us to buy stock or not buy stock so we don't talk about it, you know, exactly on this day the lawyers say this. On that day the lawyers say that but it is true that we consult with our lawyers about when in their view it's acceptable.

Trace Urdan -Signal Hill Education - Analyst And have they expressed an opinion with respect to the informal inquiry?

Chas Edelstein - Apollo Group - Co-CEO, Director I get an opinion from a lawyer almost every day.

Unidentified Audience Member Yes can you talk about what you're doing on the PR front and the legislative front, maybe that you weren't doing six months ago? And not marketing but more public relations, given everything that's going on.

Chas Edelstein - Apollo Group - Co-CEO, Director Well, I think -- I mean, I wouldn't call this PR but I would say substantively, with regard to our regulators, we have really had a focused effort on building relationship there so I don't know exactly all the things that went into those relationship building processes before but this management team was here but I can tell you that Joe D'Amico has spent a fair amount of time with folks at the Department of Education and making sure they understand how substantive we are about how we think about thi s and that's sort of the I guess the rea l aspect of it but it's not really PR. It's let us help you understand how we're thinking about it and let's be a partner. What are you thinking about? So we spend a lot oftimewith that but we have things in the advertising as well. I mean we just started a program in Washington, where in the Washington area where we're getting the word out. We have in certain publications we're trying to get our message out about what we're trying to do, the things I am talking about here, the things I talk about with our employees. It would be good for us and we understand that, not to just do that in our own offices but actually to let people know a little bit about it, so we have a much broader effort in those sorts of campaign s than we have in the past.

Unidentified Audience Member I do have one now. So you guys just finished your year and you gave three, you sort of gave long-term guidance and I'm sure you guys had a lot of discussions as to how you're going to figure those numbers out and what you're comfortable presenting to the investment community and that probably took weeks, months. It just struck me that we're here at plus 10% unemployment so how did that factor in at this point in time as you guys look out three years? How did you-- I mean, I am assuming you did some bottoms up and some top down, so how did you weave 10.9% unemployment today forward into 2010, '11 and '12 to get to your numbers?

10
THOMSON REUTERS STREETEVENTS I www.streetevents.com I Contact Us
02009 Thomson Reuters. All ri(1lts reserved. Republication or redstribution ol Thomson Reuters content, Inducing by
framing or similar mean s, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' Wld the

Thomson Reuters logo are registered llademarl<s of Thomson Reuters and its affiliated companies.

FINAL TRANSCRIPT

Nov. 12.2009 I 9:00PM, APOL- Apollo Group at Signal Hill Education Preview Investor Conference

Chas Edelstein - Apollo Group - Co-CEO, Director
You know, what I would say about that is that we're cognizant of the economy and we do think that we get some tail wind from that fact of where the unemployment is but remember most of the students that are coming to us are still employed. So my experience in a long-time participant in the industry, not in this role, but in an advisory role, is that generally schools that are more career oriented, more trade schoolish, they tend to have more cyclicality or counter-cyclicality with those markets than a university will, which is really more dampened, so I would say what you see in our longer-term targets that we talked about are lower growth rates than we're experiencing now but not dramatic changes and that's the right way to think about the tail wind that we might be getting.

Trace Urdan -Signal Hill Education - Analyst
All right, one more in the back and let's make this the last one.

Unidentified Audience Member
I have a question. What's the chance that the regulators at the end of the day decide to move the Title IV limit from 90/10 to 85/15 or 80/20 and what would that -- what would the impact -- what kind of impact would that have on the market?

Chas Edelstein - Apollo Group - Co-CEO, Director
Well, to be -- so the 90/10 rule, for those that might no know it, there's a limit as to how much of your revenues on a cash basis you can get from Title IV, 90%. And that is part of legislative law. It's not part of the negotiated rule making, just so everybody is clear about that. That would require legislative change, not interpretative change, which is what's going on for negotiated rule making, so if you're asking what's my opinion about the chance of that legislation being changed, I think that there are greater numbers of people in Washington that understand that that particular rule is causing an unintended consequence. Our programs, they vary but they're generally around the limits ofTitle IV funds. Some are a little over, some are a little under but they're around that. If we were starting to bump into 90% and potentially going over 90%, which would put our participation in Title IV at risk, we would definitely consider raising prices in order to have funds coming in beyond Title IV. And for the government to push us and others into raising their prices in order to meet this rule is not really the intended consequence, so I don't think there will be a very near term, you know, in the next few months change to this. But I think in the longer term when Congress maybe next reauthorizes the Act. which is something like four years from now, I think there's more likely to be dialogue because I do think there's more of an understanding. There's more likely to be a dialogue to get to change that rule, to get it out and replace it with something else or -- they don't want to push us into raising tuition. I am pretty confident of that.

Trace Urdan - Signal Hill Education -Analyst
Okay we'll release you now. Thank you so much.

Chas Edelstein - Apollo Group - Co-CEO, Director
Thank you, Trace.

11

THOMSON REUTERS STREETEVENTS I www.streetevents.com I Contact Us
02009 Thomson Reuters. All ri(1lts reserved. Republication or redstribution ol Thomson Reuters content, Inducing by
framing or similar mean s, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' Wld the

Thomson Reuters l ogo are registered llademarl<s of Thomson Reuters and its affiliated companies.

FI NAL TRANSCRI PT

Nov. 12.2009 I 9:00PM, APOL- Apollo Group at Signal Hill Education Preview Investor C onference
Trace Urdan - Signal Hill Education - Analyst

And t hank you, everyone, for coming t oday.

DISC LAIMER
Thomson Reuters reserves the right tO make changes to documents, content, or other information on this web sire without obligation to notify a ny person of such changes.
In t he conference calls upon which E vent Transcripts are based. companies may make projections or other forward·looking statements regarding a variety o f items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward..fooking statement based on a
number o f important factors and risks, which are more specifically identified in the companies· most recent SEC filings. Although t he <ompanies may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of t he assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the

results contemplated in the fO<Ward-looking statements will be realized.

THE INFOR MATIONCONTAINED IN EVENTTRANSCRIPTS IS ATEXTUALREPRESENTATION OF THEAPPLICABLE COMPANY'S CONFERENCECALL ANDWHILE EFFOR ARE MADETO PROVIDE TS ANACCURATE TR ANSCRIPTION, THEREM BE M AY ATER ERRORS, OMISSIONS, ORINACCURACIES IN THEREPORTING OF THE SUBSTANCEOF THECONFERENCECAllS. IN NO WAY DOES IAL THOMSON REUTERS ORTHE APPliCABLECOMPANY ASSUME ANY RESPONSIBILITY FORANY INVESTMENT OROTHER DECISIONS MAD€ BASED UPONTHE INFOR MATION PR OVIDED ON THIS WEB SITE ORIN ANY EVENT TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICAB COMPANYS CONFERENCE CAll ITSElF ANDTHE APPLICABlE COMPANY'S SEC FILINGS lE BEFOREMAKING ANYINVESTMENT OROTHER DECISIONS.
C2009, Thomson Reuters. All Rights Reserved.

12
THOMSON REUTERS STREETEVENTS I www.streetevents.com I Contact Us
1!:>2009 Thomson Reuters. All ri(1lts reserved. Republication or redstribution ol Thomson Reuters content, Inducing by
framing or similar means, is prohibited without the prior written consent of Thomson Reuters. 'Thomson Reuters' Wld the

Thomson Reuters logo are registered llademarl<s of Thomson Reuters and its affiliated companies.

From: To: CC:

Robert MacArthur <nnacarthur@altresearch com> cclurrance@rai nmedia net roberta baskin Wittman, Donna Woodward Jennifer
3/24/20102:13:32 PM

Date: Subject:

APOL overstatement graphic (obviously keep to yourself)

Rob MacArthur Alternative Research Services, Inc.
203-244-5174

rmacarthur@altresearch.com

This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Altemati ve Research Services Inc. is forbidden . This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.

ALTERNATIVE RESEARCH SERVICES, INC.
RobettMacArthur tmacatthur@altresearch.com 203-244-5174 w 203-2 15-3843 c March 24,2010

Apollo Group (APOL) -- $63.40

Sell Short:

Market Cap. Shares Out. Short Interest Days short Avg. Daily Vol. St. eps est. 2010cy St. eps est. 20 l 1cy Px/book Px/sales Px/EBITDA
Source: Bloomberg

$9.8 bil

154 mil 8.4 mil 2.27 3.72mil $5.26 $6.14 6.7x 2.30x 7.0x

Final Pre-EPS Commentary Reporting 3/29 Confidence Level High Risk to the short thesis: Pell disbursement in 4Q09 of $317M could indicate strong revenue
"Hello Rob, After four months of relentlessly pursuing the unethical and corrupt charge of $1225 on my personal account, the Financial Grievance Committee of UoP met and appropriately decided to cancel the alleged debt. This is a testament to the power of persistence and insistence on justice. However, I am still fighting the battle of $4000 in Title IV financial aid that UoP applied for on my 1 behalf without my knowledge and permission."

Our biggest fear in APOL as we head into the EPS r·eport befot·e the open on the 29th is our own naivete and timing. Adding some share buyback during the quarter and more PeU Runners, on the face, APOL could r·eport a str·ong quar·ter· ifPell is any indicator·. In our last report, dated March 19th we sought to addr·ess issue of revenue/ em·ollment ovet·statement. We discovered APOL r·eceived $317M of Pell gr·ant money up from $187.5M in the year ago period. Even w/seasonality that's high. It would not be hard for the stock to r·un to $70's assuming a big upside revenue from high velocity turnover. While the stock could see $70 our thesis remains, if anything, our conviction level is up. We assume ~$7.500 of Stafford loans to be taken out pet· student that is also receiving Pell of$2.500. At $10k ofborrowing then $317 x 4 takes revenue for the quarter to $1.2 billion. That's high because of the churn discussed in the March 19th report but worth noting because of over weighting of Pell money versus last year. In the absence of a
In the interview, lhis student claims that a UOP enrollment cotmselor signed an "e-signature" document effectively forging lhe students ' signature and keeping the student enrolled and receiving funds for several courses after the student was in attendance.
1

174 Silver Spring Rd. Ridgefield CT 06877 rmacarthur@altresearch.com

March 24,2010

negative catalyst such a reg·ulatory Issue, a strong EPS number should come as no surprise.
10/01/09 12131/09 122,672 $317,559 59% 40% 07/01/09 09/30/09 76,980 $189,413 -11% 52% 04/01/09 01/01/09 03/31/09 89,949 $189,278 3% 35% 10/01/08 12/31/08 87,345 $187,572 73%

Time Period UOP Pell Grant Recipients Pell Grant Disbursements to UOP ($000) Sequential Growth in Pel/ Recipients (%) YoY Growth in Pel/ Recipients(%)

-

06130109
86,209 $175,582 -4% 36%

-

-

-

APOL Total Associates & Bachelors Enrollments APOL Total New Associates & Bachelors Enrollments

09/01/09 11/30/09 376,400 84,300

06/01/09 08/31/09 364,800 87,100

03/01/09 05/31/09 342,700 74,800

12/01/08 02/28/09 320,700 66,800

09/01108 11/30/08 308,600 71,900

-

-

-

-

Potential Overstatement--See Attached Diagram • Attached is a diagram outlining the potential ovet·statement of revenue and enrollment at Apollo. For clarity, the diagram has a few key assumptions: 400k students instead of the actual -455k, 200k new enrollments, lOOk drops per quarter, tuition of $4k per existing student and $2k (partial attendance) per new student. Netting out drops vs. new enrolhnents, total new enrollment would be up lOOk to 500k m· 25% gt·owth. If the company is not behaving properly i.e. making late refunds, incorrect refunds etc, and keeping students enrolled, essentially holding them hostage, the school may be "skimming" half, or more, money due back to the government. Assuming a 50% skim, the additional revenue would be up 37.5% vs. the 25% enroll1nent growth. For a t·eality check we observed the ratio of revenue growth to em·olbnent growth and found that in every case going back going back several quarters, revenue was always higher.
1g10 REV GROWTH, YoY Associates Bachelors Masters Doctoral Gross Revenues Discounts Discounts as a % of Gross Revenues (BPs) Total ENROLLMENT GROWTH, YoY Associates Bachelors Masters Doctoral Total 36% 21% 10% 30% 24% 45% 76 23% 4g09 52% 23% 11% 24% 30% 33% 15 29% 3g09 53% 19% 7% 19% 26% 5% -81 27% 2g09 48% 15% 10% 19% 23% -6% -143 25% 1g09 50% 11% 10% 15% 22% 22% 0 22%

27% 16% 3% 12% 18%

37% 15% 5% 15% 22%

39% 13% 6% 17% 22%

41% 10% 5% 16% 21%

42% 7% 4% 16% 18%

2
Robert MacArthur m1acarthur@altresearch.com

203-244-5174 203-215-3843 March 24, 2010

Is this a fallacy? Are there other reasons this could be the case? APOL has pushed through some level of price inct·eases, which would contribute to the highet· sales numbers. Better traction from advertising could drive as more unemployed people seek to return to college. Existing students could suddenly be increasing the number of classes being taken at any given time. Given that discounts were $61M last quarter up fi·om $42.8M yoy, we doubt whethet· higher pricing made an impact and that doesn't wash with the average revenue per student yoy: $2,177 1$2,027 or 7.4% for associates, and $2850 I $2717 or 4.8% for bachelor. Students are not doubling up, but then we are back to the advet·tising traction discussion. In the advertising, we think we have a substantial tailwind at our backs: "The price for advertising on Web sites of all sizes dropped by about 53 percent fi·om Q4 2007 to Q4 2008, according to the index. The numbers also show that every vertical categ·ot·y suffered steep declines, with Business and Finance leading the way at 61 percent."2 Comparing against a 50% decline in the year ago period should remove the windfall of lower prices, flattening advertising as a percent of sales or growing if sales slow. Online ad pricing and advertising trends for 2009 showed an encouraging recovery fi·om the economic downturn that hit publishers in 2008. Throughout 2009 ad pricing had been steadily gl'Owing till t·eaching the top in December 2009, where ad prices wet·e even higher than pre-recession. The PubMatic Ad Price Index 2009 states a 111% increase fi·om the last quarter of 2008 to the last months of 2009. But which causes led to this strong· recovery? 5 As demand picks up prices should recover. Online Advet'tising Stops Falling, Thanks To Search. After two straight quarters of annual declines, it looks ]ike online advertising revenues stabilized in the third quat'ter. The combined online advertising revenues of Google, Yahoo, Microsoft, and AOL rose 1.2 percent to $8 billion. (see detailed article Nov. II'" 09)·• Former Financial Aid & Em·ollment Reps Interview

Below is a transcribed section of an intet·view with two fonner UOP employees. This t•epresents about 8 minutes of an 80 minute conversation. Some vet·y minimal editing has been to make it flow more easily. The transc1·iption is spliced into 2 parts as delineated by the solid line across, representing two sepa1·ate sections of the convet·sation. There we1·e a few holes in the conve1·sation that went unanswered (I didn't want to overstay my welcome grilling them for neal'ly 1.5 hours). We hope to have a follow up interview with source shortly. "D " was an em·ollment counselor both in Phoenix and at a regional ground campus so his experience was slightly longet·. The wife, who also jumped into and out of the interview, was a fmancial aid supervisor. She recounted ugly stories of financial aid counselors doubling as collections agents or and
2
3

http://wwv.r.clicla.com/3632378 http://wwrw.masternewmedia.org/online-ad-pricing-and-advettising-trends-the-pubmatic-adprice-index-2009/ 4 http: I/techcrunch. coml20091 ll I 1llonline-ad vertising-stops-fa lling/

3
Robert MacArthur m1acarthur@altresearch.com

203-244-5174 203-215-3843 March 24, 2010

getting students to take out additional loans. She had also been a student. In our· next report we will hopefully include more of her statements. One anecdote she recounted, she accidentally submitted a blank piece of paper for her online course for which she t•eceived an "A." <D> When you ask me about "How much does it cost?" my answer was not usually how much it costs. It was 'Well, I can tell you how to pay for it." You know what I mean? <Rob> Yeah. <D> So that just kinda ... We just kinda like danced around that, and then we would go back to: "Well, why do you want to go to school?", 'What' s wrong with your life right now?" ... 'What would your life look like if you had a degree?" And you r·eally just kind of pump them up. It's really ... it's just kind of sad that the college education could be an impulse buy. That's what it was. It was an impulse buy for these people. <R> Do you think people were signing agreements to take out loans and they r·eally didn't realize that they had to pay them back? <D> [sarcastically] Oh, are you kidding??? [more seriously] Ummm...yeah. <R> Just checking. <D> Yeah. Yeah, absolutely. I mean, they... we would explain it to them and they would think they understand, but they didn't realize it until they got information in the mail. By that time, it was ah·eady closed, [they were] ah-eady in school. You know, if somebody called me today thmugh Axia College, I could have them in class by next week. <R> Right. Do you feel like some of those people that were recruited should not have been recruited because of their lack of qualifications? <D> Umm... unfortunately - yeah. But I - I did the best I could with students. I would sit and talk to them. I had people there who I had to really teach them how to use then· computer- in order to, you know, get the application filled out. You know, ah, I had one student who was g·oing on-line, but he would come down to the campus and I would help him out-umm, take the time to work with him, show him how to copy and paste, and how to, urn, open documents and use the internet and his email and that kind of stuff... <R> Pretty basic stuff, I'd say. <D> Yeah, yeah. And uh... <R> Do they know how to read? <D> [pause] Well, in gener·al - yeah. Yeah. Knew how to read, but that wasn't really my concern. My concern was: "can you fill out the application?11 <R> Yeah. <D> - you know, I didn't quality them to find out where they need to start or anything like that, because the way the school is set up, you take the first two classes - in Axia you take those no matter where you -where you fall. <R> Right. <D> That way, we can get them into school, and then work out the details. <R> I've heard a lot of stories about a high turnover of students, and low retention, particularly students that are taking out Pell Grants. Urn ... I've- I've heard that the Pell - that the dt·op-out r·ate can be, you know, upwards of 50% after the second or· thir·d class. Urn, I've heard stories of students being told, uh, that they can take classes that cost $10,000, but the- and then they can borrow $15,000, and use the other $5,000 to do whateve•· it is they feel like, with the Pell Grant money. Do you know about any of that kind of st- thing, or ... ?
4
Robert M acArthur m1acarthu r@altresearch.com

203-244-5174 203-215-3843 March 24, 2010

<D> Yeah. Jfthere's money left over, then we let them know that it needs to be used for school expenses - but- you know, we could tell them that they're really the only ones that could decide what a school expense was ... because, if a person is about to lose their house, and they're not able to attend school, because of that, well -you know: is that a school expense? Js ... there's a lot of different things that can be looked at as "OK, well if I don't - if I don't use my [inaudible], then I'm not going to be able to go to school anymore, and therefore it's a 'school expense'." <R> R ight. <D> I mean, and, the students could figure out pretty quickly, that, uh, that it's not a reimbursement program where you're going to buy youT books and they're going to reimburse you. They~re going to give you -you're going to end up with the cash ... <R> You're talking directly about Pell Grants, correct? I mean, you're not getting this cash - the school receives the Pell Grant money and disbuTses it to the student, and if thet·e's, uh, T itle IV money that comes in, it just comes in to the school and the kid burns it off as a credit when it - just by taking classes. <D> Right, well - see, the loans would cover the school. The loans would cover the school, and the Pell Grant tended to be extra. 6 And you could tell you're students that, well, "OK - these are loans, but when you get your Pell Grant, that doesn't need to be paid off, so you take that money and put it towards your loans." But, who out there t•eally does that, you know? <R> You don't know how many students would have -what the retention rate would be after, like, the ftrst year? <D> [pause] Ah.. .I don't, but 1. ..1 don't recall really having very many students make it through the program, and we - that's one thing that I wish they would do, is let us Em·ollment Counselors know, down the line, how the students were doing, I mean they just disappeared off of our radar. We don't know what happens to them after their ftrst class. <R>I saw a posting by a former· Financial Aid Counselot· that said thet·e were a 100,000 students recruited, last quarter, and only 50,000 of them had - were there the followingby, by the end of the quarter.

<D> Yeah. That would- I mean -I would say that's pretty accurate. <R> A .50% drop-out rate in - within a S month period? <D> Yeah, and really the reason why is because you can't get somebody to, um, commit to ~ to 4 years on an impulse, you know what I mean? And that's what we did
<D> I don't know, I mean, my overall opinion is that, urn, it [the school/programs] could be good for a lot of people, but there's a lot of people that... don't need- they just don't have any business go ing that route, you know? <R> What percentage? <D> That's OK. I just need to think- I need to get a feel for it. When I was talking to people ... especially in Axia, because when I was enrolling people into Bachelors and Masters pl'Ograms- those people tend to have the skills. So that-that wasn't as bad. But Axia, where they maybe didn't have any prior knowledge, that's when it was worse, and I would say ... J would say 50% of the people I talked to, maybe, just ... for one reason or another ... maybe that wasn't the best route for them.

This implies to us that UOP may be taking out Pell grants for students that either dido 't need them or didn't qualify since it says the loans would cover the tuition. The revenue/emollment implications of this are substantial.

5

5
Robert M acArthur m1acarthur@altresearch.com

203-244-5174 203-215-3843 March 24, 2010

<D> Like you said, this could be like the next mortgage cl'isis, because ... thet·e's a lot of money going out to these people who can not ... t·eturn on their investment. They get half way through school, they,re in the same place they wer·e befor·e, without a degree, but now they've g·ot all this debt. And they're not going to be paying· it back because they're not out there getting· the, the good jobs fi·om the degrees that they earn - they're not getting the retm·n on their investment. <R> So they could potentially accrue 20-30 thousand dollars worth of debt, and get into a $5 an hour job <D> Right. <R>- and never· get out from under it? <D> Right. And there's just no return on the investment, and like, these are Government-backed loans <R> Do you know how many students they have now? <D> No. <R> About 460,000. <D> [long pause] [whistling thmugh teeth] 460, 000 ... <R> Do you know what they're revenue is? <D> [Silence.] <R> $4 billion. <D> [astonished] 4 bill ion doUars ... <R> And 86% of their revenue is coming fi·om Title IV and ... student tmancial aid -

<D> Hhhmmm/1 And all of that money, I mean, a good portion of that is going to be defaulted on.
<R> What percentage do you think? so? 50? 20? <D> I. .. it's hard for me to say, but I would say.. <R> I don't mean to press you, but it 's kind of important. <D> Yeah, I mean ... I would say ... <R> 10? <D> You know-up, up to .5o%. <R> Just flat out default because they s- they quit after the first or second class? <D> Yeah, and they don't feel that they should have to pay it back. So, I would say maybe between 20 and 50 percent. And [it] would depend on what school you're looking at -

6
Robert MacArthur m1acarthur@altresearch.com

203-244-5174 203-215-3843 March 24, 2010

The rest of the group Pell grants: • We highlighted the yoy g rowth of Ashford, (Bl'idgepoint-BPI) because ofthe 95% yoy growth rate in Pell money. For the quarter ended D ecember 09, BPI t•eported revenue of $131M, which by itself it S5% of revenue, not including the Title IV that goes with it. In other words, they are aggressively recruiting Pell Runners, too.

2009-2010 Awa1'll Year Gr ant Volume by Sd10ol Awanl Yea•· Quartel'ly Activity (1 0/01/2009-12/3112009) Sum of Recipients 122672 34062 19198 32205 18480 U864 13434 5594 10214 10032 4956 4937 8881 2,569,363 Sum of Disbursements $317,558,928 $67,892,847 $47,022,812 $40,494,275 $23,125,340 $20,848,677 $20,513,720 $14,184,138 $13,267,806 $13,260,830 $12,972,670 $12,848,901 $11,835,058 4,724,080,016

OPE ll)

School

State

%of disbu1-scmcnts 6.72% 1.44% 1.00% 0.86% OA9% 0.44% 0.43% 0.30% 0.28% 0.28% 0.27% 0.27% 0.25%

2098800 UN IVEUSII'Y OF PHOENIX 1072700 DEVUY UNIVERSITY 188100 ASHFOUD UNIVERSn'Y 458600 KAPlAN UNIVERSITY 145900 STRAYER UNIVERSITY 1014800 COLORADO TECHN ICAL UNIVERS ITY 2113600 AJfERICAN INTERCONTINENTAL UNIVERSITY \ 2166400 lNSTITUTO DE BANCA Y COMERCIO 1303900 S 0 UTH UN IVERSITY 153400 EVEREST UNNERS ITY 1019800 ECPI COLLEGE OF TECHNOLOGY 2559300 l iN ITED EDUCATION INSTITUTE 149900 EVEREST UNIVERS ITY

AZ
JL

JA JA
DC

co
IL
PR GA FL VA CA FL

2009-2010 Aw:u'll Yc:u· Cnmt Volume by School Awanl YeaJ· Q uarterly Acfi,-ity (07/0112009-09/30/2009) Sum of Recipients 76980 33056 33204 11032 %53 10767 6995 4,607,392 Sum of Disburse ments SJ89,4l3,197 $56,391,822 $51,569,166 $28,190,275 $25,795,418 $. 4,722,748 2 $19,075,618 9,183,611,+«) 2.06% 0.61% 0.56% 0.31% 0.28% 0.27% 0.21%

OPEID

School

State AZ

2098800 UNIVERS ITY 0 F PHOEN IX 1072700 OEVRY UNIVERS ITY 458600 KAPL..<.\.N UNIVERS ITY 2166400 lNSTITUTO DE BANCA Y COMERCIO 267800 BRYANT & STRA'ITON COLLEGE 188100 AS HFORD UNIVERS n·v 2151900 KEISER UNIVERS ITY

IL
lA
PR NY

lA
FL

7
Robert MacArthur m1acarthur@altresearch.com

203-244-5174 203-215-3843 March 24, 2010

Disclaimer This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.

8
Robert MacArthur m1acarthur@altresearch.com

203-244-5174 203-215-3843 March 24, 2010

From:

To: CC:
Date: Subject:

rob@altresearch <nnacarthur@altresearch com> rob@altresearch
6/ 18/2009 4:12:52 PM

APOL Philadelphia speech latest draft...comments and criticisms welcome

Robert MacArthur Alternative Research Service, Inc. Rmacarthur@altresearch.com
203-244-5174

This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This infonnation is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.

ALT ERNATIVE RESEARCH SERVICES, INC
Robert MacArthur rmacarthur@altresearch.com 203-244-5174 w 203-215-3843 c June 18, 2009

Ladies and Gentlemen: My name is Rob MacArthur. I am a research consultant in the investment industry. I have been following the for-profit education sector for over a decade. Over the many years I have watched the cat and mouse game between the Department of Education and the industry. Sadly, despite claims of being heavily regulated this industry has been largely unregulated tmder the Bush Administration. With a former APOL lobbyist at the helm of Post-Secondary Education, enforcement was lax despite numerous inspector general reports urging better enforcement. This disservice to tax payers has enriched the managements of the for-profit industry and left in its wake thousands of students who bought into the hopes of a finer future only to be overrun with student debt. I personally have no investments in the industry. I am here before you today to bring to your attention an issue which has received some press but has yet to be properly addressed by the Department; that is the corruption and chronic misbehavior of the for-profit education industry. There are many issues that the Department needs to address including: transferability of credits, default prevention, graduation rates, and of course, incentive compensation . Apollo Group, parent company of University of Phoenix, is largest school in the country. In 1998 the company had 71K students. That nmnber grew to 157K in 2002 and is presently 397K. How is tltis possible? In FY08 the company spent $322 million on advertising, most of which was on the internet. At the present rate of growth advertising will likely reach over $400 million dollars in 2009. The company spent an additional $385 million in FY08 on enrollment cmmselor compensation.
In fiscal 2008, 82% of University of Phoenix's $2.9 billion of revenue came from Title IV programs. And total revenue companywide was $3.1 billion in fy08. That's nearly $2.4 billion dollars of taxpayer money flowing through the company. In 2001 , with $770 million of revenue, UOP received only 10% of its revenue from Title IV programs.
2

Robert MacA rthur rnJaca rthurl2'3@comcast. nel 203-438-0688 203-2 15-3843 June 18, 2009

Incentive Compensation Through heavy industry lobbying efforts and a f1iendly administration, the so called "Safe Harbor" provisions were established that effectively nullified the ban on incentive compensation for enrollment counselors. This devious loophole allowed the industry to bypass the regulation leading them to establish internal systems designed to prove that bonuses, that the industry calls "salaries," were based on factors other than the nmnber of enrollments made. This loophole has created a wave of defaulted debt and the taxpayer bears the burden. Enrollment counselors are overly incentivized to bring in students with no chance succeeding or paying off loans. There are many, many sad stories I can recount from direct interviews I have conducted with both former UOP students and enrollment counselors documenting the true horrific outcome for unsuspecting students. Similar stories are widely available in public depositions in the qui tam suit against UOP.
In the now frunous February 2004 progra.J.TI review of UOP, the author begins, "This report contains a serious finding regarding the school's substantial breach of its fiduciary duty; specifically that the University of Phoenix (UOP) systematically engaged in actions designed to mislead the Department of Education and to evade detection of it improper incentive compensation system ... "

The Department interviewed more than 60 present and former enrollment counselors prior to, and after the site visit. Most of the recruiters said that when hired, UOP told them that the job had tremendous finru1cial potential, a1.1d that they "could make a lot of money." UOP promised to "double or triple their salary in 3 to 6 months ... " In another deposition an enrollment counselor stated, " A: I was told to enroll students no matter what." ...regardless of qualifications. Another enrollment counselor complained that the potential student was illiterate but was forced to admit that person regru·dless. The Department must take itmnediate steps to protect students from predatory marketing practices of this industry. Buried on its web site, UOP reports a graduation rate of only 9 .77%. Is that what the taxpayer deserves? Is tllis how we want to invest in America's future?
2

Robert MacA rthur rnJaca rthurl2'3@comcast.nel 203-438-0688 203-2 15-3843 June 18, 2009

That national average graduation rate is closer to 55o/o.

Refund Calculations Regarding refunds, in an OIG report dated December 2005, the department found, "UOP applied inappropriate methodologies to determine the "percentage of Title IV aid earned" for calculation ... " "UOP did not have a policy to review the accuracy of payment period end dates for the purpose of calculating Title IV aid." "UOP systematically monitored students' status and progress, readjusting the beginning and ending dates of payment period to accommodate leaves of absence, "no shows" , failed courses or repeat courses. Referring to this process as "remapping", UOP readjusted payment period end dates and rescheduled second disbursement dates." - said the IG wrote another report in January 1oth 2008. And the issues at Apollo are proliferating. In November, 2008 Grand Canyon University came public with former APOL president Brian Mueller at the helm. Mr. Mue11er left Apollo in July of 08. In August of 08, the Office of the Inspector General issues a subpoena related to alleged enrollment practice violations and in September a lawsuit was filed citing rare for a company to go public while under such legal burdens. Grand Canyon' s revenues were up 66% in the March quarter of 09 to $59 rni11ion-not bad for a company whose revenue in 2005 was $51 million. Another company Bridgepoint, filled with fonner UOP employees, came public in April of 2009. They also have OIG audit under way. Their 2007 revenue was $85 million and $218 in 2008 and $84 million alone in the March 09 quarter. On May 26 2005, John Higgins, the Inspector General testified in Congress that 74% of their institutional fraud cases involve proprietary schools. " Violations .... occur when refunds are not paid tilnely, when incorrect calculations result in returning insufficient funds, and when institutions fail to pay refunds at all, which is a criminal offense under HEA." In March of 2005 the SFA wrote a letter UOP regarding its audit of WIU, a division of Apo11o Group. The Department found that 37 .5o/o of refunds were
2

Robert MacA rthur rnJacarthurl23@comcast.nel

203-438-0688 203-2 15-3843 June 18, 2009

not made within the 30 day legal limitation. They found inaccurate refunds and refunds not paid at all. WTU incorrectly calculated refunds 25% of the time. Many late funds cite were up to 800 days late. Is this abiding by the spirit of the administrative capability statutes? I think not. While I understand the Administration ' s desire to improve access to college, the for-profit model is not an efficient way to achieve that goal. Intel even announced a few years ago they would no longer accept students with a diploma from UOP. One needs look no further than the ripoffreport.com and consumercomplaints.com other web sites where hundreds of complaints from former students can be found. Rather than recount their stories I am entering several into the record. The Department is ill-prepared through no fault of its own to deal with such ntthless, sophistication and distain for the law. Current regulations that are obsolete or have been softened by industry lobbying over years need to be improved. I have 3 specific recommendations: • Incentive compensation for enrollment counselors should be suspended or at the very least based on graduates going out the door not warm bodies commg. • Move the proposed " 3rd default rate" calculation change to apply retroactively not starting with the 2009 cohort but with current default rate data. Stru1ing with the 2006 default rate data the government would better protect itself against default rate manipulation as laid out in detail in the IG' s December 2003 report. • Lower the cohort default rate loss of eligibility threshold from 30% to 15%. I am submitting my text for the record and would gladly provide supporting docmnentation for any of the facts referenced in my comments upon request.

Disclaimer This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from this report without the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for

2

Robert MacA rthur rnJacarthurl23@comcast.nel

203-438-0688 203-2 15-3843 June 18, 2009

use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.

2

Robert MacArthur rnJaca rthurl2'3@comcast.nel

203-438-0688 203-2 15-3843 June 18, 2009

From:

To:

CC:
Date: Subject:

Finley Steve Si~el Brian Burton Vanessa Scaniffe. Dawn Morelli, Denise Marinucci, Fred Jenkins Harold Woodward Jennifer Wolff. Russell Sann~ Ronald Wanner, Sarah Vamovitsky Natasha Yuan, Georgia 9/22/2010 8:51 :16 AM article from the author of the GE study that was published last week

From HigherEdWatch:

Guest Post: Gauging Gainful Employment

September 21, 2010 By Ben Miller Newspaper readers across the country have been greeted the past several days with full.-page color ads featuring large pictures ofsmjJing nurses, medical assistants, and mechanics under the headline "I don 't count? Some in Washington think I don't." The ads warn that new Gainful Employment regulations that the U.S. Department ofEducation has proposed would put 100,000 people out of work and eliminate educational opportunities for up to one million lowincome and minority students. This ad campaign is funded by Corinthian Colleges , a for-profit higher education company that could have a lot to lose if these regulations-- which would penalize proprietary schools for saddling students with more debt than they can pay back-- go into effect. So it should come as no surprise to readers of Higher Ed Watch that the ads ' claims are a bit hysterical. I recently conducted my own analysis of the Education Department's proposed gainful employment rule by looking at the pricing, repayment rates, and estimated salary information for over 12,600 proprietary school programs. I found that, under these standards, only a small share of programs would be in danger of being removed from the federal student aid programs. These new standards, however, would probably force many for-profit colleges to alter their pricing and approach to student debt- changes, that would, in other words, ultimately benefit the low-income and minority students these schools predominantly serve. The issue of Gainful Employment dates back to the first Higher Education Act of 1965 and makes perfect sense -if you

train people for specific jobs or vocations, you need to show that your graduates are actually able to find employment in the fields in which they train. Despite being on the books for 45 years, Congress never actually defined a way to measure gainful employment, instead giving colleges that offer vocational programs a free hand to report job placement and salary data in whatever way they saw fit. But now, with widespread allegations of lending abuses at for-profit colleges , the Education Department has decided that it wants to curtail that freedom. Under the regulatory proposal it released in July, the Department would start determining whether a program provides gainful employment by using hard data that judges programs by the ratio of the debt that graduates assume relative to their current earnings and the rate at which they are able to repay it. If programs offered by for-profit colleges meet certain thresholds on those measures, they' ll be fine and nothing will change. But if they exceed specific benchmarks, they risk losing eligibility for federal student aid. Programs that fall in between will have to warn students that they may be taking on high debt levels and could have their enrollment capped. Given the reliance of the for-profit education industry on federal student aid dollars, a proposal that threatens schools' participation in these programs is understandably very controversial. Much of the debate has centered on how many and what types of programs are likely to be affected. The Education Department estimated that about 5 percent of programs --representing about 8 percent of students at for-profit schools-- would lose eligibility. A study by an advisory company called the Pamtheon Group and funded by Cotinthian Colleges estimated the effect would be four times as large, affecting 32 percent of for-profit students. Such wildly different estimates makes it difficult to accurately gauge the standard's effect, let alone see what types of programs are most likely to be in danger. To shed more light on the subject, I decided to conduct my own analysis. Overall, my findings are not that dissimilar from the projections made by the Education Department. About 4 percent of programs would become ineligible for federal student aid, while 16 percent would remain fully eligible. Another 65 percent of programs would retain eligibility for student aid but have to warn prospective students about the debt levels they are likely to incur. The final 15 percent would fall into the "restricted" category and would have their enrollment capped. Not surprisingly, I found that the effects would be slightly greater at bachelor's degree programs, with about 8 percent losing eligibility and about 29 percent being restricted. That makes sense- obtaining a bachelor's degree takes longer, so students are likely to borrow more debt relative to their starting incomes. There are two categories of programs that appear to be most vulnerable. The first are those that train students in lowpaying occupations, like medical assistant, cosmetologist, and cook/chef. The second are those in high-tech areas that have better earnings opportunities, but also substantially higher costs. These include programs in areas like e-commerce, graphic design, design and visual communication, and Animation, Interactive Technology, Video Graphics and Special Effects. It's worth noting that there aren'ttypically lots of available jobs in these areas, so the pay is only good if you can get it. One of the difficulties with all these estimates is that there isn 't a reliable source that shows federal and private loan borrowing information for graduates by institution. Instead, my analysis assumed that student debt levels are roughly equal to the cost of tuition, fees, books, and supplies less federal grant aid. Tlus makes sense-- you borrow to pay for your education. Most students at for-profits are working full-time, so their salaries can cover living expenses and other costs. If anything, one would think this assumption slightly overestimates borrowing levels-- while about 92 percent of for-profit students take out loans, surely some must drag down the average by not borrowing at all or taking out only a small amount of money. So imagine my surprise when the main lobbying group for proprietary schools released a statement criticizing the report for vastly undercounting the amount of debt for-profit college students take on. The Career College Association tried to lay the blame on students , saying that they often borrow far more than they need. But it's not clear that schools are innocent in this practice. Recent investigations by the Government Accountability Office and ABC News have revealed

that some of the largest for-profit higher education companies have been encouraging their students to take out as much student loan debt as is available. Regard!ess, CCA' s argument sends a strange message : asking regulators to back off on the grounds that borrowing levels are even worse than we imagined. If this is true, then that only makes a stronger case for why the government needs to keep a closer eye on these institutions. Ben Miller is a policy analyst at Education Sector , where he writes for the blog The Quick and the Ed . Prior to joining Education Sector, Miller was a program associate in the Education Policy Program at the New America Foundation and a prolific Higher Ed Watch contributor. His views are his own and do not necessarily reflect those of the New America Foundation.

From:

To:

Finley Steve Si~el Brian Burton Vanessa Scaniffe. Dawn Morelli, Denise Marinucci, Fred Jenkins Harold Woodward Jennifer Wolff. Russell Sann~ Ronald Wanner, Sarah Vamovitsky Natasha 2/112010 10:18:46 AM Article from the Chronicle on the Program Integrity negotiated rulemaking

CC:
Date: Subject:

(much less detailed than the Inside Higher Ed article that Brian sent around earlier)

http://chronicle.com/article/Panel-Revising/63825/ January 31,2010

Panel Revising Higher-Education Rules Fails to Agree on Several Key Issues

By Jennifer Gonzalez Washington A panel charged with negotiating 14 regulations that govern colleges' eligibility for federal financial aid failed to reach consensus on several key issues, including how colleges can compensate student recruiters and how providers of vocational education must measure whether their graduates have achieved "gainful employment." The panel, which included federal officials and representatives of colleges, students, lenders, and others, ended three months of meetings on Friday after reaching consensus on only nine issues. Among them were the definition of a highschool diploma, the timeliness and method of disbursement of student-aid funds, and how to monitor student academic progress. The panel's decisions wouJd have become final only if it had reached consensus on every issue. Because it did not, the future of all14 regulations is now in the hands of the U.S. Department ofEducation. The department will probably follow the panel's recommendations on the nine issues the group agreed upon. But it is not clear how the department plans to handle the issues still under dispute-including the two most contentious, the rules on incentive compensation for student recruiters and on how colleges must define "gainful employment."

Division Over Incentives

In the middle of last week, it looked as if the panel was getting close to reaching consensus on the topic of incentive compensation. A subgroup of negotiators offered the department an alternative to the rule education offic1als had proposed. The department's recommendation, which took many of the negotiators by surprise last fall, was to eliminate the 12 "safe harbors" created in 2002 to clarify a ban on incentive compensation for student recruiters. The safe harbors specify types of college compensation plans that do not violate the ban.

Panel members were concerned that the department's proposal would leave institutions without any guidance on what is or is not pennissible. The department reviewed the subgroup's proposed alternative, which suggested eliminating the safe harbors but provided more guidance to colleges than the department had offered. Under the subgroup's proposal, institutions could make merit-based adjustments to employee compensation as long as those adjustments were not based on success in securing enrollments on a per-student basis or in helping the students acquire student aid. Elaine Neely, senior vice president for regulatory affairs at Kaplan Higher Education Corporation, who represented the for-profit higher-education sector in the negotiations, continued on Friday to argue that the language of that alternative was too stringent. "What we see in this is that we won't be able to compensate employees for doing their job," she said. "Based on the language here, we cannot compensate for the number of career fairs they go to, the number of students they speak to, the number of students they advise. Unless I completely misread this, you can't compensate a recruiter for increasing the number of minorities on campus." At the 1lth how·, Ms. Neely suggested changes to the language but the department soundly rejected them. Because she did not sign off on the other negotiators' suggested alternative, it had to be shelved.

No Agreement on 'Gainful Employment'

The issue of defining "gainful employment" had seemed to stall in discussion on Thursday and never regained traction. To be eligible to participate in the federal student-aid programs, providers of vocational programs are required to prepare students for "gainful employment in a recognized occupation." But federal regulations do not define gainful employment or how institutions should measure their performance on that issue. So the department set out to define the issue during the negotiations. The department defended its proposal, which would measure gainful employment by using a debt-to-income ratio for graduates, an idea that drew opposition from many panel members. Only the student and consumer advocates on the panel appeared to support it. Opposition to the proposal centered around three arguments. Some panelists said it amounted to social engineering. Others cited a lack of data supporting its effectiveness. And some, equating the department's proposal to tuition control, questioned whether the department had the legislative authority to regulate such a matter.

From: To:

Brian Jenkins, Harold Marinucci, Fred Finley Steve Sann, Ronald
4/21/2010 10:54:34AM Article on Gainful Employment issue from Inside Higher Ed

Si~el

CC: Date: Subject:

Going Ahead With Gainful Employment April 21 , 2010 WASIDNGTON -- A long recession and a wavering job market have brought for-profit higher education institutions into the public eye as never before. Big advertising budgets have given them name recognition. Dramatic enrollment growth (fueled by increasing amounts of federal financial aid) and assurances to students that a degree or certificate is the path to a comfortable job in a specific field have brought them scrutiny. Many newspapers, websites and TV networks have told the tale of programs at for-profit institutions that don't prepare students for the jobs they've been all but promised-- and plunge them into debt in the process. While the anecdotes are often true, they' re only part of the story~ plenty of for-profit colleges (the institutions themselves prefer the term "private sector" or "market funded") do prepare students for good jobs and don 't sink them in a pool of post-graduation debt. Title IV of the Higher Education Act of 1965 requires all for-profit offerings other than those clearly designated as "liberal arts," and non-degree vocational programs at nonprofit institutions, to show that they prepare students for "gainful employment in a recognized occupation." If they don 't, they're not supposed to be eligible for federal financiaJ aid dollars. No one, the U.S. Department ofEducation has contended, seems to have a satisfactory way of determining which programs meet that standard. "It's illuminating for us that when we ask institutions how they 're complying with this current law, we have not received adequate answers," says Bob Shireman, deputy undersecretary of education. "And this is the law." Through a process of negotiated rule making that began last year after passage of the Higher Education Opportunity Act in 2008, the department has sought to develop a formulaic solution to the dilemma, in the form of regulations that defme "gainful employment'' using data on incomes and debt loads, as well as completion, job placement and loan repayment rates.
In essence, this is a crude mechanism to assess the quality and value of vocational programs. The "good" programs that

help students get jobs without saddling them with debt could continue to exist and deliver Pell Grants and subsidized loans to their students. The "bad" programs-- the ones found to lead graduates to jobs they could've gotten without the educational experience or that don't pay well enough for borrowers to repay their loans-- would be identified and put under closer scrutiny. Representatives of the for-profit sector have aggressively fought such an approach, but most analyses so far suggest that the proposed regulations are unlikely to be a sector killer. The department has acknowledged the need for nonprofit and for-profit vocational programs, and has estimated that just 6 to 8 percent of programs that qualify for Title IV under

gainful employment would potentially need to change under the proposed rules. In research that's been circulated but not yet publicly released, the Career College Association, the trade group that represents for-profit colleges and universities, has less-conservatively estimated that close to 20 percent of career college programs and a third of the colleges' students would be affected. In what the department would consider a positive outcome, some of the "bad" programs would shut down, while others would lower ptices or work to improve their completion and job placement rates. Though some observers have suggested that rewriting federal financial aid policy would be a better way to address these problems, the Obama administration's Education Department is seizing on the opportunity it has now, with Democratic majorities in both houses of Congress, to effect change. The revision of the gainful employment rules could be a once-inan-administration (if not once-in-a-career) chance for Shireman-- who has advocated for reform and increased protections for borrowers since serving in the Clinton White House-- and his staff to tackle what they consider to be a major source of student debt. Shireman himself does not put it that way. "We have to do everything we can in the regulatory process, as well as in the legislative process, to protect taxpayers and students," he says. "We have these regulatory opportunities so we have to take them." He does acknowledge that he is unwilling to wait for the next renewal of the Higher Education Act, in 2013, when lawmakers would be most likely to make major changes in the law. "We' re not going to wait for a reauthorization to ensure that federal funds are being used appropriately." The department sent a version of the regulations to the White House Office of Management and Budget this month, and, though it's sti ll being revised, a final draft will be published by mid-June. Over the summer, there will be one last chance for public input and, by Nov. 1, the regulations will be printed in the Federal Register, to go into effect on July 1, 2011. Defining Gainful Employment The Education Department was slow to formulate a proposed definition of gainful employment. In November and December, during the first two week-long rule making sessions, the discussion among negotiators focused on whether the department had the statutory authority to establish a formulaic definition of gainful employment. Many negotiators saw the department's suggestions-- particularly one that sought to determine the value a credential would add to a recent graduate' s earning power, and to use that to determine an acceptable maximum tuition - as price controls. The most vocal opponent was the 1 negotiator representing for-profit institutions, Elaine Nee!y, senior vice one president of regulatory affairs at Kaplan Higher Education. In December, Neely said she was "flabbergasted that [the department] would impose price controls when clearly Congress itself has not been able to come to the decision to do that on higher education." By warning of a "slippery slope" toward price controls throughout higher education, Neely was able to get many representatives of nonprofit institutions on board in opposition to the proposal.
An idea that took up much less of the panel's time was the department's proposal to determine whether the starting

salary in the field for which a program prepared students was sufficient to pay the average annual debt obligation of the program's graduates. If the average debt load for a program's graduates was $9,000 on a 10-year loan with a 6.5 percent interest rate, students would have loan obligations of $1 ,250. With a debt-service-to-income ratio of 5 percent, the starting income in that field would have to be at least $25,000 to be considered "gainful employment." By mid-January, as the department and negotiators prepared for the third and final round of rule making, this debtservice ratio had become the department's preferred regulatory path. Based on a partial reading of a 2006 paper by

Sandy Baum, of the College Board, and Saul Schwartz, of Ontario's Carleton University, the department's ratio became 8 percent. (While Baum and Schwartz's paper discusses 8 percent as a generally accepted standard, most likely derived from mortgage underwriting standards, the authors suggest that a ratio as high as 18 percent could be appropriate for single people earning $150,000 annually.) Under the proposal made in January, which remains the only complete definition made public by the department, vocational programs would be eligible for Title IV funds if their graduates' median atmuaJ payments on a 10-year loan were no more tl1an 8 percent of the Bureau of Labor Statistics' 25th percentile of annual earnings for people in occupations for which a given program prepared students. Programs that exceed 8 percent could still be eligible for Title IV funds by producing what the department considers good outcomes: by showing that its graduates' annual earnings are higher than the BLS' s 25th percentile and keep the debt-income ratio below 8 percent; by documenting that students have at least a 75 percent repayment rate on federal loans; or by demonstrating a program completion rate of at least 70 percent and an in-field employment rate of at least 70 percent. In the third round of negotiations, debate was contentious and without resolution. Terry W. Hartle, senior vice president for government and public affairs at the American Council on Education, said he worried about cost, privacy and the potential for "unintended consequences." A former Bush administration Education Department official, Todd Jones, president and general counsel of the Association of Independent Colleges and Universities of Ohio, said he saw the proposal as ripe for lawsuits. Department officials were unwilling to reconsider the approach entirely, though they were open to constructive feedback. "We put things on the table partly because we think they're a good idea and partly to get input," Shireman says. The department started with its most extreme-- but politically viable idea-- and was ready to negotiate, but many negotiators seemed too intent on persuading officials to obliterate the proposals to make good, constructive suggestions. And, since the third round of negotiations ended in late January, the department has continued to discuss the proposals with stakeholders and to get feedback. "We recognize that some people felt- even we felt- that there was not enough discussion at negotiated rule making for whatever reasons," Shireman says. "So we continue to hear from associations and institutions, getting input from tl1em that continues to be helpful, to continue to hear what suggestions they have about what the term gainful employment should mean." Who Would Be Hit In broad terms, the Department ofEducation's goal is to determine which programs really are preparing students for gainful employment and not sinking graduates into chasms of debt. "There's a tremendous number of students graduating with incredibly high levels of debt," says Rich Williatns, higher education associate at the U.S. Public Interest Research Group, who represented students on the negotiated mle making panel. "And in some cases they' re unable to enter the fields they studied at the levels they tllought they'd be qualified for." Pauline Abernathy, vice president of the Institute for College Access and Success, anticipates the regulations "will lead to programs that are currently leaving students in terrible debt either having to change the quality of their programs or their cost structure." Before Shireman joined the Obatna administration, he was TICAS's president. But it's unclear whether the department' s proposed mles would really weed out those programs and would do so in a

way that kept all good programs up and running. "I don't think you can draw a line that separates the wheat from the chaff perfectly," says Mark Kantrowitz, publisher ofFinaid.org. "The choices are tough-- you either throw out the baby with the bathwater or, because you want to keep the baby no matter what, you're going to get some bathwater too. I think that' s a reality that everyone needs to come to terms with." When applied to the existing landscape of vocational programs, the department's approach would seem to favor programs at public institutions over private ones (either for-profit or nonprofit), those that required fewer credits earned over more credits, and those in higher-paid fields like nursing and information technology over lower-paid careers in the arts. Because the rules would apply only to certificate programs at community colleges, state universities and private, nonprofit institutions, they're less likely to force any real change at nonprofits. Tuition on these programs at public institutions is so low that it' s relatively rare for students to take out loans. If they do, they're likely to be small. Even at private nonprofits, where tuition is likely to be of a similar magnjtude as at for-profit colleges, the fact that the rules apply only to non-degree programs will keep many programs out of regulatory reach. Shireman and other department officials have insisted in many instances that the department is not "out to get" for-profit colleges and that it is not the department's intention to regulate the sector out of existence. "We have made it quite clear that we are interested in improvement and outcomes all across the spectrum, all across the sectors," he says. Nonetheless, it seems clear that the gainful employment regulations will force the most change on for-profit institutions, which will have to choose between lowering tuition, improving student outcomes or shutting down programs that don' t align with the rules. In the short run, at least, all of these options would hurt the institutions' bottom lines. Even if some programs end, says Abernathy, ofTICAS, "there will be plenty of other for-profit programs that will be very eager and capable of being able to meet that need, but that do so in a way where students and taxpayers are better off" For a field in which a for-profit institution offers multiple certificate and degree options, the ones that cost the least-- and often require the fewest credits-- are the ones least likely to be regulated out of existence. If an institution offered certificates, associate degrees and bachelor' s degrees in, for example, culinary arts, that allied to the same Labor Department-classified jobs and the same Bureau of Labor Statistics-reported 25th percentile of income, it's logical that the 8 percent rule would make the preferred outcome a certificate and not a bachelor' s degree. Kantrowitz, ofFinaid.org, says that though the department's existing proposals "really didn't consider the impact on bachelor's and graduate degrees," he thinks the next draft of regulations will because the department hasn't shown any indication of wanting to discourage students from pursuing longer programs. "Take an associate's degree versus a bachelor' s degree. Students are in school twice as long, paying twice the tuition, but they don 't have twice the income." Though programs would have the option of collecting their own salary data rather than relying on the BLS numbers, institutions often find it difficult to collect this information. As of now, observers say, few institutions have a comprehensive view of their graduates' incomes. Kantrowitz and others have suggested that the department use different labor data-- in his own calculations, Kantrowitz used federal Census data, which details age group and educational attainment but not field of employment-- but the ideal data set does not exist. Apollo Group, which owns the University of Phoenix and other institutions, said in a March 30 earnings call that it has begun the process of analyzing its programs. But, "given the number and range of disciplines offered by our universities

as well as the uncertainty regarding the implementation process of the draft proposal, our analysis is both extensive and complex." In mid-March, analysts at Morgan Stanley said they thought that Education Management Corp. (which runs the Art Institutes and Argosy University, among others) and ITT Educational Services would need to undergo the most widespread change to meet the regulations because of high tuition rates and, at Education Management, an enrollment that leans heavily toward low-paying arts fields. Two companies that would have very few endangered programs, according to Morgan Stanley: American Public Education, Inc., which focuses on serving members of the military and public servants, who are less Likely to take out student loans; and Capella Education Company, whose programs have very low loan default rates and would be able to qualify for Title IV funds under one of the alternative definitions ofgainful employment. Gregory W. Thorn, Capella's vice president of government affairs and general counsel, agrees that his company would probably have to make few changes to abide by the gainful employment regulation. "Capella is viewed by folks within the department as a high quality institution," he says. "We have a degree of comfort that however this plays out, Capella would be fine and Capella would be in good shape." And yet, until the final regulations go into place and the institution can collect and calculate all the appropriate data, Capella can't be sure that it's out of the woods. "There are so many moving parts," Thorn says. "It's premature to engage in speculation on how this is going to play out ... at Capella on a program-by-program basis." A leader at another for-profit institution with low cohort default rates said he also thought his programs would meet at least one ofthe gainful employment rules, but still worried that they might not. Insufficient data and a still-unclear sense of the precise regulations the department will decide upon has left him feeling a bit uneasy about the outcomes. The Feedback At every hint that the Department of Education is backing down from proposed regulations that would force some programs offered at for-profit colleges to lower their ptices, improve their outcomes or shut down, Wall Street analysts and the for-profit institutions breathe a sigh of relief When Secretary ofEducation Arne Duncan testified before the House of Representatives' Education and Labor Committee on March 3, and was questioned on the gainful employment regulations, his comments that the department was "by no means wedded to any one direction" and "[didn't] want to be overly heavy-handed" were perceived by forprofit boosters as signs that the department was open to scaling back the regulations. Before and since, the Career College Association and lobbyists for for-profit institutions have pounded the halls of Congress trying to get members to put pressure on the department. Some members of the Congressional Black Caucus sent a letter to Duncan charging that the rules are discriminatory because for-profit institutions disproportionately serve minority students. A bipartisan group of 18 House members wrote to Duncan asking that he puii the plug on the department's approach altogether. Last week, when a report from Credit Suisse cited someone "close" to the Office of Management and Budget as saying that the department had seemingly decided to soften one of the alternative methods of qualifYing for Title IV, higher education stocks soared as the rumor spread. The source told the bank that the option to demonstrate a progran1 completion rate of at least 70 percent and an in-field employment rate of at least 70 percent had become a 50 percent completion rate and a 70 percent employment rate.

Though it is one of the possibilities the department is considering, the switch to a 50 percent completion rate is not final. Officials submitted a draft to the OMB to begin the process leading to the publication of rules and the public comment process, but are said to be continuing to analyze data and listen to feedback. The for-profit institutions tout these small bits of news and others as indications that the department may be backing away from its tough-line approach, but it is unclear whether any perceived motion on the department's part wiLl actually materialize as dramatic changes to the next draft of regulations. Teddy Downey, of Washington Research Group, says he doubts the department would take any steps that would dramatically lessen the reach of the regulations. In an e-mail message last week after the Credit Suisse rumor circulated, he said he anticipates "a very low chance that this change will amount to a truly significant loophole."

In an interview, he went further. "I don't think the department would do anything it doesn't think will have the desired effect. I think they have the data to support whatever they choose to do."
Kantrowitz, ofFinaid.org, is skeptical of whether the department has the data, but he agrees that the department isn't backing down on gainful employment. "They're not going to do anything that doesn't have teeth in it," he says. "It may just be some kind of educated guess, but it's going to have teeth." -Jennifer Epstein

From:

To:

Robert MacArthur <nnacarthur@altresearch com> grovesb@sec goy melvin goldberg@oag state ny.us Woodward. Jennifer
7/26/2010 9:30J6 AM At 90% of revenue from Uncle Sam--what about separation of church and state.?

CC:
Date: Subject:

July 25, 2010 Why Do You Think They're Called For-Profit Colleges?

Michael Morgenstern for The Chronicle

Michael Morgenstern for The Chronicle By Kevin Carey Michael Clifford believes that education is the only path to world peace. He never went to college, but sometimes he calls himself"Doctor." Jerry Falwell is one of his heroes. Clifford has made milJions of dolJars from government programs but doesn't seem to see the windfall that way. Improbably, he has come to symbolize the contradictions at the heart of the growing national debate over for-profit higher education. Until recently, for-profits were mostly mom-and-pop trade schools. Twenty years ago, a series of high-profile Congressional hearings, led by Senator Sam Nunn, revealed widespread fraud in the industry, and the resulting reforms almost wiped the schools out. But they hung on and returned with a vengeance in the form of publicly traded giants like the University ofPhoenix. Entrepreneurs like Clifford, meanwhile, have been snapping up dying nonprofit colleges and quickly turning them into money-making machines. Most of that money comes from the federal government, in the fonn ofPell Grants and subsidized student loans. Phoenix alone is on pace to reap $1-billion from Pell Grants this year, along with $4-billion from federal loans. A quarter of all federal aid goes to for-profits, while they enroll only 10 percent of students. Unfmtunately, a large and growing number of graduates of for-profit colleges are having trouble paying those 1 oans back Horror stories of aggressive recruiters' inducing students to take out huge loans for nearly worthless degrees are filling the news. The Obama administration, flush with victory after vanquishing the student-loan industry this year, has proposed cutting off federal aid to for-profits that saddle students with unmanageable debt. Congress has rolled out the TV cameras for a new round of hearings that are putting for-profits on the hot seat. One observer called the event "the Nunn hearings on steroids."

I spoke with Michael Clifford recently as he was driving down the California coast to meet with a higher-education charity he runs. He's an interesting man-sincere, optimistic, a true believer in higher education and his role as a force for good. A musician and born-again Christian, he learned at the knee of the University ofPhoenix's founder, John Sperling. In 2004, Clifford led the sale of a destitute Baptist institution called Grand Canyon University to investors. Six years later, enrollment has increased substantially, much of it online. The ownership company started selling shares to the public in 2008 and is worth nearly $1-billion today, making Clifford a wealthy man. He has since repeated the formula elsewhere, partnering with notables like General Electric's former chief executive, Jack Welch. Some of the colleges that Clifford has purchased have given him honorary degrees (thus "Doctor" Michael Clifford). Clifford will concede, in the abstract, to abuses in the for-profit industry. But he rejects the Obama administration's proposal to cut off federal aid to for-profits at which student-debt payments after graduation exceed a certain percentage of the graduates' income. In fact, he denies that colleges have any responsibility whatsoever for how much students borrow and whether they can pay it back. He won't even acknowledge that student borrowing is related to how much colleges charge.

Rob MacArthur Alternative Research Services, Inc. 203-244-5174 rmacarthur@altresearch.com

This material has been prepared by Alternative Research Services Inc., a Connecticut-registered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, replicating, or quoting from tlus report without the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The firm does not make a market or hold positions in the securities mentioned herein, nor does the firm maintain any investment banking relationships in such securities.

From: To:

Robert MacArthur <nnacarthur@altresearch com> Robert MacArthur 8/16/2010 3:38:20 PM Barmack

CC:
Date: Subject:

Student Aid Policy Analysis

Summary and Analysis of Gainful Employment NPRM
Mark Kantrowitz
Publisher of FinAid.org and FastWeh. com

August 15, 2010

EXECUTIVE SUMMARY The US Department of Education published a Notice of Proposed Rulemaking (NPRM) OD Program Integrity: Gainful Employment in the Federal Register on July 26, 2010. 1 The NPRM will have a 45-day public comment period ending on September 9, 2010. lt defines gainful employment in terms of affordable debt restrictions based on a triad of three metlics, a loan repayment rate, a debt-service-toincome ratio and a debt-service-to-discretionary-income ratio. This "three strikes" rule provides for-profit colleges and vocational certificate programs with three opportunities to maintain eligibility for federal student aid. The proposed definition of gainful employment appears to represent a reasonable compromise that separates the wheat from the chaff without discarding too much wheat. However, the proposed rule will negatively impact colleges that serve greater numbers of low income and minority students. More than half of Pell Grant recipients at for-profit colleges are enrolled in colleges where the loan repayment rate is under the 35% threshold and an additional third are e nrolled in colleges that are between the 35% and 45% thresholds. lt is unclear how the proposed rule will affect for-profit medical schools, many of which have very low loan repayment rates due to most graduates relying on deferments and forbearruJces during their residencies and internships. The loan repayment rates for the publicly-traded for-profit colleges do not seem to be consistent with common intuitions and analyst statements conceming institutional quality. Default management programs are likely to start emphasizing the use of income-based repayment instead of deferments and forbearances. Deferments and forbearances have no impact on the loan repayment rate, while widespread use of income-based repayment may be sufficient to shift a program from the restricted zone into the fully eligible zone. Colleges are also likely to become more selective in their admissions policies and to adopt aggressive counseling and services for the students who are most likely to drop out and default on their loans. METHODOLOGY This analysis of the Gainful Employment Notice of Proposed Rulemaki.ng (NPRM) is based on several documents: • • The version of the Gainful Employment NPRM that was released on July 23, 2010 The version of the Gainful Employment NPRM that was published in the Federal Register on July 26, 2010

1

Federal Register 75(142):43616-43708, July 26, 2010.
-1-

• •

The press release that was provided to news media at 6 pm on July 22,20102 (as well as the additional details that were disclosed during the conference call with reporters) The release of data and technical documentation for the Gainful Employment NPRM on August

13,20103
This student aid policy analysis paper represents an updated and expanded version of the July 26, 2010 preview paper, Gah~ful Employment NPRM Proposes "Three St1ikes" Rule.

RECOMMENDATIONS
The gainful employment definition will apply only to for-profit colleges (and certain vocational training programs at non-profit colleges) because of the statutory language. However, Congress should consider applying these affordable debt rest:J.ictions to all colleges. Just because a college lacks an overt profit motive does not mean that it should be permitted to routinely graduate students with excessive debt. In addition to requiring colleges to disclose the three metrics in all communications with prospective students, whether online, in ptint or in person, the US Department of Education should itself disclose the loan repayment rates and debt to income ratios to students. When the US Department of Education began disclosing graduation rates as part of FAFSA on the Web, it caused high school seniors to rank graduation rates higher among their college selection criteria, as demonstrated by the Fastweb and Maguire Associates College Decisionlmpact Survey. The US Department of Education should consider disclosing the loan repayment rates and debt to income ratios on the FAFSA and on the College Navigator web site to enable students to compare colleges based on the affordability of the student debt. They should disclose the met:J.ics for all colleges, including for-profit, non-profit and public colleges. Perhaps the disclosure can use a green (eligible zone), yellow (restticted zone) and red (ineligible zone) color coding scheme to help families iuterpret the metlics. The US Department of Education does not need any statutory or regulatory authority in order to disclose this data. The US Department of Education should consider allowing loan repayment rates to be based on a ptior set of four fiscal years, similar to the manner in which the debt to income ratios may be based on a prior three-year period. Programs that use this option would be required to demonstrate loan repayment rates greater than the 45% threshold. This accommodation is necessary for medical schools which tend to have lower loan repayment rates because of the routine use of deferments and forbearances by medical school graduates during their residencies and internships. The US Departl11ent of Education should consider publishing deferment and forbearance rates for all colleges. This will better inform analysis of the differences between loan repayment rates and cohort default rates. The definition of the loan repayment rate should be based on reductions in the ptincipal and accrued but unpaid interest balance of a loan, as opposed to just reductions i.n the principal balance of the loan. Reliance on just reductions to principal causes significant delays in the recognition of borrowers who have resumed making full voluntary monthly payments on their loans.
2

3

A copy of the press release may be found at www.finaid.org/educators/20100722gainfulemploymentrelease.pdf. ifap.ed.gov/eannouncements/081310ReleaseGainfuiDataTechDocNPRM.html and www2.ed.gov/policy/highered/reg/hearulemaking/2009/integrity-analysis.html

- 2-

The US Department of Education should consider modifying the proposed rules to calculate debt to income ratios at the institution level when the institution 's individual programs lack sufficient completers to yield statistically significant results. Statutory changes are beyond the scope of tbe rulemak.ing process. However, there are two consequences of the proposed regulatory changes that may require Congressional action: • The main tool for compliance with the affordable debt restrictions of the gainful employment NPRM will i1wolve tuition reductions. However, the main tool for institutional compliance with the 90/10 rule is to increase tuition rates. These statutory and regulatory requirements are in conflict with each other. Since encouraging tuition reductions is a better public policy objective, Congress should consider modifying or repealing the 90/10 rule to remove this conflict. Section 479A(c) of the Higher Education Act of 1965 provides colleges with the authority to "certify a loan amount or make a loan that is less than the student' s determination of need (as determined under this part), if the reason for the action is documented and provided in written form to the student" on a case-by-case basis, so long as this action does not discriminate on the basis of race, national origin, rel igion, sex, marital status, age, or disability status. However, the US Department of Education has issued subregulatory guidance that limits the ability of colleges to use this authmity. Specifically, on page 3-94 of the 2009-2010 Federal Student Aid Handbook, the US Department of Education writes "Also note that your school cannot engage in a practice of certifying Stafford loans only in the amount needed to cover the school charges, or to limit unsubsidized Stafford botTowing by independent students." Between this guidance and the caseby-case restriction, colleges are precluded from adopting lower loan limits for students according to field of study or degree program. This is particularly problematic for colleges that offer Associate's degree programs because the Stafford loan program has a single set of aggregate loan limits for all undergraduate degree programs. While these aggregate loan limits may be appropriate for Bachelor's degree programs, the limits are too high for Associate's degree and certificate programs. The 150% timeframe SAP restliction does not preclude students who transfer from one college to another or switch degree programs from accumulating an excessive amount of debt for an Associate's degree. Congress should consider adopting separate lower aggregate loan lin1its for Associate's degree and certificate programs and providing colleges with the authority to set lower loan limits based on the field of study and/or degree program.

PROPOSED DEFINITION OF GAINFUL EMPLOYMENT The proposed definition of gainful employment establishes affordable debt resoictions on educational programs at for-profit colleges. The affordable debt resuictions are implemented through three metlics, each of which has two thresholds. If a program satisfies none of the three meu-ics, it loses eligibility for federal student aid. This is effectively a "three stlikes and you're out" rule. The metrics with the most forgiving looser thresholds are as follows:

J. A loan repayment rate of at least 35%. 2. A debt-service-to-income ratio of at most 12%. 3. A debt-service-to-discretionary-income ratio of at most 30%.
- 3-

All three metrics are applied to all borrowers entering repayment, not just those completing the program. The loan repayment rate is applied to just federal student loans. The debt-service-to-income ratio and the debt-service-to-discretionary-income ratio are applied to both federal and plivate student loan debt. A program that fails to satisfy at least one of these metlics may not offer federal student aid to new students. It may offer federal student aid to current students for the remainder of the current award year and one additional year, provided that it warns them about the program's low repayment rates and high debt-to-earnings ratios. The debt to income ratios indicate whether a borrower is capable of repaying the debt while the loan repayment rate indicates whether a borrower is actually repaying the debt. Almost all of the programs with a loan repayment rate over 45% satisfy at least one of the prefened debt to income ratios. It is only at loan repayment rates under 45% that the debt to income ratios provide additional differentiation among programs. There are also three additional preferred thresholds that are tighter. Programs that satisfy at least one of these tighter thresholds are fully eligible for federal student aid. Programs that do not satisfy at least one of these tighter thresholds are subject to cettain restrictions and are refened to as "restricted programs." The tighter metrics are as follows:
1. A loan repayment rate of at least 45%. 2. A debt-service-to-income ratio of at most 8%. 3. A debt-service-to-discretionary-income ratio of at most 20%.

Programs that do not satisfy both the first and either of the second or third of these tighter metrics will be required to disclose their repayment rates and debt-to-earnings ratios to thei1· students . A total of 55% of programs would be required to warn students about their low loan repayment rates and high debt -to. . 4 eru·mngs rat1os.
In several sections of the NPRM the US Department of Education asks whether it should adopt stlicter standards for the three metrics.

Page 43619: "While we believe that these restrictions are appropriate considering the poor performance of these programs, we seek comment on whether programs with a loan repayment rate of less than 45 percent but higher than 35 percent should be subject to the loss (~f title IV, HEA programfunds. " Page 43620: "We seek comment on whether a program with a loan repayment rate below a specified threshold should be ineligible for title N, REA funds, regardless of the debt-to-income ratio. "

It is unclear why the US Department of Education is treating the disclosure of loan repayment rates and debt-toearnings ratios as a sanction, instead of requiring all colleges to disclose this information. Requiring the disclosure of these rates and ratios for all colleges would be beneficial to students, enabling them to compare colleges according to the affordability of the student debt. The US Department of Education should consider disclosing this information on the FAFSA, the Student Aid Report and the College Navigator web site, just as it currently discloses graduation rates.
- 4-

4

Page 43623: "We spec~fically seek comment on whether the 30 percent threslwldfor the first three years of employment is appropriately rigorous or whether the Department should consider using the 20 percent of discretionmy income or 8 percent of average annual earnings to define programs as ineligible."

While it is not unusual for the US Department of Education to seek specific comments on part of a proposed tule in an NPRM, these three comments would appear to signal that the US Department of Education is unlikely to soften the thresholds in the final rule in response to public comments.

SANCTIONS ON RESTRICTED PROGRAMS
The restricted programs will be subject to a limit on enrollment equal to the average enrollment during the past three years.5 Restricted programs will also be required to obtain employer certification that the program satisfie s the employer's requirements. Using a three-year moving average effectively forces a reduction in enrollment the first year a program becomes restricted, since most programs at for-profit colleges have been experiencing double-digit annual enrollment growth and the moving average will be below the most recent year's total enrollment figures. This is illustrated by the foUowi.ng graph, which assumes a 25% emollment growth rate. The setting of the enrollment based on the moving average begins in the fourth year, in the section of the graph marked in red. The y axis has been truncated to start at 90% instead of 0% in order to enlarge the graph to show detail on the damped oscillation of the enrollment figures. The fluctuation s settle down by the fifth year of moving averages, identified as year 8 in the graph.

Changes in Enrollment for 25% Growth Rate
160% 150% 140% 130% 120% 110% 100% 90%

1

2

3

4

5

6

7

8

9

10

11

12

13

14

Years

New programs will be subjected to limits on enrollment growth based on projected enrollments for the next five years (until loan repayment rate data is available for the program}, unless the institution already offers a similar eligible program. New programs will also be required to "demonstrate employer support for the program."

5

- 5-

LOAN REPAYMENT RATE The loan repayment rate is essentially a performing assets ratio. It calculates the percentage of original federal loan balances at repayment (including interest that was capitalized at repayment) that are generating payments to plincipal. It is based on all borrowers who left the program, including completers and drop-outs/stop-outs, during the prior 4 federal fi scal years, but excludes borrowers who entered repayment within the last six months of the most recent fiscal year. 6 Borrowers in an i.n-school or military deferment are excluded from both numerator and denominator. It weights the repayment rate by the original principal balance of the loans, yielding a measure of the financial perfonnance from the federal government's perspective. The loan repayment rate definition addresses most of the flaws in the cohort default rate as identified by a 2003 audit report by the Office of the h1spector General at the US Department of Education. 7 The loan repayment rate counts only the loans of borrowers who are making payments to principal, includi11g borrowers who have paid off the loans in full. 8 The loans of borrowers who are delinquent, in an economic hardship defetment, in a forbearance or in default will be counted in the denominator but not the numerator of the loan repayment rate. In addition, borrowers in income-contingent repayment or income-based repayment who are not making payments of more than the interest that aCCJ1les will be counted in the denorn.il1ator but not the numerator. This reduces the loan repayment rate by about 7%, since slightly more than half of bonowers in income-contingent and income-based repayment are paying less than the interest that accrues and about 15% of active borrowers are in these repayment plans. However, bonowers in income-contingent repayment or income-based repayment who are participating in public service loan forgiveness will be treated as though they are making payments to plincipal, reducing that offset slightly. (The press release restJicts this offset for public service loan forgiveness to borrowers who completed the program.) The press release reports that the average loan repayment rate for students at for-profit colleges is 55%: " In addition, while 88 percent of recent bmTowers from nonprofit institutions and 80 percent of botTowers from private institutions were able to pay down the balance of their student loans in recent years, only 55 percent of borrowers attending for-profit institutions were able to pay off more than acc111ed interest." A similar statement occurs in Appendix A on page 110 of the pre-publication version of the gainful employment NPRM: "On average, 80 percent of recent borrowers from public institutions and 88 percent from nonprofit institutions paid at least a penny more than interest on their loans si nce FY 2006 i.n FY 2009, compared to 55 percent at for-profit institutions." These figures are not consistent with the average loan repayment rates reported below in the "Loan Repayment Rates by Sector" section and in the following table (LRR ~ 0.0%), namely 53.7% at public colleges, 56.0% at non-profit colleges and 36.4% at for-profit colleges. The figures are also not consistent
The federal fiscal year runs from October 1 to September 30. The last six months of the federal fiscal year start on March 31. The fiscal year is also used with cohort default rates. 7 Audit to Determine if Cohort Default Rates Provide Sufficient Information on Defaults in the Title IV loan Programs, Office of the Inspector General, US Department of Education, ED-OIG/A03-C0017, December 2003. www.ed.gov/about/offices/list/oig/auditreports/a03c0017.pdf 8 loans paid in full by consolidation do not count as paid in full until the consolidation loan itself has been paid in full. Until then the consolidation loan is included in the numerator if the borrower has made payments to principal on the loan.
6

- 6-

with the average loan repayment rates for institutions with loan repayment rates over the 45% threshold, as demonstrated by the following table.

4-year

Non-Profit
2-year

The figures in the press release are also not consistent with the Institutional-Level Repayment Rates from page 43619 of the Gainful Employment NPRM as published in the Federal Register. The overall loan repayment rate should equal the average of the loan repayment rates for the< 35%, 35% to 45% and~ 45% categories, when weighted by the percentages of institutions in each category.lf we assume that the average loan repayment rate is the maximum loan repayment rate for the< 35% and 35% to 45% categories, namely 35% and 45%, respectively, that shou ld yield a lower bound on the average loan repayment rate in the~ 45% category. Thus we have 35% · 40.0% + 45% · 23.8% + x · 36.2% =55%, where xis the lower bound on the average loan repayment rate in the~ 45% category. Solving for x yields
X= (55%- 35%.40.0%-45% · 23.8%)/36.2% = 83.7%

That lower bound on the average loan repayment rate in the~ 45% category seems quite high even for an overall average, considering that only the most elite institutions have loan repayment rates that are in this range (e.g., Harvard 75.1%, MIT 87.0%, Princeton 76.9%, Yale 72.3%, California Institute of Technology 92.4%, Carnegie Mellon University 79.1%, and UC Berkeley 72.8%). The figures in the press release may be reporting the percentage of institutions with loan repayment rates of at least 35%, which are 79.8% at public colleges, 87.9% at non-profit colleges and 59.3% at for-profit colleges. These figures round to 80%, 88% and 59%, respectively.lt is possible that 55% was substituted for tbe figure at for-profit colleges through a typographic enor, as tbe 55% figure appears repeatedly in the NPRM in other contexts (e.g., the percentage of programs subject to the reporting of loan repayment rates and debt to income ratios).

- 7-

CORRELATION OF LOAN REPAYMENT RATES WITH DEFAULT RATES The overall correlation of loan repayment rates and 2-year cohort default rates among all colleges is very weak, with an R2 of 32.5%. If the set of colleges is limited to just the for-profit colleges, the con·elation becomes even weaker, with an R2 of25.1 %. The correlation of loan repayment rates with 3-year cohort default rates among all colleges is slightly stronger, with an R2 of 42.7%. There is, however, a strong almost linear relationship between each loan repayment rate and a maximum 2-year cohort default rate, after omitting a handful of outliers, as illustrated by the following graph. For example, only 2 of 2,702 institutions with loan repayment rates of 45% or more have a 2-year cohort default rate above 25%. Similarly, only 3 of 946 institutions with loan repayment rates of 35% to 45% have a 2-year cohort default rate above 30%.

Maximum 2-Year CDR per LRR
y = -0.4626x + 0.4846

R2 = 0.9374

0%

20%

40%

60%

80%

100%

Maximum LRR

Likewise there is a strong almost linear relationship between each loan repayment rate and the maximum 3-year cohort default rate, after omitting a handful of outliers, as illustrated by the following graph. For example, no institutions with loan repayment rates of 45% or more have a 3-year cohort default rate above 43%. Similarly, no institutions with loan repayment rates of 35% to 45% have a 3-year cohort default rate above 50%.

Maximum 3-Year CDR per LRR
80.0% 70.0% 0:: 60.0% 0 u 50.0% E :I 40.0% E ·:;c 30.0% "' :2 20.0% 10.0% 0 .0%
y

= -0.6866x + 0 .7397 - - 2 = 0.9536 R

+-~,.-----'-----------------

.0% 20% 40%

-

r---

60%

80%

100%

Maximum LRR

- 8-

This graph is the upper frontier of the following scatter-plot of the relationship between loan repayment rates and 3-year cohort default rates.

3-Year Cohort Default Rates by Loan Repayment Rates
80.0%

~ ::J

a: "'

...
Ql

70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

J!! Ql
0

t:
..s::.
0 0

... "' >
Ql

u

m

Loan Repayment Rate

While any given loan repayment rate must have a cohort default rate below a particular threshold, the converse is not necessarily true. An institution can have a 2-year coh011 default rate under 25% and still have a loan repayment rate under the 45% threshold. This is because colleges use a variety of default rate management techniques, such as deferments, forbearances and consolidation, to rutificially reduce their coh01t default rates. Defennents and forbearances, for example, can be used to push a borrower who is likely to default outside the 2-year or 3-year default rate window. There might be a strong conelation between the sum of deferment, forbearance and default rates and the loan repayment rate, but data concerning deferment and forbearance rates at all colleges is not publicly availableY Another way to determine whether a college is actively managing its cohort default rate is by comparing the 2-year and 3-year cohort default rates in the Ttial 3-Year Cohort Default Rate spreadsheet published by the US Department of Education. 10 Since it takes 360 days of nonpayment for a default to occur, the 2year cohort default rate etlectively provides a 1-year window in which a default can occur and the 3-year cohort default rate effectively provides a 2-year window in which a default can occur. Thus one would expect the 3-year cohort default rate for an individual college to be no more than twice the college's 2year cohort default rate. Colleges for which the 3-year cohort default rate is triple the 2-year cohort default rate were almost certainly managing the cohort default rate through the end of the 2-year cohort default rate window and abandoning the botTowers dming the third year. A total of 459 colleges have 3year cohort default rates that are at least triple the 2-year cohort default rate, slightly more than lO% of
9

Colleges for which the ratio (deferment rate+ forbearance rate)/(default rate) is greater than 2.5 are likely to be actively managing defaults by encouraging borrowers to use deferments and forbearances to push them out of the 2-year or 3-year default rate window. 10 federalstudentaid.ed.gov/datacenter/library/TriaiYearCDR.xls
- 9-

the total. These include 263 for-profit colleges (57.3% of the total), 88 non-profit 4-year colleges (19.2%), 25 non-profit 2-year colleges (5.4%), 33 public 4-year colleges (7.2%) and 50 public 2-year colleges (10.9%). The average loan repayment rate for a 3-year cohort default rate of 30% or higher is 25.9% with a standard deviation of 11.4%. This means that most colleges with a trial3-year cohort default rate of 30% or more will not have loan repayment rates above the 35% threshold on eligibility. The following chart illustrates the average loan repayment rate versus 3-year cohort default rates in 5% increments, with error bars based on one standard deviation.

Average Loan Repayment Rate by 3-Year Cohort Default Rates
90.0% 80.0%

a: "'
Q)

...

Q)

70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%

-~"-

...
s:::

E

~~

"'
a:
0 "' .....
Q)

>

Q.

s:::

'
0% 10%

~

~~

~

"""
SO%

..A.

\. l
70%

20%

30%

40%

60%

3-Year Cohort Default Rate

Current default aversion programs emphasize the use of deferments and forbearance s to avoid defaultiJJg on federal student loans. These progt·an1S will probably start emphasizing income-based repayment instead. Although only about half of borrowers in income-based repayment will count toward the loan repayment rate, that compares favorably with deferments and forbearances, where none of the borrowers count toward the loan repayment rate. Deferments, forbearances and income-based repayment are all effective in manipulating the cohort default rate, but only income-based repayment can have an impact on the loan repayment rate. Switchi.ng default aversion programs from deferments and forbearances to income-based repayment will likely u1crease the loan repayment rate by up to about 10% to 15%, assuming an average defetment and forbearance rate of about 25%. That is enough of a difference to shift a loan repayment rate from the restricted zone (35% to 45%) into the eligible zone (2:: 45%) and from ineligible (assuming a loan repayment rate of 25% or more) into the restricted zone. While the use of income-based repayment may be motivated by a desire to manipulate the loan repayment rates, incomebased repayment provides genuiJle benefits to both the borrower and the federal government as compared with the use of deferments and forbearances.

. 10 -

Colleges may be able to manipulate the debt to income ratios by adopting tuition or financial aid policies that reduce median debt at graduation for just the students who complete the program. For example, the college could charge a lower tuition rate for students in the second year of a two-year program. Such reductions could be targeted at just the small subset of the students needed to shift the median, namely students whose cumulative debt is just above and under the median. This type of manipulation would be most beneficial to programs with low graduation rates, since the bulk of the tuition revenue for such programs will be from students who do not complete the program. Thls type of manipulation can be detected by the presence of a large gap in the disttibution of borrowers by debt above the median. Average debt is not prone to thls type of manipulation. Colleges will also become more selective (e.g., requiring a test to determine commitment to completing the program), reduce dropouts through " try before you buy" policies, and adopt aggressi.ve counseling and services for students who are most likely to default on their loans (e.g., students who are single parents, students who work full time and emoll part-time). Colleges will also evaluate the extent to which parttime emollment conttibutes to lower completion rates and, consequently, a lower loan repayment rate. Note that the data published by the US Department of Education repotts institutional loan repayment rates. It is possible that a college will have an institutional loan repayment rate greater than 45% but still have individual programs with loan repayment rates less than 45%. LOAN REPAYMENT RATES ARE VERY LOW AT MEDICAL SCHOOLS Medical schools have low loan repayment rates because most medical school graduates suspend repayment using a deferment or forbearance duriJlg their residencies and internships, which last several years after graduation. 11 Unlike the debt to income ratios, which have the option of using a previous 3year period, the loan repayment rate is limited to just the 4 prior federal fiscal years. 12 Many medical schools, as a result, will be limited to the debt to income ratios in order to maintain eligibility for federal student aid funds. For example, 320 colleges wi.th "Medical", "Medicine", "Health" or "Physician" in the name of the college had 30 or more borrowers in the denominator. The overall loan repayment rate for this group of colleges was 37.5%. Of these colleges, 42.2% had loan repayment rates under the 35% threshold and 16.9% had loan repayment rates between 35% and 45 %. For example, Harvard Medical School has a loan repayment rate of 24.4% and Johns Hopkins University School of Medicine has a loan repayment rate of 31.0%. The following chart shows the dist:Iibution of medical schools according to loan repayment rate in 5% increments.

11

The elimination of the 20/220 rule effective July 1, 2009 means that most medical school graduates will no longer qualify for the economic hardship deferment. Depending on whether these borrowers shift to forbearances or income-based repayment, loan repayment rates at medical schools may be significantly different in the future than during the initial introduction of the gainful employment rules. 12 Perhaps the US Department of Education should allow the use of an earlier set of fiscal years for medical schools?
- 11 -

Distribution of Medical Schools by Loan Repayment Rate
16.0% 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
-

--

-

I I

-

-

,__,

-

1-

-

-

-t- I- •

Loan Repayment Rate

PERCENT OF DOLLARS VERSUS PERCENT OF BORROWERS
The loan repayment rate calculates the percentage of original loan dollars that are producing payments to principal. This is in contrast with the cohort default rate, which calculates a percentage of borrowers who have defaulted. The use of dollars is necessmy to measure the financial impact on the federal government. However, as the following graph demonstrates, there is a very strong correlation between the percentage of borrowers who are makjng payments to principal and the loan repayment rate. The average va1iance is only 2.5%, with a standard deviation of only 3.8%.

% of Borrowers Paying to Principal
...
Ill

Ql

0 ... ...

~

co
c:
Ql Ql

...
v ...

0

c..

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0%

y = 0.9997x + 0.0255 R2 =0.9586

20%

40%

60%

80%

100%

Loan Repayment Rate

- 12 -

DEBT-TO-INCOME RATIOS
The debt-service-to-income and debt-service-to-discretionary-income ratios are based on all education debt, including both federal and private student loans. P1ior debt at the same or a related institution is included. Income is based on actual earnings data from the Social Security Administration. 13 (The use of Social Security earnings data addresses the problems associated with borrowers who do not file a federal income tax return because of low income, since such borrowers still have FICA taxes withheld and reported to the Social Secmity Administration.) The calculation of discretionary income will be the san1e as for income-based repayment, reducing income by 150% of the poverty line, and will assume a family size of one. Debt will be based on the median student debt 14 for the three most recent award years prior to the earnings year of students who completed the program. This includes students who graduated without debt. 15 Programs have the option of using the prior three-year pe1iod (i.e., 4, 5 and 6 years prior to the earni11gs year), but then would be restricted to the preferred 8% and 20% thresholds. Since the less resttictive tru·esholds are 50% higher than the preferred thresholds, this will mainly be useful for programs where income jumps by 50% in three years. For example, medical school graduates typically strut off with low salru·ies during their residencies and internships, but then switch to a much higher six figure salary three or four yeru·s after graduation. Using the prior three year period might also be useful during a recession when new graduates have difficulty getting a job, especially in industries with massive layoffs like the auto industry. The use of discretionary income and actual earnings presents an effective solution to differences in degree programs without requiting any kind of a special exception or adjustment for those programs. The same rules will apply to all programs, regardless of educational attainment. For example, the previous proposal to use Bureau of Labor Statistics data had an inherent bias against Bachelor's degrees and more advanced degrees, since an MBA in accounting would map to the same average wage data as for an Associate's degree in accounting. Using actual eru·nings addresses this problem. Similru·ly, college graduates with advanced degrees can devote a greater percentage of their income towru·d repaying debt than graduates who hold just ru1 Associate's degree or ce1tificate, and so are more likely to satisfy a debt-service-todiscretionary-income tru·eshold as opposed to a debt-service-to-income tru·eshold.

AVERAGE EARNINGS VERSUS MEDIAN INCOME
The use of earnings as opposed to income yields an increase i11 the debt to income ratios because earnings are lower than income. The use of means as opposed to medi.ans yields a decrease in the debt to i.ncome
The colleges will provide the US Department of Education with lists of the students completing each program. These lists will be provided to the Social Security Administration, who will report average earnings figures for each program. Neither the US Department of Education nor the colleges will have access to individual earnings figures for privacy reasons. 14 Parent PLUS loans are excluded. Parent-only private education loans, such as the Wells Fargo Student Loan for Parents, appear to be included based on the draft regulation's use of the phrase "private educational loans" as opposed to "private student loans". 15 Since 93.1% of students at for-profit colleges graduate with federal and private student loans (86.0% at for-profit less-than-2-year institutions, 97.6% at for-profit 2-year institutions and 97.0% at for-profit 4-year institutions), the inclusion of all completers as opposed to just completers with debt will have a minimal impact on the debt to income ratios at for-profit colleges.
- 1313

ratios because means are greater than medians. The following data comes from table 8 (income) and table 9 (earnings) of the US Census Bureau's Current Population Survey, 2006 Annual Social and Economic Supplement. 16 The figures are for year-round full-time workers for all races.

Median Earnings

I Mean Earnings
Median Income Mean Income

$35,053 $38,077 $35,535 $38,980

--

$41,593 $50,411 $42,092 $51,774

$50,438 $56,327 $51,391 $58,001

$70,691 $90,707 $71,308 $92,546

$57,902 $74,440 $60,213 $77,198

The use of eamings as opposed to income increases the debt-service-to-income ratios by 0.9% to 3.8%, depending on the degree program. The use of means as opposed to medians decreases the debt-service-toincome ratios by 7.9% to 22.2%, depending on the degree program. The combi11ed effect is a decrease in the debt-service-to-income ratios of 6.7% to 21.4%, depending on the degree program. This is the equivalent of a 0.8% to 2.6% point decrease in a 12% debt-service-to-income ratio. The smallest size decrease is for Associate's degree programs. COMPARING THE METRICS The three metrics can be confusing because the details differ. The following chart illustrates the key differences among the metrics.

Year Number of Years Type of Students Type of Loans

Fiscal Year (October to September) 3.5 (4 fiscal years minus the last six months of the most recent fiscal year) All students who left the program, including both completers and dropouts Just federal student loans, including the Stafford and Grad PLUS loans. The Parent PLUS loan is excluded. Income: Calendar Year 3 (either the 3 years prior to the earnings year or the 3 years before that) Just students who complete the program Federal and private student loans incurred by students at the same or related institution.

J

PHASE-IN OF THE NPRM The three metrics will be phased in, with programs not subject to a loss of eligibility or the debt warning disclosures until the 2012-13 award year starting on July 1, 2012. During the fust year of implementation, forming programs within each category of program. the loss of eligibil ity will be limited to the lowest-pe• Petf"ormance will be measured by the loan repayment rate. Each category will be defined based on the type of degree or certificate awarded. Within each category the loss of eligibility will be capped at no more than 5% of completers during the plior award year. The remaining ineligible programs would be treated as rest:Iicted, in addition to the programs already in the rest:Iicted zone. The US Department of Education estimates that 5% of programs representing 8% of students would lose eligibility and that 8% of programs representing 8% of students would be in the restricted zone. The cap
16

Note that US Census Bureau data includes only individuals who are employed and as such does not include individuals with zero earnings and zero income.
- 14 -

may or may not reduce the number of programs losing eligibility during the first year, as the cap is based on 5% of completers while the 8% figure is based on the number of students em·olled in the affected programs. However, while programs with lower loan repayment rates tend to have lower graduation rates, they also tend to have lower enrollment rates. Empirical analysis suggests that the 5% completion cap will affect slightly less than 5% of enrollments. Opportunities for colleges to adapt to the new rules may be limited despite the phase-in because several of the years in the prior three-year period and the prior four fiscal years have aiJeady passed.

IMPACT OF THE NPRM ON PELL GRANT RECIPIENTS
The following table shows the correlation between the percentage of students receiving a Pell Grant and the loan repayment rates across all colleges, not just those subject to the gainful employment requirements. Average loan repayment rates were based on the sum of the corresponding original loan balances for all of the institutions within each range. Except for the institutions with a percentage Pell Grant recipients of 80% or higher, the average Joan repayment rates demonstrate a Jjnear relationship. 17

b.O%0.0%-19.9~
0.0%-29.9~

0.0% -39.9° 40.0%- 49.9%

18.4% 24.2% 15.9% 10.9% 8.8% 7.9% 4.5% 2.8% 1.5%

61.7% 54.1% 46.6% 38.3%

The loan repayment rates are likely to have a significant impact on Pell Grant recipients, since Pell Grant recipients are disproportionately enrolled at institutions with loan repayment rates under the 35% threshold. Institutions with a higher percentage of Pell Grant recipients have a lower loan repayment rate. Generally, institutions that have 40% or more of Pell Grant recipients are unlikely to satisfy the 45% loan repayment rate threshold. Similarly, institutions that serve 50% or more of Pell Grant recipients are unlikely to satisfy the 35% loan repayment rate percentage. Colleges with loan repayment rates under the 35% threshold represent 26.5% of Pell Grant recipients. Colleges with loan repayment rates between 35% and 45% represent 21.7% of Pell Grant recipients. As the following tables illustrate, for-profit colleges represent 23.6% of Pell Grant recipients, with 12.4% of Pell Grant recipients enrolled at for-profit colleges that are under the 35% threshold (52.2% of Pell Grant recipients at for-profit colleges) and 8.1% enrolled at for-profit colleges that are between the 35% and 45% thresholds (34.1 % of Pell Grant recipients at for-profit colleges).

17

The flattening out of the trend at institutions with a percentage Pell Grant recipients of 80% or more may be due to greater volatility from a smaller sample size, since relatively few institutions have such a high percentage of Pell Grant recipients.

- 15 -

All Colleges 4-year 2-year
~ear

26.5% 25.7% 24.6% 62.2% 52.9% 42.9% 64.0% 63.4% 23.7% 23.3% 41.4% 61.8% 22.7% 24.3% 20.0% 39.8%

100.0% 66.0% 26.9% 7.0% 23.6% 10.0% 7.1% 6.6% 19.5% 18.9% 0.4% 0 .2% 56.9% 37.2% 19.4% 0.2%

For-Profit 4-year 2-year < 2-year Non-Profit 4-year 2-year
~ear

Public 4-year 2-year ...__5}:Jear

I For-Profit

12.4% 2.6% 11.5% 26.5%

8.1% 3.3% 10.3% 21.7%

3.2% 13.6% 34.9% 51.8%

23.6% 19.5% 56.8% 100.0%

I

Non-Profit Public Total

For-Profit Non-Profit Public Total

52.2% 13.1% 20.3% 26.5%

34.1% 17.0% 18.2% 21.7%

13.6% 69.9% 61.5% 51.8%

1oo.o% 1 100.0% 100.0% 100.0%

I

Given that such a high percentage of Pell Grant recipients are likely to be affected by the gainful employment rules, the US Department of Education should conduct further analysis of the impact of the NPRM on Pell Grant recipients, especially those who graduate. The extent to which for-profit colleges have low loan repayment rates because they serve a greater proportion of Pell Grant recipients is uoclea.r. Financialmetrics like the loan repayment rates and debt to income ratios do not clarify the degree to which for-profit colleges are serving an under-served population or exploiting it. CORRELATION OF GRADUATION RATES WITH LOAN REPAYMENT RATES The following table shows the correlation of graduation rates with loan repayment rates across all colleges, not just those subject to the gainful employment requirements. Institutions with graduation rates of 40% or higher are likely to satisfy the 45% loan repayment rate threshold.

- 16 -

Loan Repayment
0.0%-9.9% [ 10.0% - 19.9% 20.0% .__ - 29.9% 30.0% - 39.9% 42.1% 35.1% 38.6% 42.0% 48.3% 56.0% 58.4% 63.3% 66.3% 66.3%

---

f""-. ,. .
1\0.0%- 49.9~

~0.0%- 59.9~

0.0% -79.9~ . 0.0%- 89.9~ 0.00-' - 100~

The following table illustrates graduation rates by institution type as well as the distribution of FfE enrollments and share of completers by sector.

All Colleges 4-year 2-year [if year For- Profit

I

~r

2-year < 2-year Non-Profit 4-y_ ear 2-year < 2-year Public 4-year 2-year < 2-year

45.2% 53.4% 24.0% 67.9% 45.9% 30.4% 56.8% 67.1% 62.2% 62.2% 52.1% 73.6% 39.7% 52.2% 20.0% 78.3%

100.0% 67.6% 29.4% 3.0% 11.6% 5.9% 3.0% 2.8% 21.3% 21.0% 0.3% 0.1% 67.1% 40.8% 26.2% 0.1%

100.0% 79.9% 1 15.6% 4.5% 11.8% 3.9% 3.7% I 4.1% 29.3% 28.9% 0.3% 0.2% 58.9% 47.1% 11.6% I 0.2%

- 17-

LOAN REPAYMENT RATES BY SECTOR The following table shows the loan repayment rates by institution type. Community colleges have a 40.3% loan repayment rate despite having only a 20.0% graduation rate, probably because fewer students graduate with debt and the average debt at graduation is much lower. This is in contrasts with for-profit 2year colleges, which have a 34.3% loan repayment rate and 56.8% graduation rate, probably because of the much greater incidence of high debt among the graduates.

All Colleges
~ear

51.3% 53.3% 38.3% 35.5% 36.4% 37.4% 34.3% 34.7% 56.0%
""'I

2-year < 2-year For-Profit 4-year 2-year < 2-year Non-Profit
~ear

2-year < 2-year Public 4-year 2-year < 2-year

-56.0% I -_2_ 1.9%
40.2% 53.7% 55.7% 40.3% 51.4%
""'I

The following table is based on the table of Institutional-Level Repayment Rates from page 43619 of the Gainful Employment NPRM as published in the Federal Register. Considering that 11.8% of non-profit colleges and 19.3% of public colleges (including 27.3% of community colleges) have loan repayment rates below 35%, Congress should consider extending the gainful employment rules to apply to traditional colleges in addition to for-profit colleges.

1

For-Profit 4-year 2-year
<2~

1729 218 565 946 1635 1434 156 45 1598 590 860 148 4962 2242 1581 1139

36.2% 25.2% 32.9% 40.7% 77.7% 78.3% 76.3% 64.4% 57.5% 74.2% 43.1% 74.3% 56.8% 72.1% 42.8% 46.0%

23.8% 32.6% 23.2% 22.1% 10.5% 10.5% 9.6% 11.1% 23.2% 14.9% 29.5% 19.6% 19.2% 13.8% 25.3% 21.3%

4o.o% 1 42.2% 1 43.9% 37.2% 11.8% 11.2% 14.1% 24.4% 19.3% 10.9% 27.3% 6.1% 24.0% 14.1% 31.9% 32.7%

Non-Profit
4-~

_l-y~
~year

Public 4-year 2-year

,___5_]::J ear
Grand Total 4-year 2-year

I

< 2-year

- 18-

IMPACT ON PUBLICLY-TRADED FOR-PROFIT COLLEGES The following table summarizes the loan repayment rates for the largest publicly-traded for-profit colleges.

:::::::::::::::::::::::: . .oan: epayment

40.1% ' - - - - - - - - - - - - - - - -39.7%] 39.1% - - - - - - - - - - - - - - - - - - -39.1% ] 38.5%

----------------------------------~379%~
~~-------------------

37.7% 37

This ranking of the publicly-traded colleges according to loan repayment rates does not seem consistent with commonly-held intuitions and analyst statements concerning institutional quality. The loan repayment rates also differ significantly from internal analyses by several colleges. (These internal analyses necessarily omit loans that have been consolidated because data concerning consolidation loans is not available to colleges through the NSLDS intetface.) It is possible that there is a bug in the COBOL

- 19 -

program used by the US Department of Education to calculate loan repayment rates. 18 The most likely source of error is in the treatment of consolidation loans that consolidate loans from more than one institution. lf these consolidation loans are not properly split according to souxce institution, the principal balance at the end of the fiscal year would be higher than the principal balance at the strut of the fiscal year for any borrower who consolidated duri11g the fiscal year. Even small amounts of debt from another institution could cause a bonower who is making payments to principal to not be identified as such. This would result in a lower loan repayment rate, especially for colleges that have a high transfer-in rate. OBSERVATIONS CONCERNING THE NPRM There are several potential issues in the NPRM's definition of gainful employment: • Payments on a loan ru·e applied in a preference order, first to collection charges and late fees, second to accrued but unpaid interest, and fiJ1aUy to principal , per 34 CFR 682.209(b) and 34 CFR 685.2ll(a). The proposed definition of loan repayment rate in 34 CFR 668.7(b)(3) will count loans in the numerator only if the borrower made payments that reduce the principal balance of the loan as compared with the start of the federal fiscal year. But if a borrower has been delinquent, whether in the current or a previous fiscal year, there may be enough accrued but unpaid interest that there ru·e no reductions in the principal balance of the loan even if the borrower has resumed making all of the required monthly payments. On the other hand, if the borrower defaults or consolidates the loans, the interest is capitalized so that subsequent payments are treated as payments to principal. In both cases the borrower is making the same payments, but the form of the underlying loans has cha11ged. Perhaps the US Department of Education should require reductions in the outstanding principal and accmed but unpaid interest balance of the loan as opposed to just reductions in the principal balance. If a borrower has resumed making regular monthly payments, it should not have to wait months or even years for the borrower to catch up with all the accrued but unpaid interest if the borrower does not elect to capitalize the interest by consolidating the loans. The gainful employment NPRM does not adequately address situations in which a program has a small number of students and/or completers. With the cohort default rate Congress allows colleges with less than 30 bonowers entering repayment to base the cohort default rate on the three most recent award years. 19 The proposals for the loan repayment rates and debt to income ratios use 3 or more yeru·s. However, the use of programs as opposed to institutions sifts the data with a finer mesh, potentially yielding results that are not statistically significant. The US Department of Education noted this problem in its August 13, 2010 data release, warning that " ExtTeme caution should be exercised in instances where small numbers of bonowers entering repayment are observed." This is more of an issue for the debt to u1come ratios since the data sets may be smaller due to the limitation to just the students who complete the program. Moreover,

18

It is also possible that the consolidation loans entirely account for the differences without any bugs in the implementation of the COBOL program. Many colleges use consolidation loans as part of their default management plans. In addition, consolidation loans suffer from adverse selection, where borrowers who are at higher risk of default consolidate their loans to obtain a lower monthly loan payment or to switch lenders. However, the COBOL program is quite complicated, raising the risk of logic or coding errors. 19 See section 462(g)(l) of the Higher Education Act of 1965.

- 20 -

while the Social Security Administration will report average earnjngs data for each program in part to protect the privacy of the college's former students, if a program has only one completer the average earnings will equal that student's actual eamings. The Missomi data suppressed information when the program involved five or fewer completers. One possible solution is to aggregate the data at the institutional level when the data concerning individual programs lacks adequate statistical power. • The draft regulation at 34 CFR 668.7(c)(2) specifies that the debt to income ratios will be based on the median debt of program completers. However, the column in the ge-cumulative-rates.xls spreadsheet released on August 13, 2010 that is labeled as "Median Federal Debt for those Entering Repayment" is actually the average (mean), not the median. Means tend to be a bit higher than medians, due to the potential for rightward skew (the reason why the US Department of Education proposed to use medians instead of means). On the other hand the actual debt to income ratios will be based o n the combi nation of federal and private student loan debt, which should be slightly higher than the federal debt figures. The two may balance each other. However, the column should either have been labeled conectly as a mean or a footnote should have been added to explai n that means had been substituted for medians for expediency. The draft regulation at 34 CFR 668.7(c)(2) does not specify whether the median is for all completers, incl uding those that graduate with no debt, or just the completers who graduate with some debt. The former seems to be the most natural interpretation, but this should be stated explicitly for clarity. Likewise, the regulations do not discuss whether the average earnings data will include completers who earned zero income. The Social Security Admi nistration does not necessarily have eamings data for completers who earned zero income. This can potentially be inferred from the lack of earnings data for a given completer. The draft regulation at 34 CFR 668.7(c)(2) specifies that the debt to income ratios will not include debt from unrelated prior or subsequent institutions: "Loan debt does not include any debt obligations arising from student attendance at prior or subsequent institutions unless the other and current iJlStitutions are under common ownership or control, or are otherwise related entities." However, there is no sin1ilar language in the discussion of the loan repayment rates. lf the i.ntention is to include all federal debt, including debt at prior and subsequent institutions, it should be stated explicitly in the regulation for clarity. If not, then that should be stated as well. The inclusion of debt at the same institution becomes problematic when a student em·oUs in the same institution for a second degree, such as a Bachelor's degree recipient enrolli ng i.n a Master's degree program. The inclusion of such debt effectively adopts a policy of encouraging colleges to require students to seek subsequent degrees from different institutions. On the other hand, cumulative debt affects affordability, and cumulative debt is under the control of the institution when both degrees are obtained from the same institution. Perhaps the US Department of Education should disti.nguish undergraduate debt from graduate and professional debt when determining what debt at the same institution should be included i11 the analysis. The draft regulation at 34 CFR 668.7(a)(3)(iii) does not define the word "prior", leading to a potential ambiguity. Earnings year is defined by 34 CFR 668.7(a)(3)(v) as a calendar year while

- 21 -

the three-year period (3YP) is defined in terms of award year. The regulations need to clarify whether the word "prior" permits an award year to overlap with a calendar year. For example, is the award year 2008-09 prior to calendar year 2009, even though the award year ends in the middle of the calendar year? • The draft regulation at 34 CFR 668.7(c)(2) specifies that Parent PLUS loans are excluded. The use of the phrase "private educational loans" as opposed to "private student loans" would appear to include parent-only private education loans, such as the recently created Wells Fargo Student Loan for Parents. Since parent-only private education loans are a relatively recent phenomenon stimulated by the end of the FFEL program, the US Department of Education should confirm that its wording choice was deliberate and that it intended to include parent-only private education loans, perhaps by inserting "student and/or parent" before "piivate educational loans." The regulatory impact analysis in the third column on page 43634 of the Federal Register version of the NPRM indicates that 60% of the 2,086 propiietary institutions would satisfy the 45% loan repayment rate threshold and that 40% would fall below the 45% threshold. But the table on page 43619 of the Federal Register lists 1,729 for-profit colleges with 36.2% having a loan repayment rate of at least 45% (if one combines the three rows of data) and 60.0% having a loan repayment rate of at least 35%. Likewise the table on page 43630 of the Federal Register indicates that 40% of programs would have a loan repayment rate of at least 45%. Accordingly, it appears that the regulatory impact analysis has swapped the 40% and 60% figures. The table on page 4362 of the Federal Register shows 29,669 of 52,980 programs as restricted in the "Programs by Status" section. That's 55%. But the table on page 43630 of the Federal Register shows only 7% of the programs as restricted. Moreover, the "Affected Students by Status" section shows 265,000 of 3,190,476 students in restricted programs. That's 8.3%, consistent with the table on page 43631 of the Federal Register. The 55% figure is similar to the percentage of progran1S that are subjected to the debt warning/disclosure requirements (i.e., all eligible and restricted except for the 39% that are eligible under both the loan repayment rate and the 8%/20% metrics). Accordingly, it appears that the 29,669 figure was incorrectly labeled or should have been split into two figures. The draft regulations at 34 CFR 668.7(b)(3) states that "RPL also includes loans for borrowers whose payments dming that FFY qualify for the Public Service Loan Forgiveness program under 34 CFR 685.219(c), even if there is no reduction during the FFY in the outstanding principal balance of those loans." The regulations should clarify that qualifying for public service loan forgiveness includes bmrowers who are in the middle of the required service, not just those who have completed the servi.ce requirement. The regulations should also discuss how the US Department of Education plans to identify such borrowers since these borrowers do not currently file any forn1S stating their intent to obtain public service loan forgiveness or document employment i.n a public service job. The US Department of Education might be able to infer this from the borrower's employer as reported to the Social Security Administration. The gainful employment NPRM does not discuss how a college may regain eligibility after becoming ineligible.

-22-

The discussion of the debt warning disclosure in the third column on page 43623 of the Federal Register states " An institution must provide the waming if the program' s repayment rate is less that 45 percent and, using 3YP and, if applicable, P3YP, the debt-to-income ratio is greater than 8 percent of average annual earnings or 20 percent of discretionary income." The intention is that a progran1 that does not satisfy both the 45% loan repayment rate threshold and at least one of the preferred debt to income ratios will be subjected to the wami.ng requirement. But the quoted language does not quite say this. The regulations at 34 CFR 668.7(d) regarding the debt warning disclosure state "unless the progran1 has a loan repayment rate of at least 45 percent and an ammalloan payment that is at least 20 percent of discretionary income or 8 percent of average annual income." The second "at least," highlighted in yellow, should instead be "at most."

The current draft regulations at 34 CFR 668.7(c)(2) base the annual loan payment on the "current annual interest rate on Federal Direct Unsubsidized Loans." This means that for-profit colleges are likely to lobby Congress for reductions in the unsubsi.dized Stafford loan interest rate. Page 131 of the pre-publication version of the gainful employment NPRM notes that several types of programs are most likely to be affected by the loan repayment rate restrictions, including cosmetology, vehicle maintenance, legal support services, culinary arts, ground transportation , audiovisual technology, and medical assistant services programs. Note that the Missomi data does not include cosmetology programs, so it is possible that cosmetology programs may be able to satisfy the debt to income ratios. Footnote 3 on page 43622 of the Federal Register notes that "For graduate and professional programs, separate data are not available on for-profit colleges. For professional degrees, the known debt levels at public and nonprofit institutions could be problematic if earnings are not sufficient." Since some graduate and professional degree programs- especially medical schools- have inherently low loan repayment rates, the lack of debt and earnings data for these programs makes it difficult to evaluate whether these programs will be able to satisfy the debt to income ratios. The use of the Missouli data is potentially problematic because minorities are represented at a much lower rate in the Missouli completion data. For example, 27.5% of the students in the Missouri sample were non-White, compared with 41.0% in the national sample. There are especially significant differences in the Hispanic and Latino population in Missouri. Unemployment benefits are not considered earnings. As such, the debt to income ratios will increase dming a recession or other economic downturn.

-23-

From:

To:

Brian Jenkins, Harold Marinucci, Fred Finley Steve 9/7/2010 8:36:54 AM Chronicle article on lobbying by for profits on gainful employment

Si~el

CC:
Date: Subject:

*Tuesday, September 7, 2010 September 5, 2010

For-Profits Spend Heavily to Fend OffNew Rule

Enlarge Image

Andi Stempniak for The Chronicle Dawn Connor, a veterinary-technology student at Globe U. who leads a student-lobbying group supported by the Career College Association: "I just want to get it out there that there are so many students who have had a positive experience." By Kelly Field Washington For-profit colleges, under attack in Congress and faced with regulation that could ravage their revenues, are staging an aggressive, but increasingly hopeless, campaign to ward off legislation and defeat a proposed stricture.
In recent weeks, their representatives have filed thousands of comments criticizing the Education Department's "gainful

employment" rule, which would cut off federal student aid to programs whose graduates have high debt-to-income ratios and low loan-repayment rates. Advocates of the colleges have flooded town-hall meetings in lawmakers' districts and pressured faculty and staff members to speak out against the proposal. As of early last week, more than 26,000 comments had been filed with the Education Department, a spokeswoman said. The colleges have spent hundreds of thousands of dollars lobbying Congress and federal agencies, nearly doubling their lobbying expenditures over the past year. Some of the most vulnerable companies spent three or four times as much on lobbying in the second quarter of2010 than in the same period in 2009. One company, Education Management

Corporation, spent eight times as much.

The fight has taken on new urgency in the three weeks since the Education Department released an analysis of loanrepayment rates suggesting that many programs could become ineligible for federal aid under the rule. Student aid is the lifeblood of many for-profit colleges, accounting for an average of77 percent of revenue at the five largest companies, according to an analysis by the Senate education committee. Without access to federal dollars, many programs would be forced to shut down. Lobbyists for for-profit colleges warn that the rule would displace millions of students and cost thousands ofjobs, undermining the Obama administration's efforts to revive the economy and expand college access. But supporters of the proposal, including consumer and student groups, say the rule would affect only low-quality, overpriced programs, eliminating those that fail to deliver on their promises to students. "The access fears are totally unfounded," said Pauline M. Abernathy, vice president of the Institute for College Access & Success, an Oakland, Calif-based nonprofit that advocates for affordable higher education. The rule would take effect next July, but its penalties wouldn't kick in until July 2012.

A Spending Spree

With so much at stake, for-profit colleges have intensified their lobbying, increasing spending by nearly a quarter, to $1.4-million, from the first to the second quarters of2010 alone. Some of the largest increases came from companies that could suffer the most under the rule, including the Career Education Corporation, Corinthian Colleges, Education Management Corporation, and Kaplan fuc. The biggest spender in the second quarter, which ended June 30, was Corinthian, which has nearly tripled its lobbying expenditures over the past year, to $310,000 in the second quarter. Only 26 percent of students who have left Corinthian in the past four years had paid down any principal on their loans as oflast September, according to the Education Department's analysis of loan-repayment rates. That's nine percentage points below the department's proposed cutoff for federal-aid eligibility. While the company's programs could still qualify for aid by passing a debt-toincome test, analysts for the for-profit sector have predicted that at least some of its programs would fail that test as well. Kaplan, which more than tripled its spending on lobbying between the first and second quarters, from $75,000 to $270,000, had a weighted average loan-repayment rate of28 percent in the Education Department's analysis, seven percentage points below the eligibility cutoff. Mark Harrad, a spokesman for Kaplan, said its increased spending on lobbying was "primarily the result of increased regulatory and legislative attention" to for-profits and "the fact that we brought on a new staff member." Cheryl Smith, a fonner top aide to Rep. David RObey, a Wisconsin Democrat who is the departing chairman of the House Appropriations Committee, joined Kaplan as a lobbyist this year. The lobbying effort extends all the way up to the chief executive of the Washington Post Company, which owns Kaplan. Donald E. Graham, son of the legendary publisher Katharine Graham, has made several trips to Capitol Hill to lobby against the rule. Mr. Harrad declined to say which offices Mr. Graham has visited. The Career Education Corporation, which reported spending $200,000 in the second quarter, more than twice what it

spent in the first quarter of this year, scraped by with a repayment rate of35.3 percent, according to BMO Capital Markets, which provides corporate analyses. But two of its colleges, the International Academy ofDesign and Technology and the Gibbs Schools, fell below the cutoff JeffLashay, a spokesman for Career Education, said it wanted to make sure that for-profit students are heard in the debate over the rule. "We're in the midst of frequently narrow-minded and unfair public criticism that lacks context, so it's important that we raise the level of public discourse and provide a voice for the more than two and a half million students" the sector serves, he said. Education Management Corporation, which raised its spending on lobbying from $10,000 to $80,000 per quarter over the past year, had a loan-repayment rate of 37 percent, just over the cutoff But one of its colleges, Brown Mackie, came in at only 21.4 percent, according to BMO. The company was one of three that hired Heather Podesta+ Partners, a law firm led by a top Democratic fund raiser with longstanding ties to Congress. DeVry Inc. and Concorde Career Colleges also retained the firm. It's not clear what the colleges have gotten for their money. While a few more lawmakers have added their names to letters opposing the rule, only one member, Rep. Robert E. Andrews, a New Jersey Democrat who is a longtime supporter of for-profits, has offered an alternative to the department's approach. Aides to members of Congress say lawmakers are reluctant to stick their necks out for a sector that has gotten so much negative publicity in recent months, particularly when the Education Department appears intent on tightening its regulations. "Democrats aren't going to get in the way of a moving bus and be portrayed as allowing for-profits to take advantage of students," said one Senate Republican aide, who asked not to be named.

Repairing Reputations

For-profit colleges have been on the defensive since last fall, when the department began holding a series of negotiations to craft the gainful-employment rule and other regulations aimed at the sector. The pressure mounted over the summer, when Sen. Tom Harkin, the Iowa Democrat who chairs the education committee, held a pair of damaging hearings on for-profit education. The tipping point seemed to come in early August, when the federal Government Accountability Office released the results of an undercover investigation that found widespread deception in marketing by for-profit colleges. Though the report's findings focused on recruiting, not job placement, they strengthened the department's case for regulation and made legislation involving for-profit colleges almost inevitable. In an effort to repair the sector's reputation and build opposition to the rule, the Career College Association urged its 1,400 members to flood Congressional town-hall meetings over the August recess. "Attending Town Hall Meetings and building relationships with Members of Congress are incredibly effective ways of combating the negative perceptions of our students and schools," the association said in a notice on its Web site. To prepare its members for the meetings, the association posted a Webinar that encouraged members to bring students-which the group called "our best asset"-to the meetings, along with "positive data to support our schools and

students." The material was created with the help of the press secretary to Rep. Jim Moran, Democrat of Virginia, whose brother, Brian, is the association's vice president for government affairs. It described the meetings as a way to "set the facts straight" about for-profit education and "begin creating a positive narrative about our schools." The trade association has also provided financing and technical support to a group of for-profit college students called Students for Academic Choice. The group, which was formed at the association's annual Hill Day lobbying event, in March, gathered 32,000 signatures on a petition opposing the Education Department's proposed rules and recently created a Web site using money from the association. A spokesman for the association declined to say how much the effort had cost, only that it was "de minimus." Critics of for-profit colleges have dismissed the group as an exercise in "astroturfing," an attempt by the Career College Association to manufacture opposition to the rule. But Dawn Connor, the student group's president, said she's genuinely concerned about preserving access to for-profit education. Ms. Connor, a veterinary-technology student at Globe University's campus in Eau Claire, Wis., said she had attended three nonprofit colleges but never got a degree. She said Globe offered smaller classes, better equipment, and more personal attention than the traditional colleges did. She called her decision to attend the for-profit college "the best choice I've made, by far." "I want other students to have that choice as well," she said. Ms. Connor estimated that about 150 students have joined the lobbying group. She said it is working with a lawyer to secure nonprofit status and is preparing to send an "action alert" e-mail to students who signed the petition urging them to submit testimonials on the group's Web site about attending for-profit colleges. "There is just so much negative press," she said. "I just want to get it out there that there are so many students who have had a positive experience." For-profit colleges have also gotten some support from the U.S. Chamber of Commerce, which sent a letter to the Education Department in mid-August warning that the proposed gainful-employment rule would "limit education and economic opportunities for many Americans." RolfLundberg Jr., the chambers chieflobbyist, said four or five of its employees are "very focused" on the rule and have attended a "couple dozen" meetings with Congressional aides in recent months. "We are in the crescendo phase of this effort," he said. Minority-group lawmakers and groups are divided on the rule. While the NAACP and the National Council ofLa Raza have endorsed the proposed rule, saying it would protect mjnority students, the National Hispanic Caucus of State Legislators said it would discriminate against students who have to borrow to attend college and has passed a resolution opposing it. The president of the Mexican American National Association, a pan-Latina group, has argued that the rule would establish "two tiers of colleges" and relegate minority students at career colleges to "second-class status." "I'm not a cheerleader for the career colleges," said Alma Morales Riojas, the association's president, in an interview. "But if we're looking to educate our community, we need as many options as possible."
In the House ofRepresentatives, several members of the Congressional Black Caucus have signed on to a pair of letters

to the Education Department. But the rule has split the Tri-Caucus, a coalition comprising the black caucus, the

Congressional Hispanic Caucus, and the Congressional Asian Pacific American Caucus. Forty-three percent of students attending for-profits are from minority groups, and almost 50 percent are among the first generation in their families to pursue higher education, according to the Career College Association. For-profit colleges argue that they provide access to underserved populations at a time when some public co!Jeges, faced with budget cutbacks, are turning students away. Critics of the for-profit sector say some colleges are taking advantage of those students, saddling them with debt and leaving them unprepared for a career. As Ranis N. Miller, president of the Career College Association, put it, "We see ourselves as helping minorities, the other side sees us as exploiting them."

A Flood of Comments

With the public-comment period set to end this week, groups on both sides of the gainful-employment debate have created Web sites that encourage people to submit comments on the rule. The Institute for College Access & Success, a leading supporter of the proposed rule, said its site had generated 800 comments as of early last week. That is dwarfed by the number of comments submitted through sites created for the Education Management Corporation by Bipac, a business-oriented lobbying group. Education Management recently sent an e-mail to its faculty and staff members urging them to file comments through the sites, which generate "customizable" form comments for students, faculty members, and friends and relatives of members of groups opposing the rule. Education Management has also hired DCI Group, described by O'Dwyer's PR Daily as a "brass-knuckled Republican PR firm," to contact its employees to help them craft "personalized letters" to the department, according to Higher Ed Watch, a blog of the New America Foundation. Todd S. Nelson, Education Management's chief executive, has sent an e-mail to the company's roughly 20,000 employees encouraging them to participate. "The proposed rule's potential consequences on EDMC could be substantial," he wrote. Critics of the rule concede that the department isn't likely to back down from its proposal, despite their efforts to defeat it. "I don't think there's anything that has arisen or will arise that will dissuade them," said one lobbyist for the for-profits. But the battle may be just beginning for for-profit colleges and their critics. The Education Department is expected to issue the final version of the gainful-employment rule by November l. After that, the action will shift to the Senate, where Senator Harkin is promising more hearings and legislation cracking down on "bad actors" in the sector. Goldie Blumenstyk contributed to this article.

From:

To: CC:
Date: Subject:

Robert MacArthur <nnacarthur@altresearch com> Robert MacArthur
7/ 15/2010 10:24:24 AM

Chronicle of High Ed ran an article today re short selling...Here's an except. It's reasonably balanced

July 14, 2010 For-Profit Colleges, Under Fire From Regulators, Face a New Foe: Short-Sellers

U.S. Senate Committee on Health, Education, Labor, and Pensions Steven Eisman, who manages a hedge fund, says short-sellers should continue to identify weaknesses in the for-profit higher-education industry. Enlarge Image

U.S. Senate Committee on Health, Education, Labor, and Pensions Steven Eisman, who manages a hedge fund, says short-sellers should continue to identify weaknesses in the for-profit higher-education industry. By Paul Fain Wall Street has made a bundle on the rapid growth of for-profit higher education. But some sophisticated money managers are now betting against those companies in the stock market, and the influence of big money and related questionable behavior is clouding a debate about the industry on Capitol Hill. Last week, ProPublica reported that an unnamed investment company paid a researcher to draft a letter to the Department ofEducation about for-profit recruiters targeting potential students at homeless shelters. The researcher, who solicited signatures from officials at 20 homeless shelters, some of whom had no direct knowledge of for-profit recruiting, later admitted she was working for a short-seller who has a stake in a drop in value ofthe for-profits' stocks.

Steven Eisman, a hedge fund manager, made a splash with his testimony at a high-profile hearing in the U.S. Senate last month on for-profits. Mr. Eisman had famously bet against the housing market, and at the hearing he compared the growth and practices of career colleges to those of the subprime mortgage industry. The share prices of major for-profit companies took a hit after Mr. Eisman's June 24 testimony, as they did after a

similar speech he gave at an investors' conference in May. Shares ofiTT Educational Services, for example, fell 4.5 percent after the hearing, and Apollo Inc., which owns the University ofPhoenix, dropped 3.7 percent. Those were hardly isolated events. Hedge funds have driven much of the volatility in for-profits stocks, with many dumping their holdings or selling short in recent months. And Trace A Urdan, an analyst with Signal HI! Capital Group, said Wall Street firms use "leaks and access" in Washington to angle for their interests. Employees of investment companies have been regular fixtures on the Hill in recent weeks. "This feels like some weird distillation of insider trading," said Mr. Urdan, whose group helps education companies raise capital, and who advises investors on buying and selling education stocks.
Mr. Eisman's testimony was controversial even before he sat in front of the microphone. But scrutiny of his role has increased in the wake of the ProPublica report. In an interview with The Chronicle, Mr. Eisman said he had no

involvement with the researcher who created the homeless-recruiting letter. "That was not me," he said.

Rob MacArthur Alternative Research Services, £nc. 203-244-5174 rmacarthur@al tresearch. com

This material has been prepared by Alternative Research Services Inc., a Connecticut-regi stered Investment Adviser, employing appropriate expertise, and in the belief that it is fair and not misleading. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. We do not guarantee its accuracy. This information is not to be used as the primary basis of investment decisions. Copying, faxing, repli cating, or quoting from this report without the express written consent of Alternative Research Services Inc. is forbidden. This is not an offer or solicitation of an offer to buy or sell any security or investment. Any opinion or estimates constitute our best, and are subject to change without notice. This material is intended for use only by professional or institutional investors and not the general investing public. The finn does not make a market or hold positions in the securities mentioned herein, nor does the finn maintain any investment banking relationships in such securities.

From:

To:

Brian Finley, Steve Wolff. Russell Woodward. Jennifer Sann, Ronald Marinucci Fred 5/18/2010 8:33:48 AM Chronicle ofHigher Ed article on "gainful employment"

Si~el

CC: Date:
Subject:

Federal Proposal Could Jeopardize For-Profit Programs, Especially Bachelor's Degrees

Nathaniel Brooks for The Chronicle Nancy Kyer, a licensed practical nursing student, in the lab at Mildred Elley School in Albany, NY. Albany, NY, Wednesday, May 12, 2010. By Jennifer Gonzalez Mildred Elley, a two-year proprietary college that opened its doors in Albany, N.Y., in 1917, prides itself on helping people get back to work. But Faith A Takes, the college's owner and president, fears that a new federal proposal that would evaluate for-profit colleges by comparing their students' borrowing to their graduates' earnings will jeopardize her college's high-demand nursing, medical-assisting, and information-technology programs at the very time more adults are turning to the institution for training. The U.S. Department of Education is expected to unveil its plan in the next few weeks, and for-profit colleges like Ms. Takes's are scrambling to squash the idea. Administrators at those institutions say the department's proposal would force for-profit colleges to shut down educational programs. Programs in nursing, engineering technologies, and culinary arts are among those that could be affected because graduates in those fields may not make enough to satisfy the department's proposed debt-to-earnings ratio. Bachelor'sdegree programs, experts say, would be most at risk because students in those programs tend to borrow more than students in shorter-term ones. Officials at DeVry, Kaplan, and Keiser Universities all agree that the department's proposal could seriously jeopardize their bachelor's-degree programs. "The bachelor's degree as we know it would be gone," said Arthur Keiser, president ofKeiser University, which is based in Florida. The department has said its goal is to crack down on colleges that overcharge and underdeliver in training students for jobs right after graduation. Education Secretary Arne Duncan has said that former students of vocational programs have reported that they were enticed into poor-quality programs and are now saddled with loads of student-loan debt they

can't repay because they have no jobs.
Mr. Duncan wrote in a recent opinion piece for AOL News that the problems afflict only a small minority of vocational

and career programs. But, he added, the problems "will fester unless steps are taken to protect students and taxpayers."

Defining a Rule

The Higher Education Act of 1965 requires that proprietary and vocational colleges, other than those clearly designated as "liberal arts" and vocational programs not designed to lead to a degree, provide "an eligible program of training to prepare students for gainful employment in a recognized occupation." Compliance with the rule is a condition for those colleges' students to be eligible to receive federal financial aid. The rule took on more prominence in the late 1980s, when it was used to fight problems that arose after some for-profit colleges were found to be recruiting near welfare offices, low-income housing complexes, and homeless shelters. The colleges enrolled ill-prepared students who brought with them thousands of dollars in federal loans and grants that the colleges received upfront as payments for tuition. The for-profit sector's most-egregious abuses may be behind it, but problems persist. The sector continues to be called out on its high tuition costs, and the average default rate ofborrowers who attended for-profit colleges, 11.9 percent, is higher than that of students who attended public colleges, which averages 6.2 percent, or private, nonprofit colleges, at 4.1 percent. Aggressive recruiting practices continue to plague the industry, an issue highlighted in a recent PBS television documentary. In fact, the University of Phoenix settled a lawsuit last year that accused the university of improperly compensating its recruiters, in violation of laws governing federal student aid. The department's attention to the sector has a lot to do with its fast growth, too. Enrollment in the nation's nearly 3,000 for-profit colleges has grown faster than in the rest of higher education, by an average of 9 percent per year over the past 30 years. For-profit institutions now educate about 7 percent of the nation's roughly 19 million students who enrolJ at degree-granting institutions each fall. The higher-education act does not currently define "gainful employment" as described by the proposed rule. So the Education Department set out to do that late last year, convening a panel that included consumer advocates, for-profitcollege officials, and student advocates to re-examine the rule. Because the panel could not agree on a gainfulemployment definition, the department is now free to propose its own. The department has not yet finalized its proposal, but officials are considering requiring that a program's students do not take on loan payments that exceed 8 percent of graduates' expected earnings based on a 10-year repayment plan and Bureau ofLabor Statistics earnings data. The rule would apply to programs at proprietary colleges and any institution with programs less than two years in length. Under proposals the department has floated, programs that exceed the 8-percent limit could still be eligible for federal financial aid by showing that their graduates' true earnings were higher than the government averages or that 90 percent of all graduates repaid their loans~ by documenting that students have at least a 75-percent repayment rate on federal loans~ or by demonstrating a program-completion rate of at least 70 percent and a 70-percent job-placement rate. Last month analysts at Credit Suisse reported that the department was considering lowering the completion rate to 50 percent. However, it is unclear exactly which exemptions, if any, will be part of the department's final proposal.

The department is expected to release its final draft in the next few weeks, which includes 13 other rules related to forprofit colleges, with public comment to take place over the summer. Final rules will be set by November and go into effect in July 2011.

What's the Problem?

For-profit-college officials and their supporters say they are not clear what the department is trying to accomplish through the proposed gainful-employment regulation. If the department wants to regulate the sector's "bad actors," the proposal may do more harm than good, the advocates say. It may shut down some unscrupulous colleges, but it may also eliminate worthy programs and leave students without a college to attend. As part of its lobbying efforts, the for-profit sector is throwing around large numbers about how many programs and students would be affected by the change. But there are no good estimates of what the impact will actually be. One study at the center of the debate was commissioned by the Career College Association, which represents 1,400 colleges, most of them for-profit. That study, conducted by a professor of economics at the University of Chicago and a consulting company, was based on data from about 10,000 programs enrolling more than 640,000 students. It found that 18 percent of the programs, enrolling one-third of the students, would not pass muster under the proposed rule. Although a report on the study notes that the programs evaluated were not necessarily representative of the range of programs offered by for-profit colleges, the report's authors projected the impact of the rule, assuming that it would affect one-third of all students who enroll at for-profit institutions each year. Using that assumption, and historical trends on enrollment growth for the sector, the Career College Association has argued that the rule could eliminate programs for 360,000 students by next year, and a total of more than 5.4 million by 2020. Supporters of the rule view the study findings differently, arguing that they show that only a minority of programs would even be affected and that the proposed rule wouldn't necessariJy mean the end of the students' chance to pursue higher education because they could enroll in different programs that might result in their earning higher wages, or find colleges where the tuitions costs, and debt, are not as high.
If the department's aim is to curb excessive student debt, for-profit college officials say, then it should deal with individual students rather than propose a rule that would affect large numbers of students across an entire sector of higher education.

"The department assumes that every institution with a high debt-to-income ratio among its students is a bad actor," says Harris N. Miler, president of the Career College Association. "That's unfair." The department's plan, he and others say, will ultimately limit access and student choice, which runs counter to President Obama's call to increase the number of Americans with college degrees. Other supporters of for-profit colleges accuse the department of using the rule-making process to try to regulate tuition at for-profit colleges. For the 2009-10 academic year, average tuition and fees range from $7,020 at public four-year colleges to $14,174 at for-profit institutions and $26,273 at private nonprofit colleges, according to the College Board. Because salaries for a given occupation vary regionally, programs of equal cost and quality in different locations may have different abilities to meet the 8-percent threshold. For-profit colleges also have limited control over how much loan debt a student takes on and cannot stop students who agree to take on thousands of dollars in loans if they are eligible for those amounts.

"Our hands are tied," said Ms. Takes, ofMildred Elley, which has campuses in New York and Massachusetts. "But we are the ones being held responsible." For-profit colleges have complained that the department is focusing on the sector without examining the huge amount of debt that students, especially those studying the liberal arts, incur at nonprofit colleges. Mark Kantrowitz, publisher ofFinAid, a Web site that provides student-aid advice, said that if the department is serious of about curbing excessive student debt, then all of higher education should be subjected to the federal proposal. In fact, he says, nonprofit colleges should be wonied because some have graduation rates in the single digits and it's an open question whether they are providing value for the money students are spending. He said nonprofit colleges should not be surprised ifthey become the department's next focus. Among 2007-8 bachelor's-degree recipients who borrowed, median debt was about $17,700 at public, four-year colleges, $22,380 at private, nonprofit colleges, and $32,650 at for-profit institutions, according to the College Board. "A lot of theater-arts students rack up thousands of dollars of student-loan debt," he said. "No one can pay that back waiting tables."

Focus on the For-Profit Sector?

Pauline M. Abernathy, vice president of the Institute for College Access and Success, a California-based nonprofit group that advocates for affordable higher education, dismissed the idea that the department is out to get the for-profit sector. She says that community-college work-force programs would also be affected by the department's proposal. But unlike its for-profit counterpart, the two-year and technical-college sector welcomes the department's proposal. Both the Florida College System Council ofPresidents and the National AJijance of Community and Technical Colleges have written letters to Mr. Duncan supporting the department's efforts to define gainful employment. The council called the proposal a "fair measure that will help prevent students from borrowing more money