Finance

Why a Certain $21 Million Is Worth Much More to the U. of Phoenix

A Defense Department decision could have an outsize impact on the university's bottom line

October 10, 2015

For now, the University of Phoenix is barred from enrolling active-duty military personnel under the Department of Defense’s Tuition Assistance Program. The money associated with that program — some $20.5 million — represents a small fraction of the university’s estimated $2.5 billion in annual revenue, but the loss of the program’s funds could have an outsize impact on its bottom line.

The department announced that decision on Thursday in a letter to the nation’s largest for-profit university, citing investigations by the Federal Trade Commission and the California attorney general into Phoenix’s practices for recruiting servicemembers.

The university was also put on probation, but it is allowed to continue to enroll previously accepted active-duty servicemembers using their Tuition Assistance money. In 2014, Phoenix enrolled about 9,400 active-duty members of the military, and received more than $20.5 million in revenue from the Tuition Assistance Program, according to figures compiled by BMO Capital Markets, a financial-services company.

But if the probation turns into a longer-term punishment, the university could find itself in danger of violating the federal "90/10 rule," which prohibits for-profit colleges that receive federal financial aid from getting more than 90 percent of their revenue from federal sources, including Pell Grants and federally backed student loans.

The University of Phoenix now gets about 81 percent of its revenue from federal sources, and servicemembers are helping to keep it comfortably on the right side of the line. That’s because revenue brought in through the Tuition Assistance Program doesn’t count against the 90-percent cap, so it’s a valuable counterweight in the 90/10 calculation for proprietary institutions, many of which have focused heavily on recruiting military personnel.

Put another way, for every $90 of Title IV student-aid money Phoenix takes in, the university needs to draw $10 from other sources. So the $20.5 million it receives through the Tuition Assistance Program allows Phoenix to collect more than $180 million in other federal dollars.

The problem for Phoenix could get much bigger, too, if the Department of Veterans Affairs, which administers money under the Post-9/11 GI Bill, decides to follow the Defense Department’s actions. Education benefits under the GI Bill also don’t count toward the 90-percent cap.

A spokesman for the Veterans Affairs Department said in an email to The Chronicle that the Defense Department’s actions would not have any immediate effect on veterans who attend the University of Phoenix. But the VA is working with the Pentagon and the states "to further evaluate any potential impact" on the university’s eligibility to receive the GI Bill money, the spokesman said.

Sen. Richard J. Durbin, an Illinois Democrat who has been an outspoken critic of for-profit colleges, is now calling on the Veterans Affairs Department and the Department of Education to look further into Phoenix’s practices and to "take appropriate action to protect students and federal tax dollars," according to a statement released by his office.

Senator Durbin has also proposed legislation that would change the incentives for for-profit institutions by counting Tuition Assistance Program money as part of the 90-percent cap on revenue they may receive from federal sources.

Goldie Blumenstyk contributed to this report.

Eric Kelderman writes about money and accountability in higher education, including such areas as state policy, accreditation, and legal affairs. You can find him on Twitter @etkeld, or email him at eric.kelderman@chronicle.com.