The fast-growing University of Phoenix fosters a high-pressure sales culture that rewards recruiters who put the most “asses in classes,” intimidates those who fall short, and encourages enrollment of unqualified students, concludes a newly released report by the U.S. Department of Education.
The review of the for-profit university’s compensation practices, released last month shortly after the company paid a multimillion-dollar fine to the department to settle the matter, says Phoenix violated the Higher Education Act, which prohibits paying recruiters based on the numbers of students they enroll. In addition, the university set up a system “designed to mislead the Department of Education and to evade detection of its improper incentive compensation system,” the report asserts.
Officials of the Apollo Group, the university’s parent company, said the report was misleading.
“We’re shocked,” said Todd S. Nelson, the company’s chairman, president, and chief executive officer, in an interview. “We don’t think it accurately portrays what’s happening.” The settlement involves no admission of wrongdoing or violation.
Phoenix is the nation’s largest and most successful for-profit university, based on such factors as revenue and reputation.
But the Education Department says the institution pressured its recruiters to enroll students who were academically unqualified and to use federal financial aid as a “tool for closing a sale.” The report also describes “intimidation techniques” used by recruiting managers on subordinates who were “not meeting the enrollment numbers.” Poorly performing recruiters, for instance, were ordered to work in a glass-enclosed area known as the “Red Room,” where senior recruiters and managers “hovered over the unfortunate recruiters” and monitored their calls, the report says.
“It sounds like a boiler room, doesn’t it?” said David W. Breneman, director of the For-Profit Higher Education Research Project and dean of the Curry School of Education at the University of Virginia.
The report also describes a set of bonuses and trips awarded to successful recruiters. The Sperling Club Trip Awards, as the program is known, was named for the university’s founder, John G. Sperling. One recruiter reported that she and her husband had received an expenses-paid trip to Universal Studios, and that she also received a trip to Las Vegas, along with $100 in gambling chips.
Mixed Reaction
The report comes amid intense scrutiny of education companies. Apollo, which had previously disclosed that a review of its practices was under way, was eager to put the accusations contained in the report and the possible public fallout from their release behind it. The company announced in early September that it had reached a settlement with the department, agreeing to pay a penalty of $9.8-million (The Chronicle, September 17). The settlement was concluded before the report became public.
Phoenix had initially sought to refute the findings, after privately receiving the report in early February. But because the matter has been settled, the department will not issue a “final determination” taking those responses into account. (After the settlement was reached, the report became available from the department under the Freedom of Information Act.)
The conclusion of the inquiry appears to have limited some of the negative fallout. Wall Street seems to have taken the matter in stride, with many investors and analysts deciding that aggressive sales practices are to be expected from a growth-oriented institution like Phoenix. Apollo’s stock price dipped, following the settlement, from the mid-$80s to the mid-$70s, a drop smaller than the $22 decline it suffered earlier in the summer, when negative news about other higher-education companies caused a falloff in their stock prices.
Nor has the report prompted concern at the university’s accreditor, the North Central Association of Colleges and Schools. Steven D. Crow, who heads its higher-education division, said that many of the charges in the report seemed “anecdotal,” and that the department’s willingness to settle suggested that its officials saw “they were going to have a hard time making all this stick.”
But others viewed the report with some alarm. Mr. Breneman, who has long admired Phoenix for its readiness to accommodate students, said he was “deeply saddened” by the report. If true, he said, it seemed to bear out the critics who have contended that the for-profit higher-education industry is not worthy of trust.
Sean Gallagher, an analyst at Eduventures, a Boston consulting company that follows the industry, said he wondered if the culture described in the report was representative of the entire for-profit sector. “I would certainly hope that it isn’t,” he said.
David Hawkins, director of public policy at the National Association for College Admission Counseling, called the hard-sell tactics and compensation policies portrayed in the report “an affront to the principles that have been developing in college admissions over the last three decades.”
Re-examining the Rules
The report should give pause to lawmakers who are considering proposals that would allow for-profit colleges to more easily qualify for federal grants and loans, according to some officials of higher-education organizations. Others have called for re-examining the rules on recruiter compensation, which were last revised in 2002.
“Congress owes it to the taxpayers to take another look at those rules,” Mr. Hawkins said. Even after the rules were clarified, he said, “students were still being treated in a way that Congress clearly intended to outlaw.”
Several observers have questioned whether the settlement itself was politically motivated, noting that Apollo campaign contributions have gone to several members of Congress who have the most influence over higher education. And a former Apollo lobbyist, Sally L. Stroup, was tapped by the Bush administration to serve as assistant secretary for postsecondary education. Education Department officials said she recused herself from the investigation of Phoenix.
Defending his company, Mr. Nelson said the low rate of default -- about 6 percent -- by its students on federal loans, and the high percentage of students who receive reimbursement of their tuition from their employers -- about 56 percent -- are the kinds of indicators on which the institution should be judged. The university, which caters primarily to working adults, enrolls more than 213,000 students at its more than 70 campuses and online, up from about 80,000 in 2000.
In the university’s annual surveys, he added, 90 percent of the alumni say they were pleased with their education and would recommend the institution to friends. “I would think that statements like that are more important than someone’s opinion of the Sperling Club,” he said.
He also noted that some of the wording in the report was suspiciously similar to language in a “false claims” lawsuit filed by one current and one former employee who are trying to establish that Phoenix has defrauded the government of billions of dollars in federal student aid by relying on illegal recruiting practices.
The suit has twice been dismissed in a federal district court in California, but the employees are appealing that dismissal. If they manage to get the suit reinstated and ultimately prevail, they are eligible for a share of damages owed to the government.
Lawyers for the employees said the language was similar because the department began its investigation after the suit was filed and then found witnesses and documents that substantiated allegations in the lawsuit. Daniel Bartley, one of the lawyers bringing the case, blasted the settlement, calling it a “sweetheart deal.” The lawsuit seeks damages of more than $3-billion, he noted in an e-mail exchange. “We are avidly pursuing” the balance, he said, referring to the difference between the fine Phoenix paid and the $3-billion they seek. “And we intend to recover every penny of it.”
Mr. Nelson has his own financial stake in protecting the institution’s image. As Apollo’s chairman, president, and CEO, he receives a salary and bonus of more than $4.5-million a year and stock options worth at least six times that amount.
Free Trips
The Education Department based its report on interviews with more than 60 current and former recruiters during and after visits to campuses in California and to the university’s headquarters, in Phoenix, in August 2003. It says the company established elaborate systems to make it appear that recruiters were being paid based on a number of factors, such as customer services. But ultimately, the report says, salary increases were based on numbers of students that the recruiters enrolled.
The report says that “72 percent of the recruiters interviewed stated that it was always about the numbers -- all about ‘butts in seats’ or ‘asses in classes’ -- to use the vernacular commonly heard at UOP.”
Mr. Nelson said the report mischaracterized the company’s activities.
The so-called Red Room, he said, was intended not to intimidate recruiters but as a training room where underperformers could “have access to the best managers” at the company. Phoenix interviewed its recruiters about the room, he said, and for the majority “it was a very positive experience.” The company stopped using the Red Room in 2002.
Mr. Nelson acknowledged that recruiters received free trips. In some cases they were attending business meetings, he explained. Trips awarded under the auspices of the Sperling Club were available to all sorts of employees and were not a perk specifically for recruiters, he said. Company executives were not aware of anyone being given gambling chips, he said.
The university employs more than 5,000 “enrollment counselors,” the company term for recruiters, Mr. Nelson said, but the report is based on comments of just a few, among them “disgruntled and former employees,” he said.
The report also describes tactics that managers used to pressure recruiters to do better. Sometimes managers would post large tote boards listing names of recruiters and their progress toward meeting weekly goals for applications and enrollments.
In other instances, the report says, managers would punish poor performers by depriving them of chances to pursue prospects who seemed to show the most promise of enrolling. Recruiters prized these “new leads,” the report says, because their pay as enrollment counselors was directly linked to the number of their recruits who enrolled and then attended class long enough for the university to keep 100 percent of their tuition payments.
Not true, Mr. Nelson said: “If everything that was said in here was accurate, my assumption is that the fine would have been significantly larger.”
The Education Department said that the $9.8-million fine was the largest it has ever assessed. Typically, a spokeswoman said, it levies financial penalties of $2-million to $3-million.
Size, of course, is relative. For a company with annual revenues approaching $1.8-billion, one stock analyst noted, the fine paid by Apollo is “chump change.”
FOR-PROFIT COLLEGES UNDER SCRUTINY
Investigations of and lawsuits against colleges and companies in the for-profit higher-education industry have increased in recent months. Here is a glance at who is looking at whom:
U.S. Department of Justice
- Career Education Corporation is being investigated by the U.S. attorney in Chicago.
- ITT Educational Services is being investigated by the U.S. attorney in Houston.
U.S. Securities and Exchange Commission
- The SEC, which regulates financial activities of companies, is either investigating or conducting informal probes of Career Education, Corinthian Colleges, and ITT.
U.S. Department of Education
- The department had imposed restrictions on the awarding of federal loans and grants by one of Corinthian’s Bryman Colleges, in San Jose, Calif., after finding that the institution was not complying with federal financial-aid procedures. The restrictions, which had been in place since December, were lifted last month.
- In September the department also settled with the Apollo Group following a yearlong investigation into recruiting practices at its University of Phoenix. The department said the $9.8-million fine was the largest it had ever levied. The settlement involved no admission of wrongdoing.
California Attorney General
- The division that investigates allegations of fraud involving government money is examining the activities of ITT.
- The consumer-protection division is looking into the practices of a number of for-profit colleges and companies, including Corinthian.
Accrediting bodies
- The Southern Association of Colleges and Schools, which accredits seven campuses of Career Education’s American InterContinental University, has put them on warning status because of continuing problems with “institutional effectiveness.”
- The Accrediting Commission for Community and Junior Colleges, part of the Western Association of Schools and Colleges, has put the two campuses of Career Education’s Brooks College on probation.
Class-action lawsuits
- Shareholders of ITT and Career Education are seeking class-action status for lawsuits that accuse the companies of using misleading financial information to artificially inflate the value of their stock.
- Students at Florida Metropolitan University, which is owned by Corinthian, are seeking class certification for their claims that the company misled them about the transferability of credits from FMU.
SOURCE: Chronicle reporting
http://chronicle.com Section: Money & Management Volume 51, Issue 7, Page A1