September 20, 2023

New Debt Relief for Scammed U of Phoenix Students Heightens Peril of Idaho Deal

New Debt Relief for Scammed U of Phoenix Students Heightens Peril of Idaho Deal

The U.S. Department of Education announced today that it will provide $37 million in student debt cancellation for some 1,200 former students who contend they were scammed by the University of Phoenix, which has long been the largest for-profit college and has received tens of billions in taxpayer funding.

“The University of Phoenix brazenly deceived prospective students with false ads to get them to enroll,” Richard Cordray, head of the Department’s Office of Federal Student Aid, said in a statement. “Students who trusted the school and wanted to better their lives through education ended up with mounds of debt and useless degrees. ”

Today’s announcement, the latest in a series of student loan relief approvals under the Biden administration, adds to doubts about the University of Idaho’s plan to buy the troubled online for-profit University of Phoenix.

The Department of Education authorized today’s announced loan discharges under a federal law, called borrower defense to repayment, which cancels or reduces federal loan debts for ex-students who can demonstrate to the satisfaction of the Department that their school deceived them.

In the case of the University of Phoenix, there is a long record of deceptive practices and corresponding investigations and actions by law enforcement agencies. Most recently, in December 2019, the school reached a record $191 million settlement with the Federal Trade Commission, which claimed Phoenix had lured students with false claims, during the years 2012-2014, about partnerships with major employers. Phoenix ran ads falsely indicating that the school had deals with companies including AT&T, Yahoo!, Microsoft, Twitter, and the American Red Cross to create job opportunities for its students and tailor school programs for such jobs, when that was not the case. The deceptive claim went to the heart of prospective students’ motivations for enrolling.

The Department of Education today used the FTC’s evidence to conclude that Phoenix students could show their eligibility for borrower defense relief. But the Department’s announcement was limited to 1,200 former students who both (1) attended Phoenix in the 2012-2014 period in which those deceptive ads were run; and (2) then affirmatively applied for borrower defense relief.

However, on a call today with reporters, which included remarks by Department of Education and FTC officials, a senior Department official said the Department would publicize its findings regarding deceptive practices at Phoenix to make other former students aware of them — and of their potential eligibility for similar relief.  A press release from the Department today helpfully notes, “Borrowers who may qualify for relief because they have been affected by this finding can visit to learn how to apply for borrower defense.”

Another Department official said on the call that the Department planned to use its authority under the borrower defense law to seek recoupment for the cancelled loan debts from the University of Phoenix, which pocketed all those loan disbursements. Recoupment is a process the Department already has launched against one for-profit school (DeVry University) and last month announced it would pursue against another (Ashford University).

Phoenix would have the right to contest any such recoupment action in administrative proceedings within the Department, and to appeal any decision in court. But the perils of major liability would be real.

A reporter on the call asked whether the owner on the hook for recoupment would be the current owners of Phoenix — private equity firms that include giant Apollo Global Management — or the proposed new owner, the public University of Idaho, which announced in May its plan to buy Phoenix and has since faced withering criticism both outside and within the state, as well as a lawsuit from the state’s own Republican attorney general. In response, a Department official noted that the sale had not yet been completed.

The University of Idaho has been starved for funds by the state legislature, and its president, Scott Green, has touted the Phoenix deal as creating a new profit center that would subsidize the state school. But using proceeds from a predatory college that targets veterans and low-income people, that offers low-quality courses, and that reports a dismal graduation rate and high loan burdens, to provide money for a state’s flagship school is not an appropriate solution to a fiscal challenge.

Moreover, today’s announcement raised the risks that, in the end, the purchase of Phoenix will be a money loser for the University of Idaho and the taxpayers of Idaho.

President Green has previously told reporters and state lawmakers that he estimated liability for Phoenix borrower defense claims was about $7 million.

In fact, liability for borrower defense claims could skyrocket well above the $37 million in loan cancellation announced today.

In 2012, University of Phoenix student enrollment stood at 404,000. By 2013, enrollment had declined to 344,000, and it down to 285,000 in 2014. But given the high dropout rate at the school, one could assume that in the 2012-2014 period covered by the FTC settlement, there were around half a million individual students enrolled at Phoenix. If loan cancellation for 1,200 students equals 37 million dollars, cancellation for 500,000 students could be 15 billion dollars. (Phoenix’s enrollment stood at around 87,000 last year.)

It could get even worse than that. The Department last week told a requester seeking information under the Freedom of Information Act that it had received from all former University of Phoenix students a total of 73,740 borrower defense claims. 34, 940 of those claims were already deemed entitled for debt relief under the 2022 settlement of a lawsuit against the Department brought by student loan borrowers from a range of schools, while another 38,210 remain pending. (The Department closed another 580 cases.) Publicity around today’s announcement could cause those numbers to go up.

More former students might be able to make individual showings that Phoenix deceived them, through advertising or one-on-one false claims by recruiters. But students could also piggyback on broader findings of Phoenix abuses, even beyond the 2019 FTC case.

In 2015, the Defense Department temporarily suspended the University of Phoenix from recruiting on military bases, citing media exposes revealing blatant abuses by the school.  Military service members and their families harmed by those deceptions could file still more claims.

And in May, six U.S. senators wrote to the Department of Education, Department of Defense, and the FTC, contending, based on reporting by Republic Report, that Phoenix, in 2022-23, was again engaged in deceptive advertising, this time by falsely implying that the school was a public, rather than a for-profit, school.  Students who enrolled in this period could potentially file even more debt relief claims, if they haven’t already.

The Department of Education also could, as it has done for some closed predatory schools, and has said it would consider for some still-open schools, provide automatic group loan discharges to some group of Phoenix ex-students, meaning they would have their debt cancelled without needing to file an application.  Then the volume of loan losses would grow even more substantially.

If the Department of Education ultimately agrees to broaden debt relief for former University of Phoenix students, and if it then pursues broader efforts to recoup funds from Phoenix, this potential liability could fall on the non-profit organization created by the University of Idaho to purchase the for-profit school. As a practical matter, the ultimate loser in that transaction could be the University of Idaho, and its patrons the taxpayers of Idaho.

Three of the six senators who called out the most recent Phoenix advertising deceptions — Dick Durbin (D-IL), Elizabeth Warren (D-MA), and Richard Blumenthal (D-CT) — wrote a letter last week to University of Idaho president Green, urging him to reconsider the ill-advised Phoenix deal; they cited a history of predatory behavior by the school and poor outcomes for students, and they noted the risk of borrower defense liabilities.

In response, Green sent the senators this letter defending the deal. Meanwhile, Idaho governor Brad Little (R) sent the senators a letter telling them to mind their own business. “Perhaps,” Little wrote, “you should focus your attention away from Idaho and do your job by passing a responsible federal budget so our government can function properly. If you spent as much time focused on securing the U.S.-Mexico border as you did the University of Idaho we would have fewer drugs pouring into our country.” Little added, “We are taking control of our future in Idaho, and we urge the U.S. Senate not to interfere with efforts to make education more attainable in rural America.”

The thing is, though, whether the University of Idaho buys the University of Phoenix, and allows Phoenix to protect its predatory online operation under the shield of an esteemed flagship state university, is the business of every American, not just Idahoans. Because among those tricked into enrolling will be many students outside of the state, and most of the funding for the school will continue to come from federal student aid that is funded by taxpayers across the country.

One more thing: In response to this debt relief announcement from the U.S. Department of Education, I predict you will hear University of Idaho officials repeat a lie they have repeatedly sold to media both in-state and out-of-state, sold to the state Board of Education, and sold to members of the state legislature: That the University of Phoenix’s abuses are long in the past, and occurred under prior leadership that has now been replaced by a wonderful group of humanitarians.

The facts are otherwise.

The University of Phoenix did change owners in 2016, going from a publicly-traded company to ownership by private equity interests, including Apollo Global Management. But Apollo Global is a firm with its own share of scandals and controversies.

Some key staff have changed since then, but other top staff remain. Most notably, Gregory W. Cappelli, current insider board member and ex-CEO  of the University of Phoenix’s parent company, Apollo Education Group, became CEO in 2009, through the matters that gave rise to the FTC settlement, and the Defense Department suspension, and other investigations. And through the deceptive ad campaign, highlighted by six U.S. senators, that ran this year. (Apollo Education Group coincidentally shares the Apollo name with the Apollo Global Management private equity firm that bought the school in 2016.)

In addition, the supposedly new and improved Phoenix management that the University of Idaho now touts also decided just last year that the right person to lead the University of Phoenix as its president was one George Burnett, who previously ran Westwood College, a for-profit school shut down after law enforcement probes exposed its cruel and illegal deceptions against low-income students. Burnett resigned after the Department of Education posed tough questions about his record.

After Burnett left, Phoenix promoted Chris Lynne, who had joined the company in 2018 as chief financial officer, to be the new president. Lynne was CFO at for-profit Northcentral University from 2010 to 2014, overlapping there with the school’s then-president and CEO, George Burnett. In addition, from 2003 to 2010, Lynne was a senior executive of Education Management Corporation (EDMC), another of the biggest for-profit college operations. EDMC collapsed after in 2015 it settled, for about $200 million, major fraud investigations pursued by both the U.S. Department of Justice and more than a dozen state attorneys general, brought over alleged deceptive practices and other illegal conduct that extended back into Lynne’s tenure at the company. At that time of the settlements, U.S. Attorney General Loretta Lynch called EDMC “a high pressure recruitment mill.”

Phoenix has not changed, and is not equipped for change that would benefit students. And even if it somehow changed now, the University of Idaho and President Green may have to spend a lot of time and resources in the future paying for Phoenix’s past abuses.

People of Idaho: This is a bad deal.

UPDATE 09-20-23 9:05 pm:

After we published, we learned that last week the University of Idaho last week posted a new FAQ answer related to potential borrower defense liability. It indicates that any borrower defense liability would fall mostly not to the University of Idaho but to “the University of Phoenix,” a designation that might mislead some people into thinking that refers to the prior private equity owners of the University of  Phoenix but instead seems to refer to the new non-profit entity that has been created by and is affiliated with the University of Idaho. Ultimately if that entity started running out of money from borrower defense claims or other pressures, the University of Idaho would, under the proposed deal, be on the hook for $9.9 million annually. I guess after that the University of Idaho might just let the new non-profit declare bankruptcy and walk away from its obligations. Cool. This new explanation doesn’t in any way change my conclusion that Idaho faces real risks from borrower defense — or from being associated with a predatory school.  The statement asserts in part:

Under the terms of the asset purchase agreement, University of Phoenix would be owned by a newly created not-for-profit known as Four Three Education, Inc., which would be affiliated with the University of Idaho. University of Idaho would not be liable for the obligations of University of Phoenix, except for what it agrees to take on such as a potential agreement to backstop $9.9 million in annual debt service payments in the unlikely event University of Phoenix is unable to pay bond debt obligations or should the University of Idaho co-sign University of Phoenix’s PPA agreement.

Based on its due diligence, University of Idaho is confident in the comprehensive compliance systems in place at University of Phoenix and the rigorous process used to review and respond to each and every BDR claim, as well as the overall financial risk.

If University of Phoenix were to face a BDR recoupment demand based on a large-scale loan forgiveness action similar to Ashford’s, the University of Phoenix is prepared to vigorously challenge such action on appropriate grounds.

Additionally, University of Phoenix has a long history of financial stability and strong operating performance. That, combined with other financial tools in place (including $200 million in cash that is to be left on the balance sheet post-closing) mitigate that risk. Accordingly, it is expected that the University of Phoenix would be able to meet its own obligations.

UPDATE 09-21-23 9:00 am:

Andrea Smiley, a spokesperson for the University of Phoenix, emailed USA TODAY expressing disagreement with the education department’s action and maintaining the school’s ad campaign was legal. She also took a seemingly harsh stance against some ex-students who are seeking loan cancellation: “While the university is not against relief for borrowers who have valid claims, we intend to vigorously challenge each frivolous allegation and suspicious claim through every available legal avenue.”