March 7, 2024

Is the FTC Investigating U of Phoenix Again? Idahoans Deserve An Answer.

Is the FTC Investigating U of Phoenix Again? Idahoans Deserve An Answer.
Source: Facebook Ad Library, January 2023

The University of Idaho’s proposed $685 million deal to buy the for-profit University of Phoenix is becoming increasingly controversial in the state of Idaho.  It could get even more controversial if it turns out, as might well be the case, that the University of Phoenix, which has a long history of predatory practices and resulting legal proceedings, is under federal law enforcement investigation right now for again deceiving prospective students.

Six United States senators wrote to federal agencies last year to say that the University of Phoenix had violated the law with a recent advertising campaign falsely implying that the school was already a state-operated public institution. But whether law enforcement officials have launched an investigation and contacted Phoenix for information about those ads remains a secret. Although even without a new law enforcement probe the deal to buy Phoenix is a bad one for Idaho, it seems like Idahoans should know as soon as possible whether Phoenix is under law enforcement scrutiny now. 

New opposition and setbacks for the deal

This week the Idaho House of Representatives passed a resolution, by a vote of 49-21, asking the University of Idaho to reconsider the purchase and authorizing the leaders of the legislature to sue to stop it. That bill has now gone to the state Senate.  The bill had passed in a House committee last week after the legislature’s legal counsel, Elizabeth Bowen, filed an opinion concluding that the State Board of Education did not have the legal authority to create the non-profit organization that was set up to acquire Phoenix; the University President, C. Scott Green, argued back that the expensive lawyers he hired knew better than Bowen, but he did not prevail. 

Yet, in the heavily GOP-dominated world of Idaho politics, the resolution could die in the Idaho Senate, where Green and his team are now lobbying aggressively, and the bill is perceived by some of that institution’s traditional Republicans as an effort by MAGA Republicans to derail efforts by Governor Brad Little and President Green to invest in higher education for the state.  

Traditional Republicans should be able to figure out that the state could make much more effective investments in its higher ed future than to buy a troubled asset like the University of Phoenix, but opposition to the Phoenix deal from the Idaho attorney general, strongly conservative Raul Labrador, might be reinforcing misconceptions; Labrador is seen as aiming to be the next governor.

Labrador has pursued an appeal in his own lawsuit contending that the Board of Education violated the state open meetings law in the behind-closed-doors run-up to publicly announcing the Phoenix deal, and, in another blow to the Green’s efforts, the Idaho Supreme Court on Friday set oral argument for June — after the May deadline that University of Idaho officials insist is essential to meet for the deal to go through.

Concerns about the acquisition in the state would, presumably, increase if it turned out there is an ongoing law enforcement investigation of Phoenix. If that were true, it would undermine the repeated claims of President Green’s team that, as one official asserted, Phoenix’s worst predatory abuses “are from quite long ago when the university was under very different leadership.”

In fact, the present Phoenix leadership has been in place for decades of bad behavior (CEO Greg Cappelli) or previously worked at other for-profit colleges with perhaps even worse records (President Chris Lynne). And the abuses have continued, at least into early 2023.

If there is an ongoing investigation of Phoenix, it also would add to the risk that University of Idaho-affiliated non-profit slated to buy Phoenix would be on the hook for millions, maybe billions, in liability for Phoenix’s past misconduct. 

Phoenix’s 2022-23 deceptive ad campaign

The roots of the University of Phoenix’s latest deception problem stretch back into the previous decade.  In December 2019, Phoenix reached a record $191 million settlement with the Federal Trade Commission, which claimed the school had lured students with false claims 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. Andrew Smith, then the Director of the FTC’s Bureau of Consumer Protection, said at the time of the agreement, “Students making important decisions about their education need the facts, not fantasy job opportunities that do not exist.”

In the settlement agreement, Phoenix agreed not only to a big fine but also committed to the FTC that going forward it would tell prospective students the truth. Like all schools that receive taxpayer aid, Phoenix also has an ongoing obligation to the U.S. Department of Education to do the same.

But as we first noted in January 2023,  despite its 2019 commitment, Phoenix had been running for months an ad campaign falsely implying that it is already a state-run institution, rather than a for-profit school. The ads also falsely suggested that Phoenix’s tuition is on par with in-state tuition at state schools, when in fact it is higher than average in-state costs.

The campaign from the University of Phoenix, with video ads on YouTube, Facebook, and presumably elsewhere, touted, “No out of state tuition.” The school was making the same claim on the admissions page on its website. 

“Out of state tuition” is a concept applicable to state-operated colleges and universities. It refers to the fact that many state schools, in order to benefit their own state’s residents, charge lower tuition to students considered “in-state,” than they do to students coming from somewhere else. Prospective students are often disappointed that a desirable public college in another state would charge them the more expensive out of state tuition; hence the appeal of the Phoenix statement that it won’t charge such higher amounts.

But the term “out of state tuition” has no general usage or meaning in the context of for-profit schools.

Text from the school under the video ad on YouTube — now made private, but see our screen shot above — added to the deception. It stated, “Some state universities charge higher tuition to out-of-state students — but not University of Phoenix.” That sentence is at best ambiguous — it certainly could be read to mean that the University of Phoenix is a state university — and therefore misleading.

The text accompanying the video continued, “Here, you’ll enjoy the same fixed, affordable tuition from the start to finish of your program, regardless of which state you live in.”

People seeing that pitch from the University of Phoenix could thus have easily believed, wrongly, that it was a state-run school, and also an affordable one. In fact, it isn’t so affordable either. The school’s annual cost is $13,038, well below the mid-point of $19,526 for all four-year schools, but significantly higher than the average cost of in-state tuition at state schools, $10,423. And by saying the school doesn’t charge out of state tuition, Phoenix suggests it is charging in-state rates.

Moreover, the University of Phoenix’s graduation rate, for its largest campus, is 14 percent, so for the 86 percent who don’t graduate, the school is certainly no bargain.

One can surmise a motive for Phoenix’s apparent duplicity, beyond the benefit of falsely suggesting that the tuition price is reasonable: State colleges have a far better reputation than schools in the scandal-torn for-profit college industry — which is presumably part of why Phoenix has been trying to peddle itself to a state university for a couple of years. 

The possibility of a new investigation and potential disclosure

As a result of this latest deceptive ad, Phoenix may have gotten itself in trouble again with FTC and other law enforcement agencies. 

In May 2023, six U.S. senators, including Dick Durbin (D-IL) and Elizabeth Warren (D-MA), sent a letter to the secretaries of education, defense, and veterans affairs that cited our Republic Report article and concluding that the University of Phoenix had “run misleading advertisements suggesting Phoenix is a public university.” The letter called on the government departments to examine the University of Phoenix, and its participation in federal student aid programs. The letter also copied Lina Khan, the chair of the Federal Trade Commission, and alleged that the Phoenix ad campaign “clearly defies” the settlement agreement with the FTC. 

Before it was sold, for $1.4 billion, to private equity firms including giant Apollo Global Management, the University of Phoenix was owned by a publicly-traded company. If that still were the case, Phoenix would be required to disclose in a public filing with the Securities and Exchange Commission any significant law enforcement investigation, as did multiple times in the past. But privately-held companies have no such disclosure obligation. (I and other advocates have urged the Department of Education to require such public disclosures of colleges and universities that receive federal aid, but it hasn’t happened yet.)

Most lawyers would agree that Phoenix’s owners would have a duty, if the school were under investigation, to disclose that fact to someone, such as a state university, seeking to buy the school. So if it has, in fact, been notified that it is under investigation by the FTC, Department of Education, or any other agency, I certainly hope that Phoenix management told President Green and the State Board of Education.

But Green hasn’t said anything about that. Instead, U of I says that although Phoenix’s “reputation was tarnished by massive growth in the mid-2000,” a “change in ownership refocused the university on its founding mission…. Over the past 20 years, University of Phoenix has elected to settle a few high-profile matters rather than litigate to resolution. Litigation presents significant uncertainty and distracts from the institution’s mission, so it is sometimes better to settle the matter and move on. These settled matters have been disclosed and explained to the University of Phoenix’s accreditor and regulators.” 

The FTC and Department of Education won’t tell me whether they are now investigating Phoenix. That’s not surprising. Law enforcement agencies generally won’t confirm or deny investigations when asked by advocates, or media, or even legislators.

A federal law enforcement agency might, however, be prepared to share information with a state law enforcement agency, such as the office of the Idaho attorney general.

The FTC also could accept that any delay in disclosing whether or not there is an investigation could have a huge impact on Idahoans and on the many students across the country who might enroll at the University of Phoenix in the future if a purchase by Idaho keeps the school in business.  Meaning that if they are investigating, the FTC should try to move ahead to the point that public disclosure is appropriate. And if there is no investigation, or the agency’s concerns were resolved, they could clear that up. 

The University of Phoenix also would be free to make a statement now about whether it is being investigated or have been investigated recently by the FTC, Department of Education, or any other agency over the “No out of state tuition” ad campaign or any other matters. Reporters should ask. (Phoenix has not responded to my previous inquiries about the ads.) 

Whether or not law enforcement agencies are currently investigating Phoenix, the deal remains a terrible one for Idaho. And even if there is no ongoing probe, the deceptive ads speak for themselves as a stark indicator of the true character of the University of Phoenix and its executives. But if there is currently an investigation, perhaps some proponents of the deal would change their minds sooner.  Thus it would be a shame for the deal to get done and Idahoans to learn only afterwards that Phoenix’s predatory misconduct and resulting legal problems are, far from being in the past, are an ongoing, major problem.

Growing liability for ripped-off students

The University of Idaho’s liability to ripped-off Phoenix students could get worse. Last September the U.S. Department of Education announced $37 million in debt cancellation for 1200 students who filed claims after the Federal Trade Commission reached the $191 million settlement with Phoenix for running deceptive ads. The Department said it planned to try to recoup the funds from the school. The Department of Education reported last year that as of August 2023 there were more than 73,000 pending borrower defense claims from former University of Phoenix students. Liability could be much higher, though — even into the billions — if more ripped-off borrowers file for loan relief, or if the Department provides more relief proactively — especially if you add in students who fell prey to the “No out of state tuition” deception. 

The FTC reported in January 2023, in response to a Freedom of Information Act request, that it had located in its files 6,265 complaints that consumers had filed regarding the University of Phoenix between January 1, 2017, and December 31, 2022. 

Another report from Moody’s

Credit and bond rating agency Moody’s certainly is watching. Last month, Moody’s placed the University of Idaho’s bond ratings under review for downgrade in light of the planned acquisition. This week, Moody’s issued an update on the state of Idaho’s credit rating, again noting concerns about the Phoenix deal, saying the proposed acquisition “presents some operating risk to the state.”  

In response, Idaho state Treasurer Julie Ellsworth issued a statement, according to Idaho Education News, saying the Phoenix deal could threaten Idaho’s credit rating and thus create costs for taxpayers.

Faculty views

Although a survey of 723 University of Idaho employees conducted last fall found that slightly more than half of respondents approved of the Phoenix deal, many of those most engaged on the issue strongly oppose it. A retired UI faculty member who has closely followed the negotiations told me, “University of Idaho faculty members continue to be troubled” by the deal. “The top concerns remain the U of Phoenix’s reputation and the potential risk to the U of I’s financial stability.” The ex-faculty member also cited the revelation last week that U of I already has spent more than $10 million on consulting and legal fees related to the purchase — more than $7.3 million of that to one Wall Street law firm where Green previously worked

The former U of I faculty member added, “The potential for additional federal regulatory involvement in for-profit universities such as Phoenix makes the purchase look less attractive than it did six months ago.”