The Dot-Degree Boom

The Dot-Degree Boom

Thanks to aggressive recruiting tactics and a complaisant Congress, online enrollments at the University of Phoenix and its spinoff, Axia College, are soaring. So are student debt and disaffection.


Tyrone Jacobs has been trying to get ahead. After years of working menial jobs at Red Lobster and Toys ‘R’ Us, the 28-year-old has struck out on his own. He travels around Little Rock, Arkansas, peddling ballerina jewelry boxes, Ladybug watches and the like at local flea markets.

Jacobs, though, wants more. He’s recently married, and his wife has “one in the oven.” He’s running a website, selling the jewelry and knickknacks he picks out of wholesale catalogues. He wants to learn more about running a business. He wants an education.

“It will help me better organize and prepare myself with the accounting classes, keep up with the money and keep it organized, keep everything in order, so the business will live instead of failing,” Jacobs said.

Lately, though, he’s been getting lessons in frustration. First, he had trouble getting papers together for an audit of his financial aid, his second this year. Then, in the midst of that confusion, he had to move. He wanted to postpone his classes. His enrollment counselor said no, and Jacobs’s troubles began.

Jacobs has been attending the all-online Axia College, a spinoff of the ubiquitous University of Phoenix, a for-profit 311,000-student mega-college run by the Arizona-based Apollo Group. In little more than a year Axia College has experienced explosive growth, quietly enrolling as many students as Penn State–about 40,000–into its associate-degree programs.

Axia represents Apollo’s fastest earnings growth, tapping into a market the company has traditionally avoided: people like Tyrone Jacobs, with no degree and little, if any, college experience. If current trends continue, 5 million students like Jacobs could be attending college online a decade from now, and Apollo wants them all.

But legislation stood in the way, capping the growth of online classes. To qualify for financial aid, the federal “50 percent” rule requires colleges to conduct half of all classes in an actual classroom, with a physically present teacher, or half of all students to be physically enrolled. Apollo, leveraging the influence of patrons in Congress and the Education Department, including House majority leader John Boehner, has seen that legislation erased. It’s the latest move toward deregulation in the education market, which has mainly benefited for-profit companies like Apollo.

Apollo took in more than $2.2 billion last year, almost all of it through federal aid programs, and spent $1.5 billion. The difference went to Apollo’s shareholders and came from the pockets of taxpayers and students. Jacobs’ associate’s degree would have cost about $15,000 at Axia, but only about $4,000 at a bricks-and-mortar community college. At a traditional school, tuition and other costs more or less reflect the value of the education received. But at Apollo, something else is going on.

The company spent $935 million on instruction last year, and $485 million to lure and enroll students. It claims to be the nation’s largest university, selling education much the same way Jacobs sells Sphinx boxes and beard-trimmers at the flea market–as a product.

Selling Education

Today, the University of Phoenix employs 3,600 enrollment counselors selling education products nationwide. The bulk of them work out of the sprawling 7,000-employee office complex near Interstate 10 and the Broadway curve in Phoenix.

The complex once housed a special selling area known as the Red Room– part corporate stockade and part boiler room. The Red Room served as a detention area of sorts for Phoenix’s underperforming enrollment counselors.

In an investigation of Phoenix’s recruiting practices in 2003, investigators in the Education Department’s financial aid division heard that recruiters who failed to meet goals were sent to labor behind glass walls, “counseling” students to enroll from a room barren except for folding tables and banks of telephones. No breaks. No vacations. And if they continued to fail, no job.

A recruiter could earn $750 for each student enrolled. Management pressured employees to enroll as many students as possible, and to do “whatever it takes.” If a prospective student could find a better or cheaper option at a local community college, recruiters kept it to themselves.

Employees told investigators they learned that only one thing mattered at Phoenix: getting “asses in classes.” Federal law, however, mandates that college enrollment counselors not be paid a bounty per student, to insure that counselors do what is best for the student, rather than for themselves or the company.

As a result of the investigation into Phoenix’s Red Room recruiting tactics, the Apollo Group paid $9.8 million in fines in 2004–the largest fine ever levied by the Education Department. Late last year, the Education Department Inspector General found Phoenix owed students $10 million in unreturned tuition payments. The company was also fined $6 million in 2000 for improperly calculating student aid and for not offering enough study and instruction hours to meet federal requirements. This came a year after paying a $650,000 fine for failing to refund loans.

In fact, the Education Department found Phoenix in direct violation of the Higher Education Act. “The actions of UOP and the system it has established cultivates and maintains a corporate culture in defiance of UOP’s fiduciary duty.” Phoenix, investigators said, “flaunts the department’s regulations.”

This is where Tyrone Jacobs ran into trouble. Hundreds of miles from where he sat in Little Rock, a counselor in that nondescript office park in Phoenix told him he would lose his financial aid if he postponed his classes. Technically, according to federal law and company policy, Jacobs could drop out between semesters, re-enroll later and receive the same financial aid. But the high-pressure enrollment counselor talked him into staying, and what followed was an exercise in frustration, as Jacobs battled a company that seemed more committed to collecting tuition than providing him with an education.

“They were pressuring me to stay in the class, they were giving me false promises,” Jacobs said.

In a series of phone conversations with various counselors, Jacobs was told he could catch up on his work–even though three of the nine weeks of classes had passed. Teachers gave him conflicting information, and because of Axia regulations his enrollment counselor couldn’t talk to his teachers and help broker solutions. In fact, no one he talked to seemed to talk to anyone else.

“There’s been a lot of lying,” Jacobs said. “They do one thing and tell me something else. There’s no trusting this college.”

Helping Hands in Washington

But certain people have placed a lot of trust in Phoenix. With the aid of onetime lobbyist and former Assistant Secretary of Education Sally Stroup, John Boehner and Representative Howard “Buck” McKeon, Phoenix’s online operations have flourished, jumping from 42,756 students online in 2000 to more than 190,317 today.

This couldn’t have happened with the “50 percent” rule still in place. As a lobbyist for the University of Phoenix on the Internet Equity and Education Act of 2001, Sally Stroup knew this. She spent $440,000 lobbying to scuttle the rule that year. In June 2001, Phoenix became a participant in the Education Department’s Distance Education Demonstration Program, allowing it to skirt the rule.

In October 2001, President Bush nominated Stroup to be assistant secretary of education overseeing postsecondary education, and to run the distance trial program. Three weeks later, she resigned as a Phoenix lobbyist. (This month, Stroup left the Education Department and returned to Congress as a legislative staffer to work on education law.) Still, even with Phoenix safely placed in the trial program, the law remained on the books, which could have spelled disaster for the company if it again came under scrutiny.

Boehner started pushing to get rid of the “50 percent” rule in 2001 with the Internet Equity and Education Act. He tried again with the Expanding Opportunities in Higher Education Act and the Fed Up Higher Education Technical Amendments Act. The provision almost made it into a Hurricane Katrina relief bill, and was part of the College Access and Opportunity Act, which is still pending. But the passage of the Deficit Reduction Act last month makes that effort moot. Days after Boehner became majority leader, a two-paragraph provision eliminating the “50 percent” rule slipped into the Deficit Reduction Act. It is expected to cost taxpayers more than $700 million over the next decade.

A small group of legislators including Boehner, the former head of the House Education Committee, and his successor in that post, Representative McKeon, have been favored by Phoenix and others in the for-profit college industry.

According to the Center for Responsive Politics, the two Congressmen and their political action committees have received $313,000 from the for-profit college industry since 2000.

Peter Sperling and John Sperling, Phoenix’s largest stockholders, have given more than $550,000 to politicians and PACs of all stripes since 1997. In the past two years, Apollo’s PAC has given $30,000 to the National Republican Congressional Committee, John Sperling has given $15,000 and recently departed CEO Todd Nelson gave $25,000 to the Republican National Committee and $20,000 to the NRCC. Apollo also has its own PAC funded by its executives, employees and advisers.

A 2004 Chronicle of Higher Education investigation found that over eighteen months, those in the student loan and for-profit school industries gave $1 million in campaign contributions to the forty-nine members of the House Committee on Education. About $540,000 went to Boehner and McKeon, representing 20 percent and 45 percent, respectively, of the total revenues for their leadership PACs.

Losing Out

That may help to explain why Phoenix seems to have two sets of parents: a coddling, permissive Congress and allies like Stroup on the policy side, and the stern, accountable financial aid regulators and Inspector General in the Education Department.

Increasingly, it looks like the regulators are losing out, with Congress quietly bowing to the for-profit educational lobby by nixing the “50 percent” rule and playing hooky on a serious discussion of how to leverage billions of federal student aid dollars each year to insure quality education now and into the future.

Tyrone Jacobs’s saga with Axia ended on March 22, leaving him nearly a year and a bit less than $5,000 in the hole. He withdrew from one class in the second-to-last week because the teacher told him he couldn’t catch up. He was “auto-dropped” from another, for failure to engage in an online class discussion on the designated day. Jacobs called it an honest mistake, but Axia officials, with his tuition firmly in hand, called it a violation of strict policy. No refunds are available.

Now Jacobs will try again, possibly at a nonprofit online program, one that might cost about one-third of Axia. He hopes to transfer his credits, straighten out his financial aid and get his education back on track, moving toward an associate’s degree–to try to get ahead. Eventually, he hopes to earn a business degree at the University of Arkansas at Little Rock.

“The question is, Do you want to rush into funding these schools with public money before you’re sure the protections are in place to make sure [students] are getting a quality education, because that’s ultimately what we want,” said California Deputy Attorney General Robyn Smith, whose office handles cases of fraud involving for-profit schools.

Much as Congress avoided explicitly posing Smith’s question, it implicitly provided an answer: Phoenix, Axia and other online education businesses now have virtually no impediments to growth. The dot-degree boom begins.

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