Regulatory Matters

Student Financial Aid

In fiscal year 2012, University of Phoenix generated 91% of our total consolidated net revenue and more than 100% of our operating income, and 84% of the University’s cash basis revenue for eligible tuition and fees was derived from Title IV financial aid program funds, as calculated under the 90/10 Rule.

All U.S. federal financial aid programs are established by Title IV of the Higher Education Act and regulations promulgated thereunder. The U.S. Congress must periodically reauthorize the Higher Education Act and annually determine the funding level for each Title IV program. In August 2008, the Higher Education Act was reauthorized through September 30, 2013 by the Higher Education Opportunity Act. Changes to the Higher Education Act are likely to occur in subsequent reauthorizations, and the scope and substance of any such changes cannot be predicted.

The Higher Education Act, as reauthorized, specifies the manner in which the U.S. Department of Education reviews institutions for eligibility and certification to participate in Title IV programs. Every educational institution involved in Title IV programs must be certified to participate and is required to periodically renew this certification.

University of Phoenix was recertified in November 2009 and entered into a new Title IV Program Participation Agreement which expired December 31, 2012. The University has submitted necessary documentation for re-certification and its eligibility continues on a month-to-month basis until the Department issues its decision on the application. We have no reason to believe that the University’s application will not be renewed in due course, and it is not unusual to be continued on a month-to-month basis until the Department completes its review. However, we cannot predict whether, or to what extent, the possible imposition of a probation sanction by The Higher Learning Commission, as discussed below, might have on this process.

Western International University was recertified in May 2010 and entered into a new Title IV Program Participation Agreement which expires September 30, 2014.

Higher Learning Commission (“HLC”)

University of Phoenix and Western International University are accredited by The Higher Learning Commission of the North Central Association of Colleges and Schools (“HLC”). This accreditation provides the following:


•	Recognition and acceptance by employers, other higher education institutions and governmental entities of the degrees and credits earned by students;


•	Qualification to participate in Title IV programs (in combination with state higher education operating and degree granting authority); and


•	Qualification for authority to operate in certain states.

In April 2013, University of Phoenix received the HLC peer review team’s report regarding the ongoing accreditation reaffirmation review of the University. Although the peer review team specifically noted in the report that the University is well resourced and innovative and has many strengths, including a high level of relevant student services and technology, the team determined that the University was not in compliance with certain requirements relating to administrative structure and governance and recommended that HLC place the University on probation status. Specifically, the review team concluded that University of Phoenix had insufficient autonomy relative to its parent corporation, Apollo Group, to assure that the University’s board of directors could manage the institution, assure the University’s integrity, exercise its fiduciary responsibilities, and make decisions necessary to achieve the institution’s mission and successful operation. The report also identified various areas of concern that may require future reporting and follow-up activities by the University, but these were not the basis for the team’s probation recommendation. If HLC were to impose the sanction of probation, the University’s accreditation would be reaffirmed for the period of probation, which can last for up to two years, and during this period, the University would be required to disclose its probation status in connection with any statements regarding its HLC accreditation.

On May 6, 2013, the HLC Institutional Actions Council First Committee (“IACFC”) convened a hearing in accordance with applicable HLC procedures to review the peer review team’s report and recommendations. In advance of that hearing, the University submitted evidence regarding various governance changes made by the University and Apollo Group to enhance the autonomy of the University in response to the concerns expressed in the peer review team’s report.

The IACFC’s role is to make a separate and parallel recommendation for action to the HLC Board of Trustees, which will be considered by the Board together with the peer review team’s recommendation. The HLC Board of Trustees makes the final determination, which may be to accept some, all or none of the recommendations of the peer review team and the IACFC.

On May 9, 2013, University of Phoenix received the written hearing report from the IACFC, which recommends that HLC reaffirm the University’s accreditation for a ten-year period and that the University be placed on the lesser sanction of notice status for two years due to concerns cited in the peer review team’s report relating to governance, student assessment and faculty scholarship/research for doctoral programs.

Notice status is a sanction that means that HLC has determined that an institution is on a course of action that, if continued, could lead the institution to be out of compliance with one or more of the HLC Criteria for Accreditation or Core Components. If this sanction is approved by the HLC Board of Trustees as recommended by the IACFC, University of Phoenix would remain accredited and would be required to submit various reports and engage in specified follow up activities during the notice period, which would be expected to last until June 2015. During the period of this sanction, the University would be required to disclose its notice status in connection with any statements regarding its HLC accreditation.

The HLC Board of Trustees is expected to take final action on the University of Phoenix accreditation reaffirmation at its next scheduled meeting on June 27, 2013, and to advise the University as to its decision in a Final Action Letter to be provided in the following weeks. We cannot predict what action will be taken by HLC, which could include imposition of the sanction of notice, the sanction of probation, no sanction, or some other special status.

Also in April 2013, Western International University received the HLC peer review team’s report regarding HLC’s ongoing accreditation reaffirmation review. In the report, the review team made a finding that WIU was not in compliance with certain requirements, including governance, and therefore recommended that HLC place WIU on probation status. WIU subsequently submitted evidence to the IACFC in response to the concerns expressed in the peer review team’s report. WIU received the written hearing report from IACFC in May 2013, which recommends that HLC reaffirm WIU’s accreditation and that WIU be placed on the lesser sanction of notice status due to concerns cited in the peer review team’s report. The HLC Board of Trustees is expected to take final action on the Western International University accreditation reaffirmation at its next scheduled meeting on June 27, 2013, and to advise WIU as to its decision in a Final Action Letter to be provided in the following weeks.

Office of the Inspector General of the U.S. Department of Education (“OIG”)

In October 2011, the OIG notified us that it was conducting a nationwide audit of the Department’s program requirements, guidance, and monitoring of institutions of higher education offering distance education. In connection with the OIG’s audit of the Department, the OIG examined a sample of University of Phoenix students who enrolled during the period from July 1, 2010 to June 30, 2011. The OIG subsequently notified University of Phoenix that in the course of this review it identified certain conditions that the OIG believes are Title IV compliance exceptions at University of Phoenix. Although University of Phoenix is not the direct subject of the OIG’s audit of the Department, the OIG has asked University of Phoenix to respond so that it may consider University of Phoenix’s views in formulating its audit report of the Department. These exceptions relate principally to the calculation of the amount of Title IV funds returned after student withdrawals and the process for confirming student eligibility prior to disbursement of Title IV funds.

State Authorization

Institutions that participate in Title IV programs must be authorized to operate by the appropriate postsecondary regulatory authority in each state where the institution has a physical presence. University of Phoenix is specifically authorized to operate in all but three of the domestic jurisdictions in which it operates. In California, Hawaii and New Mexico, University of Phoenix has a physical presence and is qualified to operate through June 30, 2013 without specific state regulatory approval due to available state exemptions and annual waivers from the U.S. Department of Education. Each of these states must adopt and/or implement additional statutes or regulations in order for the University and other institutions to remain eligible for Title IV funds in respect of operations within the states.

If such changes are not made by the respective states, University of Phoenix could continue to operate in these states without specific state approval through July 1, 2014 by obtaining further annual waivers. This would require the University to have a supporting letter from each state and file a request for an annual waiver, if required by the Department. The Department has advised us that if University of Phoenix has such supporting letters, no specific approval of the annual waiver from the Department is required. We have obtained or expect to obtain either specific authorization or supporting letters for an annual waiver that will allow University of Phoenix to continue operating in each of the three states. However, if we cannot obtain either specific authorization or an additional annual waiver for the period after June 30, 2013, our business could be adversely impacted, particularly in California, the state in which we conduct the most business by revenue.