Regulatory Matters

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 2008, the Higher Education Act was reauthorized through September 30, 2013 by the Higher Education Opportunity Act and an automatic one year extension continued the authorization through September 30, 2014. Congress continues to engage in Higher Education Act reauthorization hearings and although the one year automatic extension has expired, Title IV programs remain authorized and functioning. Changes to the Higher Education Act, including changes in eligibility and funding for Title IV programs, are likely to occur in connection with the next reauthorization, but we cannot predict the scope or substance of any such changes.

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 on December 31, 2012. University of Phoenix 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. We cannot predict whether, or to what extent, the imposition of the Notice sanction by The Higher Learning Commission might have on this process.

Western International University was recertified in May 2010 and its current certification expired on September 30, 2014. Western International 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.

Higher Learning Commission Accreditation

University of Phoenix and Western International University are accredited by The Higher Learning Commission (“HLC”) of the North Central Association of Colleges and Schools. 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 July 2013, the accreditations of University of Phoenix and Western International University were reaffirmed by HLC through the 2022-2023 academic year. At the same time, HLC placed both universities on Notice status for a two-year period. 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. The University was assigned by HLC to the Standard Pathway reaffirmation process, pursuant to which the University will host a comprehensive evaluation visit in 2016-2017 and will undergo its next reaffirmation visit and process in 2022-2023.

The University is required to submit a Notice Report to the HLC by the end of calendar year 2014 providing evidence that the University meets the Criteria for Accreditation, Core Components and Minimum Expectations (Assumed Practices after January 1, 2013) identified as the basis for the Notice sanction and that it has ameliorated the issues that led to the Notice sanction. In addition, in the Notice Report the University is also required to report on its progress in other areas of concern not included in the Notice sanction, including retention and graduation rates, three-year student loan cohort default rates, and credit hour policies and practices relating to learning teams. The University also will be required to host a focused visit by the HLC in January 2015, to validate the contents of the Notice Report. The HLC Board of Trustees will review the University’s Notice Report, together with a report of the focused visit, at a meeting in 2015. During the Notice period, the University is required to disclose its Notice status in connection with any statements regarding its HLC accreditation. If, after the Notice period, HLC determines that University of Phoenix is not in compliance with one or more of HLC’s Criteria for Accreditation, HLC may elect to impose probation, which would have further, more significant consequences for the University and our business.

90/10 Rule

To remain eligible to participate in Title IV programs, proprietary institutions of higher education must comply with the so-called “90/10 Rule” under the Higher Education Act, as reauthorized, and must derive 90% or less of their cash basis revenue, as defined in the rule, from Title IV programs. The 90/10 Rule percentage for University of Phoenix was 81% for fiscal year 2014. Based on recent trends, we do not expect the 90/10 Rule percentage for University of Phoenix to exceed 90% for fiscal year 2015. The 90/10 Rule percentage for the University remains high and could exceed 90% in the future depending on the degree to which its various initiatives are effective, the impact of future changes in its enrollment mix, and regulatory and other factors outside our control, including any reduction in military benefit programs or changes in the treatment of such funding for purposes of the 90/10 Rule calculation.

Student Loan Cohort Default Rates

To remain eligible to participate in Title IV programs, an educational institution’s student loan cohort default rates must remain below certain specified levels. Educational institutions will lose eligibility to participate in Title IV programs if their three-year cohort default rate equals or exceeds 40% for any given year or 30% for three consecutive years. The University of Phoenix three-year cohort default rates for the 2011 and 2010 federal fiscal years were 19.0% and 26.0%, respectively. If our student loan default rates approach the applicable limits, we may be required to increase efforts and resources dedicated to improving these default rates.

OIG Audit of the U.S. Department of Education

In October 2011, the Office of the Inspector General of the U.S. Department of Education (“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 believed were Title IV program compliance exceptions at University of Phoenix. In February 2014, the OIG released a final audit report on this subject, which identified exceptions based on select student records related principally to the calculation of the amount of Title IV program funds returned after student withdrawals and the process for confirming student eligibility prior to disbursement of Title IV program funds. While the OIG recommended follow-up action with regard to some schools, University of Phoenix was not among them. We were not the direct subject of the OIG’s audit of the Department, and we have not accrued any liability associated with this matter.

U.S. Department of Education Program Reviews

The U.S. Department of Education periodically reviews institutions participating in Title IV programs for compliance with applicable standards and regulations. In August 2014, the Department commenced an ordinary course program review of University of Phoenix’s administration of Title IV programs covering federal financial aid years 2012-2013 and 2013-2014, as well as compliance with the Jeanne Clery Disclosure of Campus Security Policy and Campus Crime Statistics Act, the Drug-Free Schools and Communities Act and related regulations.