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. The current reauthorization of the federal Higher Education Act expired September 30, 2013, but Title IV student financial aid programs remain authorized and functioning. Congress continues to engage in Higher Education Act reauthorization hearings, but the timing and terms of any eventual reauthorization 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 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 while the Department completes its review. Additionally, 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. The University has received and responded to a draft program review report which included findings regarding compliance with the Clery Act and various Title IV administrative matters. We believe that all findings regarding Title IV administrative matters have been resolved and that a Final Program Review Determination Letter will be issued in due course. Findings regarding compliance with the Clery Act have been referred to the Department’s Clery Team and to the Administrative Action and Appeals Division which is standard protocol in such matters.

Western International University was recertified by the Department of Education in November 2014 and subsequently entered into a new Title IV Program Participation Agreement which expires in June 2018.

Gainful Employment

Under the Higher Education Act, as reauthorized, proprietary schools are generally eligible to participate in Title IV programs only in respect of educational programs that lead to “gainful employment in a recognized occupation.” In connection with this requirement, proprietary postsecondary institutions are required to provide information to prospective students about each eligible program, including the relevant recognized occupations, cost, completion rate, job placement rate, and median loan debt of program completers.

In October 2014, the U.S. Department of Education published final regulations, effective July 1, 2015, on the metrics for determining whether an academic program prepares students for gainful employment in a recognized occupation. Under the final regulations, which apply on a program-by-program basis, students enrolled in a program will be eligible for Title IV student financial aid only if that program satisfies at least one of two tests relating to student debt-to-earnings ratios. The two tests specify minimum debt-to-earnings ratios calculated on the basis of the earnings of program graduates; one test measures student loan debt as a percentage of total earnings, and the other test measures student loan debt as a percentage of discretionary earnings. Programs that fail to meet at least one of the minimum ratios for two years will lose eligibility for federal financial aid for a period not less than three years.

The Department has indicated that the official 2014 gainful employment debt-to-earnings ratios will be issued sometime during calendar year 2016. The expected timing of the issuance of the 2015 ratios is unknown at this time. We believe it is likely that some of our programs will be impacted by the regulations, which may require modification of the affected programs or, in some cases, discontinuation.

Higher Learning Commission Accreditation

University of Phoenix is accredited by The Higher Learning Commission (“HLC”), which 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 accreditation of University of Phoenix was reaffirmed by HLC through the 2022-2023 academic year. At the same time, HLC placed the University 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. University of Phoenix 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 submitted a Notice Report to HLC in November 2014 providing evidence that the University has ameloriated those conditions that led to the Notice status and continues to meet the Criteria for Accreditation, Core Components and Assumed Practices associated with those conditions. In addition, in the Notice Report the University reported on its progress in other areas of concern not included as a basis for 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 hosted a focused visit in January 2015 to validate the contents of the Notice Report filed in November 2014. Based on the process to date, we believe that the University has adequately addressed the concerns expressed by the HLC in connection with its Notice determination. We expect that the HLC Board of Trustees will consider the matter and take final action at its meeting in late June 2015. If the HLC Board were to determine that the requirements for lifting the Notice sanction have not been met or that the University otherwise is not in compliance with the applicable accreditation criteria, the Board could impose additional sanctions on the University, including probation, or take other action that could adversely impact our business.

In addition to the above, as a condition of HLC’s approval of the July 2014 changes to the voting stock trust which holds approximately 51% of our outstanding Class B common shares, the only class of Apollo voting stock, University of Phoenix hosted a visit by an HLC peer review team in December 2014 focused on ascertaining the appropriateness of the prior approval, implications for succession planning, and the effect, if any, of the change in trust arrangements on Apollo and its relevant subsidiaries, and their ability to continue to meet HLC’s Criteria for Accreditation and Assumed Practices. Based upon the process to date, we believe that we have adequately addressed the Commission’s relevant criteria in this matter. Final action is pending with HLC.

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.