Regulatory Matters

All U.S. federal student 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 most recent reauthorization of the Higher Education Act expired September 30, 2013, but Title IV student financial aid programs remain authorized and functioning. Congress continues to engage in discussion and activity regarding Higher Education Act reauthorization, 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, which is granted in a Program Participation Agreement with the institution.

University of Phoenix’s Title IV Program Participation Agreement expired on December 31, 2012. The University has submitted necessary documentation for recertification and its eligibility continues on a month-to-month basis until the Department issues its decision on the application. We believe that the University’s application will be renewed in due course. However, we cannot predict whether or to what extent the Department may seek to impose conditions on our operations in connection with any recertification, including some or all conditions to continued participation in Title IV programs following the consummation of our pending Merger transaction that the Department has identified in its response to our application for preacquisition review of that transaction.

In February 2016, the Department notified the University that for the duration of the month-to-month continuation of the University’s Program Participation Agreement, University of Phoenix must obtain from the Department prior approval of substantial changes, including (i) the establishment of additional locations, (ii) any increase in the level of academic offering beyond those listed in the Institution’s Eligibility and Certification Approval Report and (iii) the addition of any educational program (including degree, nondegree, or short-term training programs). Some of these substantial changes include changes that previously could be implemented by the University upon notice to the Department and without prior approval.

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. During fiscal year 2015, the University received a Final Program Review Determination Letter with regard to this program review. All administrative matters are deemed by the Department to be resolved and/or closed, with the exception of findings regarding compliance with the Clery Act, which have been referred to the Department’s Clery Team and to the Administrative Action and Appeals Division which is standard protocol in such matters. The outcome of this matter is uncertain at this point and, based on the information available to us at present, we have not accrued any liability associated with this matter.

Gainful Employment Regulations

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. These reporting requirements increase our costs of operations and could adversely impact student enrollment, persistence and retention if our reported program information compares unfavorably with other reporting educational institutions.

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 regulations, which apply on a program-by-program basis, the Title IV eligibility of students enrolled in a program will depend on the outcome of two tests relating to average student loan debt service-to-earnings ratios of program graduates for each cohort year. One test measures student loan debt service as a percentage of total earnings; the other test measures student loan debt service as a percentage of deemed discretionary earnings. For each test, the regulations specify the ratios that constitute “pass”, “fail”, and neither pass nor fail, which is referred to as “zone”. If a program fails both of the tests for one measuring year, the institution will be required to provide a warning notice to prospective and enrolled students advising that the program may lose Title IV eligibility based on the outcome of the tests for the next measuring year. Programs that fail both tests in two out of three consecutive years or are in the zone for four consecutive years will be ineligible to participate in Title IV student financial aid for a period of at least three years.

In late October 2016, the Department provided draft gainful employment debt service-to-earnings ratios for the initial measuring year, which the Department refers to as Debt Measure Year 2015 (“DMYR15”). The Department expects to issue the final DMYR15 debt service-to-earnings ratios in January 2017.

Based on the draft rates, University of Phoenix programs representing approximately 15% of the University’s total degreed enrollment as of November 30, 2016 failed both of the debt service-to-earnings tests, and a small number of programs were in the zone.

In connection with the University’s initiative to transform itself into a more focused, higher retaining and less complex institution, beginning in September 2015 and continuing through early fiscal year 2017, the University ceased enrolling new students in programs it believed may be impacted by the gainful employment regulations. As a result of these actions, the University has ceased enrolling new students in all of the programs that failed both of the minimum debt service-to-earnings tests for DMYR15. These programs, and the other programs that were retired in connection with the broader initiative to transform the University, represented approximately 19% of the University’s total degreed enrollment as of November 30, 2016. Students who are currently enrolled in such programs are being taught-out.

Because the measuring period for the next cohort (DMYR16) has already ended, we do not have the opportunity to make changes to any of the programs that failed both tests for DMYR15, and if these programs also fail both tests for DMYR16, they immediately will cease to be eligible to participate in Title IV programs. In such case, the University intends to provide scholarships to students enrolled in these programs to help the affected students complete their programs of study. The ultimate cost of this assistance cannot be predicted currently, but could be substantial, depending on the number of students who qualify and choose to participate.

Changes in student borrowing needs and practices, student loan interest rates, labor markets and other factors outside of our control could adversely impact compliance with these regulations for some of our continuing programs in the future.

Defense to Repayment Regulations

On October 28, 2016, the U.S. Department of Education published final regulations establishing new processes and standards for the discharge of student loans. The regulations provide for discharge of student loans first disbursed on or after July 1, 2017, and recovery by the borrower of any amounts paid on such loans where:


•	a school breaches contractual promises to a student;


•	certain judgments based on any state or federal law are entered against a school related to the loan or the educational services after a contested proceeding; or


•	a school makes substantial misrepresentations about the nature of its educational programs, financial charges or employability of graduates.

In general, the extent to which a loan obligation is discharged or previously paid amounts are recovered is limited to the amount of pecuniary damages suffered by the borrower associated with the relevant basis for the discharge, as determined by a Department hearing officer in the exercise of broad discretion. The decision of the hearing officer is final, subject to limited rights to appeal a decision to the Secretary of Education. In most cases, the Department is entitled to seek reimbursement from the disbursing school of any loan amounts discharged or recovered by students.

In addition, the Department has the discretion to initiate proceedings for discharge on behalf of groups of students if, among other reasons, the Department determines that there are common facts and claims or that such action would promote compliance by the school. Such group proceedings can be initiated whether a school has closed or is currently operating, and can include students who have not requested relief. In any such proceeding, a Department official will represent the relevant group in the fact-finding process, which will be presided over by a Department hearing officer.

There is no time limit on claims to discharge outstanding amounts owed by a borrower, regardless of the basis for the discharge, and no time limit on claims for recovery of amounts previously paid which are based on the entry of a judgment. Claims for recovery of amounts previously paid which are based on breach of contract or misrepresentation generally must be made within six years of the breach or discovery of the misrepresentation.

The new procedures and standards increase the likelihood that individual and group borrower defense to repayment claims will be made and confer on the Department substantially complete and unreviewable discretion to adjudicate any such claims, including claims initiated by the Department itself. Because the specified standards are imprecise in many respects and the Department is the final arbiter of the standards and the findings of fact, we may not be able successfully to predict how the standards will be applied to our students until claims have been made and adjudicated. Application of the specified standards relating to breach of contract and misrepresentation, and the determination of the appropriate amount of damages each are likely to involve complicated and nuanced questions of fact and may involve large groups of students deemed by the Department to be similarly situated. Accordingly, we may be exposed in a proceeding to potentially significant liability based on intensely factual analyses and judgments, under circumstances where we have available only limited due process rights. If a large group of students, in either a private proceeding or a proceeding initiated and prosecuted by the Department, succeeds in a defense to repayment claim for any reason, our business and financial condition could be materially and adversely harmed.

Financial Responsibility Standards

Also on October 28, 2016, the Department published final regulations modifying the Department’s financial responsibility standards to provide that a proprietary institution is deemed not to be financially responsible if it is subject to one or more specified triggering events on or after July 1, 2017, including:


•	A failure to satisfy the 90/10 test for the prior fiscal year;


•	For publicly traded institutions, a failure to timely file annual or quarterly reports with the Securities and Exchange Commission, the receipt of certain warnings from the SEC or the relevant stock exchange, or the delisting of the institution’s stock; and


•	Cohort default rates above 30% for the two most recent measuring periods.

In addition, an institution will be deemed not to be financially responsible if the institution is subject to one or more other specified triggering events, if the Department determines that after taking into account the possible future financial consequences a recalculated composite score for the institution’s most recently completed fiscal year would be less than 1.0. Such triggering events include the following:


•	The institution incurs a liability in connection with a judicial or administrative proceeding, including as a result of settlement;


•	The institution is sued after July 1, 2017 by a federal or state authority regarding certain matters involving student loans or the provision of educational services and such suit is still pending after 120 days;


•	The institution is otherwise sued after July 1, 2017 and such lawsuit has survived a motion for summary judgment or the time to assert such a motion has expired;


•	The institution is required by its accrediting agency to submit a teach-out plan in connection with closure of the institution or certain of its locations;


•	The institution has programs that could become ineligible to participate in Title IV programs based on the gainful employment debt service-to-earnings rates for the next measuring year; or


•	The institution has a composite score of less than 1.5 and experiences a withdrawal of owner’s equity by any means, including by declaring a dividend.

Furthermore, an institution will be deemed to not be financially responsible if the Department determines that there is an event or condition that is reasonably likely to have a material adverse effect on the financial condition, business, or results of operations of the institution, including as a result of one or more of the following events:


•	significant fluctuation in the amount of Title IV funds received by the institution;


•	citation of noncompliance by a state licensing or authorizing agency;


•	failure of a financial stress test to be developed by the Department;


•	high annual dropout rates, as calculated by the Department;


•	action by an accrediting agency to place the institution on probation or issue a show-cause order for failure to meet one or more accrediting standards;


•	violation of a provision in a loan agreement; or


•	pending borrower defense to repayment claims or an expectation that a significant number of borrower defense to repayment claims will be filed related to the institution, as determined by the Department.

If an institution is deemed to be not financially responsible because of the occurrence of one or more of the foregoing triggering events, the institution must either post a letter of credit in the amount of at least 50% of prior year Title IV receipts or, with the Department’s approval, continue participation in Title IV programs under a provisional certification for a limited period of time, post a letter of credit in an amount of at least 10% of prior year Title IV receipts and comply with certain other conditions.

These new financial responsibility standards significantly expand the circumstances under which a proprietary institution will be deemed to not be financially responsible, including circumstances and events that may not actually pose financial risks to the institution, circumstances that are based on subjective judgments of the Department about future events, and allegations and claims for relief in private or administrative litigation or enforcement proceedings that may ultimately be found to lack merit. The posting by University of Phoenix of a letter of credit in the amount of 50% or more of its Title IV program receipts for its preceding fiscal year likely would be an insurmountable burden. Accordingly, if the University is found to not be financially responsible under these new standards, it would be able to continue participation in Title IV programs only if terms of a provisional certification, including the amount of any associated letter of credit, can be agreed with the Department, the terms of which may materially and adversely impact our business and operations. In order to reduce the risk and uncertainty associated with these regulations, we may need to modify our administrative and other student-facing practices and procedures in a manner that increases our costs and reduces our administrative effectiveness. Furthermore, because of the potentially significant consequences of a determination that we are not financially responsible, our flexibility in responding to private or administrative litigation or enforcement actions may be severely constrained in a manner that materially and adversely impacts our business and financial condition.

State Authorization Regulations

On December 19, 2016, the U.S. Department of Education published final regulations, effective July 1, 2018, which establish new requirements for distance education programs to maintain the state authorizations necessary to be eligible to participate in Title IV programs. Among other things, the regulations:


•	Require an institution offering distance education to have requisite state authority to offer such programs to state residents if required by the state;


•	Define and recognize acceptable state authorization reciprocity agreements;


•	Require institutions to document individualized state processes for resolving student complaints; and


•	Require an institution to provide extensive public and individualized disclosures to enrolled and prospective students regarding its programs offered solely through distance education, including information concerning adverse actions filed against the school by state entities or accrediting bodies.

Under the regulations, individual states may impose new and diverse requirements on institutions offering distance education and thereby reduce the regulatory and operational efficiency that our schools have relied on under the State Authorization Reciprocity Agreement (“SARA”). In those states that have adopted SARA, now comprise a majority of domestic jurisdictions, our Title IV eligible programs are authorized to operate on the basis of Arizona state regulatory approval.

The regulations also require extensive new public disclosures based upon certain actions by accreditors and state entities, including state Attorneys General, and require disclosure to current and prospective students upon the mere filing of an adverse action and long after the initial action was resolved, even if resolved in favor of the institution.

The regulations raise potential risks for our business, since the precise regulatory scope of individualized state requirements and disclosures are unclear and subject to interpretation in a manner that may be adverse to us and not fully known or predictable in advance, and certain of the potential adverse consequences could arise from the mere commencement of adverse actions by government entities or accrediting bodies, even if these actions and claims ultimately are found to lack merit. Furthermore, the significant discretion vested in the Department to interpret and administer the regulations may result in unexpected outcomes that adversely affect our business. In order to reduce the risk associated with these regulations, we may need to modify our administrative and other student-facing practices and procedures in a manner that increases our costs and reduces our administrative effectiveness.

Higher Learning Commission Accreditation

University of Phoenix is regionally 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, the University’s principal accreditor, through the 2022-2023 academic year. The University is subject to the Standard Pathway reaffirmation process, pursuant to which the University will host a comprehensive evaluation visit in 2017 and will undergo its next reaffirmation process in 2022-2023.