Geoff Crimmins/The Moscow-Pullman Daily News via AP
Icicles hang from a street sign at the University of Idaho, January 18, 2017, in Moscow, Idaho.
A political storm is brewing in Idaho. At stake is whether America’s higher-education system will continue to serve as a host organism to parasitic for-profit colleges on the hunt for buyouts.
Last spring, the University of Idaho, one of the oldest land grant schools, announced a proposed takeover of the University of Phoenix, which has been the subject of numerous federal investigations and lawsuits for deceptively recruiting students with the promise of a useful degree and providing them with worthless diplomas. Because of its financial and legal troubles, Phoenix’s majority owner, the private equity firm Apollo Global Management, has been looking to unload the distressed asset for over two years now, without success, until the University of Idaho’s President Scott Green swooped in.
The deal would reward Phoenix and Apollo’s malpractice with a $685 million taxpayer bailout, potentially shielding the college from further legal repercussions for its predatory recruitment practices.
This kind of arrangement has become a pattern in recent years. For-profit colleges under siege by regulators are trying to hide under nonprofit status to escape potential lawsuits. They can qualify for more state and federal subsidies as well.
Several state universities playing along with the scheme are “poisoning the public well of higher ed,” as Higher Education Inquirer writer Dahn Shaulis has put it. The U. of Idaho/Phoenix deal faces a number of outstanding financial questions, in particular about the lucrative consulting fees given to President Green’s former employer.
This past fall, a group of senators, including Elizabeth Warren (D-MA) and Dick Durbin (D-IL), sent a letter to Green, calling for him to reconsider the deal. “We are concerned that UI’s acquisition will allow Phoenix to continue to abuse students under the guise of a trusted, public university,” the letter read.
Nonetheless, the deal has been approved by the Idaho board of education and endorsed by Gov. Brad Little. But earlier this month, a legal counsel for the state legislature issued an assessment, arguing that the board of education has no authority to purchase a for-profit school. The counsel recommended blocking the deal, which never sought the legislature’s approval in the first place.
“The Board is attempting to escape its constitutional and statutory limitations by recreating itself as a private corporation,” wrote legislative counsel Elizabeth Bowen. “If the Board’s conduct is allowed to stand, an incredibly dangerous precedent would be set.”
Idaho Attorney General Raúl Labrador has been filing legal challenges against the board of education for months, because of closed meetings it held to hide financial details of the purchase. Labrador is squaring off against his political opponent, Gov. Little, who supports the takeover. Little beat Labrador in the highly contentious 2018 Republican primary for governor, and it’s rumored Labrador might want to challenge him again in the 2026 governor’s race.
This battle royale between political adversaries is dividing the state, and it all came to a head with a series of contentious legislative hearings last week grilling President Green. Then, last Friday, the Idaho state House Affairs Committee voted unanimously to move forward a resolution demanding the board of education reconsider its deal or potentially face a lawsuit from the legislature.
TTHE BUSINESS MODEL OF THE FOR-PROFIT COLLEGE INDUSTRY was built on promising upward mobility to low-income individuals, single parents, and other vulnerable communities in order to tap public funds. The industry was bringing in about $33 billion in federal dollars per year, with up to 90 percent of the revenue coming from government-backed student loans.
A rule known as “90/10” was supposed to cap how much schools could rely on government loans, requiring at least 10 percent of revenue to come from other sources. But a since-reformed loophole allowed them for many years to circumvent the regulation by pursuing veteran students for GI Bill funds (which didn’t count under the cap), so for-profit schools targeted them aggressively.
The University of Phoenix was among the worst actors in the industry in this regard. In 2019, Phoenix settled a massive fraud case with President Donald Trump’s Federal Trade Commission and agreed to pay $191 million for deceptive practices. Thousands of consumer complaints alleged that the university used false advertising to recruit students by claiming to have partnerships to set them up for jobs with big companies like AT&T, Microsoft, and Yahoo.
While engaging in fraudulent advertising and urging students to take on loans, the school then provided low-quality courses and sported an extremely low graduation rate.
Since purchasing Phoenix in 2017, Apollo has used the same tactics it employs for other distressed companies before selling them off. Phoenix shut down 80 associate degrees and almost entirely closed down its physical campuses, turning the school into a lean, mostly online college with just 127 instructors for over 90,000 students.
Once regulators put for-profit colleges in their crosshairs, schools were exposed to massive legal risks. The Biden administration has also selectively forgiven student debt at bad-actor for-profit schools that engaged in malpractice, including a batch of 1,200 cases from University of Phoenix. Those schools can then be liable for massive revenue losses from the discharged loans.
For-profits are heading for the exits to try and avoid complete financial disaster or bankruptcy. They’ve run into the outstretched and all-too-welcoming arms of state school systems.
Most notably, Purdue University bought Kaplan, another insidious private college that was owned by Donald Graham, former publisher of The Washington Post. The sale was technically for $1 because of how it was structured. Similarly, the University of Arizona purchased Ashford University for $1. The latter deal was under intense scrutiny and has landed the school in deep financial turmoil, projected to lead to further spending cuts.
Apollo got the same idea and has been looking for a buyer for over two years. At first, they nearly had a deal with the University of Arkansas, but the university’s board voted against it.
You’d think that would have provided a warning sign. But shortly afterward, the University of Idaho swooped in to offer an even more generous deal, based on the scant financial details that have come out about the purchase. The University of Idaho claims Phoenix will generate $10 million in new funding per year, while the Arkansas board of regents said it would generate $20 million.
A new report from Moody’s Investor Services says that if the deal goes through, it could trigger a “multi-notch downgrade” for the University of Idaho’s bond rating.
The University of Idaho has a few motivations for the takeover on paper. Starved of funding from the state legislature, the school is looking for a new profit center to make up for plummeting enrollment by expanding its online programs. University of Phoenix has more students enrolled than the entire Idaho higher-education system combined.
As a public institution, however, those motivations raise further questions, many of which are outlined in Sen. Warren’s letter to President Green. For one, a state university system meant to serve public interests should not be hitching its wagon to a school whose track record of recruitment practices and poor educational standards are anathema to that mission, all just to boost revenues. Phoenix could very well continue its nefarious practices simply by using Idaho’s nonprofit status as cover.
“The concern is that some of these sharp operators may attempt to use their newly transformed non-profit colleges as private piggy banks, or use their new status to continue selling predatory programs to vulnerable students, veterans, single mothers, immigrants, low-income people,” said David Halperin of Republic Report, which has been a higher education watchdog for a number of years.
What’s equally as concerning is the financial risk that the takeover exposes Idaho taxpayers to. The purchase is structured similarly to a “leveraged buyout,” often used by private equity firms where a company’s assets are put down as collateral to take on debt.
To finance the takeover, the University of Idaho is leveraging Phoenix’s cash flow and assets, while Phoenix issues $685 million in corporate bonds that are estimated to be “BB” rated, which means they have a high risk of default.
President Green and the university defend the deal by saying that Phoenix has $200 million in cash that Idaho would receive upon the purchase being completed. However, the liabilities from Phoenix are also high. The Department of Education announced in September that it was waiving $37 million in debt for 1,200 Phoenix students proven to have taken out loans under deceptive advertising. Just in the past year, the Department of Education has received 500 new consumer complaints, including from veterans, according to FOIA documents obtained by Dahn Shaulis. Those complaints have not been reviewed yet but could lead to even more student loan write-offs, and Idaho could potentially have to pay the discharges.
The University of Idaho also says it does not directly hold the debt it takes on to finance the purchase. Instead, the school is creating a nonprofit called FourThree that will technically run Phoenix. But this is just clever accounting, because the university’s board of regents will fully own the nonprofit arm.
While unusual, the creation of this nonprofit has been cleared by the university’s accreditor, the Higher Learning Commission, as well as by the federal Department of Education in a pre-review, though that doesn’t mean the entire purchase has been approved yet.
The nature of this deal and the risk involved has brought into question the university president’s motivations. Before taking office in 2019, Scott Green didn’t have experience in higher education; instead, what he brought to the table was a background in banking at Goldman Sachs and as a financial officer at three big law firms.
President Green's most recent employer was Hogan Lovells. A recent investigation by Idaho Education News found that the University of Idaho has funneled $7.3 million in consulting fees over the past year to Hogan Lovells to advise the school on the Phoenix purchase. Green signed off on the selection of his former employer, though he claims it was in the best interest of the university.
There are more financial troubles ahead for the deal. A new report from Moody’s Investor Services says that if the deal goes through, it could trigger a “multi-notch downgrade” for the University of Idaho’s bond rating. Moody’s has not been persuaded that the supposedly independent nonprofit FourThree will inoculate the University from risk if the deal goes awry.
All of these warnings are starting to set off alarm bells in Idaho. Attorney General Labrador filed a subpoena last year against the board of education for holding secret meetings and withholding details about the Phoenix deal. A court recently ruled in favor of the board, which has called the efforts to push for public access “abusive,” but Labrador is appealing the case.
The state board of education has said they don’t need legislative approval to move forward. But after the legislative counsel’s report questioning the legality of the Phoenix purchase, a growing faction of state lawmakers are mobilizing. Several state House and Senate members introduced a resolution that would call on the board to reconsider the proposed takeover. Last week, President Green answered questions before several House committees, where lawmakers grilled him on the Moody’s report, the consulting fees to his former employer, the debt that the nonprofit would hold, and how much risk it exposes taxpayers to.
Following those hearings, the House Affairs Committee on Friday passed the resolution unanimously, which not only tells the board to kill the deal but also officially authorizes the legislature to file a lawsuit.
If sentiment continues to sour, the state legislature could vote to file an official lawsuit against the deal, upon the counsel’s recommendation.
As David Halperin has called for, the University of Idaho’s accreditor could also block the deal, as could the Department of Education. The University of Idaho has rebuffed Sen. Warren’s calls for the federal agency to block the deal, by claiming that Washington shouldn’t weigh in since it’s a state-level matter. That hardly stands up to scrutiny. Its acquisition target University of Phoenix has been a federally subsidized vulture in the higher-education industry for decades, preying on vulnerable students and siphoning off taxpayer dollars. Now, its owner Apollo wants to offload the burden to Idaho for all the financial and legal risks it accrued.
